Rising worries about a European recession hit stock markets on Tuesday as the euro slumped to a two-decade low and the pound fell to its lowest since the start of the pandemic.
Shares tumbled in London and across Europe as a jump in natural gas prices intensified the strain on the European economy.
The single currency fell by 1.5% to $1.025 against the US dollar, the lowest since late 2002. The pound dropped below the $1.20 mark to a two-year low of $1.19, the weakest point against the dollar since March 2020.
Oil also tumbled to its lowest since mid-May as recession fears mounted, with Brent crude falling by more than 9% to below $103 a barrel, and US crude dropping through the $100-a-barrel mark.
WTI oil has broken below $100 / barrel, a psychologically important level, on China lockdown and recession fears pic.twitter.com/uPU3jZJrto
— Josh Young 🦬🛢️ (@Josh_Young_1) July 5, 2022
Mining stocks, oil producers and airlines were among the big fallers in London, where the FTSE 100 share index dropped by 2.8%, or 207 points, to 7025. North Sea oil producer Harbour Energy slumped 9.6%, while Shell fell 8.5% and Anglo American and Glencore both lost 8%.
Germany’s DAX index lost 3%, and France’s CAC fell 2.8%.
Investors are anxious that rate hikes by central banks desperate to tackle soaring inflation will push economies into recession. Further disruption to Russian energy supplies would also trigger a European downturn, analysts have warned.
“Everyone is looking for peak inflation, but we’re probably at the point where it’s at its most dangerous as it becomes sticky,” Neil Wilson of Markets.com said.
“High and sticky inflation is the worst combination since it means expectations have been unanchored. This will only push the Federal Reserve and other central banks to inflict more pain.”
A jump in natural gas prices on Tuesday, after strike action forced Norway’s Equinor to shut three oil and gas fields, added to concerns over the economic outlook.
“The panic crept back in on Tuesday as a fresh surge in natural gas prices upset the uneasy calm,” said Raffi Boyadjian, the lead investment analyst at XM.
“Fears that the energy crisis in Europe is about to get a whole lot worse sank the euro, which plummeted to the lowest since late 2002, crashing below the $1.03 level. Aside from the threat of Russia cutting off gas supplies to Germany and other European importers, a strike at several gas fields in Norway is fuelling the supply concerns,” Boyadjian added.
A survey of purchasing managers showed that business growth across the eurozone has slowed to a 16-month low, as manufacturing output fell and the cost of living crisis hit spending on services.
Stocks fell in New York as traders returned to their desks after the Independence Day break. The S&P 500 index dropped 2% in early trading, having already slumped by 20% in the first half of this year.
The yield, or interest rate, on UK, US and eurozone government bonds also tumbled on Tuesday, as concerns about economic growth hit risk appetite and increased demand for safer assets.