In 2018, President Donald Trump warned German Chancellor Angela Merkel that Germany would regret becoming overly reliant on Russian energy.
Merkel and most of the rest of the European Union scoffed at Trump's warning and instead turned over energy policy to "a petulant Scandinavian teenager and a bunch of German 'greens.' " Zero Hedge noted in a July 13 analysis.
Europe is already feeling the pinch as Russia's main pipeline, the Nord Stream 1, was shut for a 10-day maintenance. The pipeline was scheduled to be turned on again on July 22, but "fears are building over whether Moscow will turn the tap back on," Bloomberg reported on July 12.
July 22 could very well be Europe's "doomsday" if Vladimir Putin decides to keep the pipeline shut down.
In an analysis this week, UBS Group AG economists detailed what they see happening if Russia halts gas deliveries to Europe:
• It would reduce corporate earnings by more than 15%.
• The market selloff would exceed 20% in the Stoxx 600.
• The Euro would drop to 90 cents.
• The rush for safe assets would drive benchmark German bond yields to 0%.
“Europe is currently being caught in a vicious circle,” said Charles-Henry Monchau, chief investment officer at Banque Syz. Higher energy prices are hurting Europe’s economy, driving the euro lower. In turn, the weaker euro makes energy imports even more expensive, he said.
Related: How Angela Merkel’s green ‘reset’ caused the economic collapse of Germany, July 12,2022
The other worry is that central banks won’t be able to do much to help the economy with inflation already running at decade-highs, said Prashant Agarwal, a portfolio manager at Pictet Asset Management. “I am not sure central bank tools work in this scenario,” he said. “In the past, they had leeway to address the situation because inflation was low.”
DB FX strategist Jim Reid said that July 22, the day gas is supposed to come back online, could be the most important day of the year: "While we all spend most of our market time thinking about the Fed and a recession, I suspect what happens to Russian gas in H2 is potentially an even bigger story. Of course by July 22nd parts may have be found and the supply might start to normalize. Anyone who tells you they know what is going to happen here is guessing but at minimum it should be a huge focal point for everyone in markets."
"All this power in the palm of Putin's hand, almost as if he knew precisely how much leverage he had back in February while Europe was — as always — completely clueless," Zero Hedge noted.
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