Thursday was another eventful trading session, European equities opened significantly lower, but losses faded throughout the day and the Euro Stoxx fell less than 1% at the close. The FTSE index fell faster than most of its European peers as energy and commodities stocks weighed on growing fears that a possible economic recession could eat away at their earnings in the coming quarters.
BP was down 4.70% yesterday and nearly 8% this week, but energy stocks remain comfortably on a positive trend to new post-pandemic highs as crude oil is back on track for more. gains on the growing tensions between Russia and Europe.
As the Europeans circumvent their own sanctions against Russia by opening accounts with the Gazprom bank to pay for Russian gas in exchange for rubles (!!), the latest news suggests that Russia is now cutting off German gas in retaliation for its penalties.
Of course, the Europeans were pretty bad at this game of poker – they showed too openly how scared they were of losing Russian gas that now Russia is taking over.
European gas futures gained another 13% yesterday, and pressure on energy prices remains clearly on the upside. Although fear of a recession tends to drive sell-offs, price declines are still seen by some as an opportunity to strengthen longs and help oil companies outperform.
In this sense, Saudi Aramco overtook Apple in terms of market capitalization this week, to become the most valuable company in the world. The latter is very symbolic, indeed, as it symbolizes the revenge of the energy companies that have been shattered during the pandemic months, against the technology companies that have largely benefited from the containment measures.
European and US futures are positive this morning, but the wind could change direction very quickly these days. And rising market volatility is more a sign of potential further losses than lasting gains.
Looking for signs of USD correction
In the area of foreign exchange, yesterday was once again marked by the strength of the US dollar. The dollar index extended its gains to a new near 20-year high. EURUSD fell to the 1.0350 level, then rebounded to test 1.04 this morning. Traders are increasingly positioning themselves for the pair to advance towards parity sooner than expected.
Cable also fell to 1.2165 on the back of an overall strong US Dollar. The dollar-lira, on the other hand, remains under decent positive pressure, and the current strength of the dollar is costing Turkey’s central bank dearly as it places a lot of weight on the lira, in an effort to keep it stable against a dollar. green that grows steadily stronger.
The dollar index is up 10% year-to-date and 17% since last May, and many investors know that the true rally in the US dollar will not last; it will soon be time to correct. Of course, the hawkish expectations of the Federal Reserve (Fed), the war in Ukraine and the massive sale of all asset classes have stimulated the greenback’s appetite. Still, as soon as investors have enough confidence to re-enter the market, the dollar will likely return some of its current strength. In that sense, I guess it’s only a matter of time before the strong dollar subsides. The question is whether the euro will reach parity and the pound sterling will reach the level of 1.20 before the trend reverses.
The dust settles
Dust seems to be settling in cryptocurrencies. Terra and Luna are almost worthless now and likely won’t regain investor confidence, and Tether, another stablecoin had a mini crash at 0.95, BUT recovered quickly before things got serious, and Bitcoin is back above $30,000, which is a sign that confidence in the wider sector may not have been shaken as much as we initially feared. That being said, crypto investors will certainly be more selective in selecting their holdings going forward, as the Terra incident is a warning that cryptocurrencies can crash as fast as they emerge.