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Europe’s gas supply crisis grows after Russia imposes sanctions

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© Reuters. FILE PHOTO: The logo of Gazprom Germania is pictured at their headquarters, in Berlin, Germany April 1, 2022. REUTERS/Fabrizio Bensch

By Joseph Nasr and Markus Wacket

BERLIN (Reuters) -Pressure on Europe to secure alternative gas supplies increased on Thursday after Moscow imposed sanctions on European subsidiaries of state-owned Gazprom (MCX:GAZP) and Ukraine stopped a gas transit route, pushing prices higher.

Russia imposed sanctions late Wednesday mainly on Gazprom’s European subsidiaries including Gazprom Germania, an energy trading, storage and transmission business that Germany placed under trusteeship last month to secure supplies.

It also imposed sanctions on the owner of the Polish part of the Yamal-Europe pipeline that carries Russian gas to Europe.

Kremlin spokesperson Dmitry Peskov said there can be no relations with the companies affected nor can they take part in supplying Russian gas.

The entities on a list of affected firms on a Russian government website were largely based in countries that have imposed sanctions on Russia in response to its invasion of Ukraine, most of them members of the European Union.

Germany, Russia’s top client in Europe, said some subsidiaries of Gazprom Germania were receiving no gas because of the sanctions, but are seeking alternatives.

“Gazprom and its subsidaries are affected,” Habeck told the Bundestag lower house. “This means some of the subsidiaries are getting no more gas from Russia. But the market is offering alternatives.”

The list includes Germany’s biggest gas storage facility at Rehden in Lower Saxony, with 4 billion cubic metres of capacity and operated by Astora, as well as Wingas, a trader which supplies industry and local utilities.

Wingas has said it would continue operating but would be exposed to shortages. Rivals Uniper, VNG or RWE could be potential sources of supply to the market. Gas flows continue to Germany from Russia via the Nord Stream 1 pipeline.

The owner of Poland’s section of the Yamal pipeline, EuRoPol Gaz, has been earning proceeds from the transit of Russian gas. It is jointly owned by Polish gas firm PGNiG and Gazprom.

While Poland, along with Bulgaria, was cut off from Russian supplies last month for refusing to comply with a new payment mechanism, it has been able to use the reverse flow on the Yamal pipeline to ship gas from Germany.

Exit flows into Poland at the Mallnow metering point on the German border stood at 9,734,151 kilowatt hours per hour (kWh/h) on Thursday, down from roughly 10,400,000 kWh/h the previous day, data from the Gascade pipeline operator showed.

Last year, EU countries got around 155 billion cubic metres of gas from Russia.

TRANSIT

Dutch gas prices at the TTF hub, the European benchmark, rose by around 20% on Thursday morning.

Germany’s Halbeck said Russia’s measures seemed designed to drive up prices but the expected 3% drop in Russian gas deliveries could be compensated for on the market, albeit at a higher cost.

European wholesale gas prices have skyrocketed over the past year, adding to burdens on households and businesses.

Although German gas storage is around 40% full, that is still low for the time of year and inventories need to be built up over the summer in preparation for winter.

Moscow announced the sanctions the day after Ukraine halted a major gas transit route to Europe, blaming interference by occupying Russian forces, the first time exports via Ukraine have been disrupted since the invasion.

The transit point Ukraine shut usually handles about 8% of Russian gas flows to Europe, and Ukraine proposed that flows could be re-directed to an alternative transit point, Sudzha.

On Thursday morning, flows through Sudzha had fallen to 53 million cubic metres (mcm) per day, from around 70 mcm the day before, Ukraine gas transmission operator data showed.

However, the Ukrainian suspension does not present an immediate gas supply issue, the European Commission said.

Meanwhile, there is still confusion still among EU gas companies over a payment scheme decreed by Moscow in March which which the European Commission has said would breach EU sanctions.

Germany’s top power producer, RWE, expects Berlin to soon clarify whether payments for Russian gas can be made under the new scheme proposed by Moscow, its finance chief said on Thursday, as a deadline approaches at the end of the month.

Russia’s demand that future payments for its most precious fossil fuel be made in roubles has been rejected by most European gas buyers over the details of the process, which requires opening accounts with Gazprombank.

That has fuelled fears about potential supply disruptions should buyers refuse to meet the guidelines to avoid breaching sanctions, which could have far-reaching consequences for Europe and Germany, in particular, which relies heavily on Russian gas.

Economy

As bear market looms, battered Wall St seeks elusive ‘Fed put’

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© Reuters. FILE PHOTO: Traders work on the floor of the New York Stock Exchange (NYSE) in New York City, U.S., March 21, 2022. REUTERS/Brendan McDermid

By David Randall

NEW YORK (Reuters) -The Federal Reserve’s determination to raise interest rates until it squashes the highest inflation in decades is darkening the outlook across Wall Street, as U.S. stocks stand on the cusp of a bear market and warnings of a recession grow louder.

At issue is the so-called Fed put, or investors’ belief that the Fed will take action if stocks fall too deeply, even though it has no mandate to maintain asset prices. One oft-cited example of the phenomenon, which is named after a hedging derivative used to protect against market falls, occurred when the Fed halted a rate hiking cycle in early 2019 after a stock market tantrum.

This time around, the Fed’s insistence that it will raise rates as high as needed to tame surging inflation has bolstered the argument that policymakers will be less sensitive to market volatility – threatening more pain for investors.

A recent survey by BofA Global Research showed fund managers now expect the Fed to step in at 3,529 on the S&P 500, compared with expectations of 3,700 in February. Such a drop would constitute a 26% decline from the S&P’s Jan. 3 closing high.

The index, which closed Friday at 3,901.36, is already down almost 19% from that high this year on an intraday basis – close to the 20% decline that would confirm a bear market, according to some definitions. [.N]

“The Fed has bigger fish to fry and that’s the inflation problem,” said Phil Orlando, chief equity market strategist at Federated Hermes (NYSE:FHI), who is increasing his cash levels. “The ‘Fed put’ is kaput until the central bank is confident that they’re no longer behind the curve.”

As a result, some investors are digging in for a long slog. BofA’s survey showed cash allocations at a two-decade high, while bets against technology stocks stand at their highest since 2006.

Strategists at Goldman Sachs (NYSE:GS), meanwhile, earlier this week published a “Recession manual for US equities” in response to client inquiries on how stocks will perform in a downturn. Barclays (LON:BARC) analysts said that numerous negative near-term catalysts mean the risks for stocks “remain firmly stacked to the downside.”

The S&P 500 closed broadly unchanged on Friday, reversing a sharp intraday decline that had briefly put it into bear market territory. The index marked its seventh straight week of losses, the longest streak since 2001.

Jason England, global bonds portfolio manager at Janus Henderson Investors, believes the index needs to fall at least another 15% for the Fed to slow its tightening, given that unprecedented monetary policy support helped stocks more than double from their March 2020 lows.

“The Fed is being very clear that there will be some pain ahead,” he said.

The Fed has already raised rates by 75 basis points and is expected to tighten monetary policy by 193 basis points this year. [/FEDWATCH] Investors will get more insight into the central bank’s thinking when minutes from its last meeting are released on May 25.

2018 REDUX?

Some worry the Fed risks exacerbating volatility if it does not heed possible danger signs from asset prices. Analysts at the Institute of International Finance said stocks may be subject to the same type of selling that rocked markets in late 2018, when many investors believed the Fed tightened monetary policy too far.

“In the past, rising uncertainty and mounting recession risk have had important effects on investor psychology, making markets less tolerant of monetary policy tightening that is seen as no longer warranted,” IIF analysts wrote on Thursday. “The risk of a similar market tantrum (to 2018) is rising again now as markets fret about global recession.”

There have been signs of resilient sentiment among investors. For example, the Cboe Volatility Index, known as Wall Street’s fear gauge, is elevated but below levels it reached during previous major selloffs.

And the ARK Innovation Fund (ARKK.K), which became emblematic of the pandemic rally, has brought in net positive inflows of $977 million over the last six weeks, Lipper data showed. The fund is down 57% in 2022.

While some investors say those are signals that markets are yet to bottom, others are more hopeful.

Terri Spath, chief investment officer at Zuma Wealth, believes some investors are re-entering parts of the stock market that have suffered outsized losses.

“The Fed is already seeing signs that they won’t be needed as a buyer of last resort,” she said.

Analysts at Deutsche Bank (ETR:DBKGn) are less optimistic.

“The Fed having badly erred on the side of excess inflation in 2020/21, cannot afford to make the same mistake twice – which favors more financial conditions tightening, and ongoing high (volatility) panicky markets,” they wrote.

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Economy

Australian prime minister concedes defeat in election

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2/2

© Reuters. FILE PHOTO: Australian Prime Minister Scott Morrison attends the third leaders’ debate at the Seven Network Studios during the 2022 federal election campaign, in Sydney, Australia May 11, 2022. Mick Tsikas/Pool via REUTERS

2/2

SYDNEY (Reuters) – Australian Prime Minister Scott Morrison said he had conceded defeat in a national election on Saturday, saying that while vote counting was incomplete the opposition Labor party looked likely to form a government.

“Tonight I have spoken to the Leader of the Opposition and the incoming Prime Minister, Anthony Albanese, and I’ve congratulated him on his election victory this evening,” Morrison said at a televised speech in Sydney.

Morrison added that he would stand down as leader of the Liberal party.

The capitulation ends eight years and nine months in power for Morrison’s conservative coalition. Morrison became prime minister in 2018 after several leadership changes.

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Economy

Bear market beckons as stock volatility continues in 2022

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© Reuters. FILE PHOTO: A trader works on the trading floor at the New York Stock Exchange (NYSE) in Manhattan, New York City, U.S., May 20, 2022. REUTERS/Andrew Kelly

By Lewis Krauskopf

NEW YORK (Reuters) – The stock market’s brutal year neared a grim milestone as the S&P 500’s slide on Friday threatened to leave it in a bear market for the first time since March 2020, fueled by worries over sky high inflation, a hawkish Federal Reserve and future economic growth.

The benchmark S&P 500 index fell below 3837.248 during Friday’s session, a decline that on an intraday basis put it more than 20% below its Jan. 3 record closing high. However, the index closed above that level, and did not confirm it was in a bear market – frequently defined as a drop of at least 20% from a closing high.

If history is any guide, a bear market would mean more pain could be in store for investors. The S&P 500 has fallen by an average of 32.7% in 13 bear markets since 1946, including a nearly 57% drop during the 2007-2009 bear market during the financial crisis, according to Sam Stovall, chief investment strategist at CFRA.

It has taken a little over a year on average for the index to reach its bottom during bear markets, and then roughly another two years to return to its prior high, according to CFRA. Of the 13 bear markets since 1946, the return to breakeven levels has varied, taking as little as three months to as long as 69 months.

Graphic: S&P 500 bear markets since 1946 – https://graphics.reuters.com/USA-STOCKS/BEAR/zjvqkmznwvx/chart.png

The S&P 500 surged some 114% from its March 2020 low as stocks benefited from emergency policies put in place to help stabilize the economy in the wake of the COVID-19 pandemic.

That decline went into reverse at the start of 2022 as the Fed grew far more hawkish and signaled it would tighten monetary policy at a faster-than-expected clip to fight surging inflation. It has already raised rates by 75 basis points this year and expectations of more hikes ahead have weighed on stocks and bonds.

Fed Chairman Jerome Powell has vowed to raise rates as high as needed to kill inflation but also believes policymakers can guide the economy to a so-called soft landing.

Adding to the volatility has been the war in Ukraine, which has caused a further spike in oil and other commodity prices.

Graphic: S&P 500 timeline in 2022 – https://fingfx.thomsonreuters.com/gfx/mkt/jnvwezxjgvw/Pasted%20image%201653063479826.png

A few areas of the stock market have been spared. Energy shares have soared this year, along with oil prices, while defensive groups such as utilities have held up better than broader markets.

Graphic: S&P 500 sectors since all-time high – https://graphics.reuters.com/USA-STOCKS/BEAR/znpnemwbdvl/chart.png

On the flip side, shares of technology and other high-growth companies have been hit hard. Those stocks — high fliers during much of the bull market over the past decade — are particularly sensitive to higher yields, which dull the allure of companies whose cash flows are weighted more in the future and diminished when discounted at higher rates.

Some of the biggest of these companies, such as Tesla (NASDAQ:TSLA) and Facebook (NASDAQ:FB) owner Meta Platforms, are also heavily weighted in the S&P 500 index.

Graphic: Casualties in 2022 stock market – https://graphics.reuters.com/USA-STOCKS/BEAR/egpbkwajjvq/chart.png

Investors have looked at various metrics to determine when markets will turn higher, including the Cboe Volatility Index, also known as Wall Street’s fear gauge. While the index is elevated compared to its long-term median, it is still below levels reached in previous major selloffs.

Graphic: VIX and bear markets – https://fingfx.thomsonreuters.com/gfx/mkt/xmpjoxrbyvr/Pasted%20image%201653068998738.png

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