The euro neared parity with the dollar for the first time since 2002. It’s been on the slide for months, but the euro took a fresh low as fears mount Russia could cut off gas supplies to Europe this winter. French Economy and Finance Minister Bruno Le Maire warned over the weekend that there is a strong chance Moscow pulls the plug. This is further stoking recession fears in the bloc and the currency just cannot catch a bid. At this level there is a lot of interest so expect a robust defence before it eventually goes and then it gets messy. At some point the bears are just going to drive this right through the parity level and be done with it. When does the ECB act – fragmentation risks or not, the ECB is fiddling while the currency burns, causing worse inflation and more misery for the population. Time for an emergency inter-meeting hike to show they are serious – the market just doesn’t believe in the ECB any more. Inflation above 8% and interest rates remain negative….it’s madness. ZEW economic survey due up shortly…

There is not much relief for peers – sterling dipped to a new two-year low against the dollar, with GBPUSD below 1.1850. USDJPY rose clear of 137.750, a new 24-year low for the yen. At least the pound made a two-month high against the euro. The dollar continues to act as a haven, whilst the better-than-expected payrolls report on Friday lifted sentiment – the US economy is nowhere near where the UK or Eurozone are. The US also has a serious central bank, one that is far more credible than the disastrous ECB or BoE. Dollar index north of 108 this morning, new 20-year high.

The pressure on the euro and sterling reflects grave concern about the economic outlook. With inflation soaring and no plan to get it under control, the currencies are sitting ducks. UK retail sales fell at the fastest pace since the worst of the pandemic, all due to inflation. It’s this weird stagflation environment – you have a job but are generally just anxious and looking at rising costs with concern. 

European stock markets fell on Tuesday with just about every sector in the red – only utilities and telecoms managing to stay green. US stocks broke their 5-day win streak, the S&P 500 down over 1% and the Nasdaq sliding by more than 2%. After a decent ramp in the last week, we’re just starting to get the kind of earnings jitters we can expect. I’d anticipate the outlook will not be good. Overnight Asian stocks fell to a 2-year low. Oil also fell amid the risk-off tone – energy crisis in Europe, fresh covid outbreaks in China and central banks tightening all combining to sour investor mood. Treasury yields are lower, with the benchmark 10yr note under 2.94% having traded above 3% yesterday, recession fears driving inflation expectations lower. Push-pull of inflation vs recession continues to move markets….my bet is that inflation proves stickier than markets think.