Euro hits lowest level in two decades as energy crisis intensifies – business live

The UK’s National Grid has doubled the size of its regular emergency planning drill, at a time when fears of energy supply shortages are rising.

The emergency gas shortage planning exercise, in which various scenarious including electricity rationing are war-gamed, will run for four days instead of the usual two, the BBC reports this morning.

Here’s the details:

The government insists there is no risk to UK energy supplies and consumers should not panic.

But industry say ministers need to do more to secure supplies this winter.

The National Grid exercise, which gets under way next month, will involve government agencies, regulators, lobby groups and major energy firms.

Called Exercise Degree, it will simulate scenarios in which a loss of gas supply triggers an emergency situation for the UK’s energy system.

The BBC also reports that business Secretary Kwasi Kwarteng does not appear to have sought any advice from government officials on the possibility of rationing energy – a BBC Freedom of Information request found he had not done so before the end of June.

Sterling is also under pressure against the US dollar this morning.

The pound has dropped by almost half a cent to $1.172 against the dollar, the weakest since March 2020 (when the Covid-19 pandemic rocked global markets).

Britain’s surging energy costs and weakening economy have weighed on the pound, with families facing rocketing energy bills.

As Jane Foley, head of FX strategy at Rabobank in London, explained yesterday:

“The weak UK growth outlook continues to weigh on the pound. News that Ofgem is set to announce on Friday that UK average annual household energy bills are likely to rise to more than £3,500 pounds reinforces the headwinds facing consumers.”

European gas prices are being driven higher by concerns over supplies from Russia (Gazprom has cut flows through Nord Stream 1 pipeline this summer), and also rising demand.

On the latter point, James Huckstepp, head of EMEA gas analytics at S&P Global Commodity Insights, explains:

The recent hot, dry, and relatively still (non-windy) weather is as bullish as it gets for summer gas demand.

This translates to high air-conditioning load, low hydro-generation (along with other nuclear and coal fired generation issues that come along with low-river levels), and then relatively low wind generation.

Regarding price-driven demand destruction—although it is visible both in the data and anecdotally—this may have plateaued for the time being.

Good morning, and welcome to our rolling coverage of business, the world economy and the financial markets.

The euro has sunk to a fresh two-decade low as surging gas prices fuel concerns over the eurozone economy.

The single currency has dropped as low as $0.991 against the US dollar this morning, its weakest point since 2002, as fears of a European recession and more aggressive US interest rate rises both rattle the markets.

The euro came under renewed pressure as wholesale energy prices rocketed on Monday, after Russia announced it would halt natural gas supplies to Europe via the Nord Stream 1 pipeline for three days at the end of the month, for maintenance.

Last night, the benchmark European gas price settled at its highest closing price on record, having surged during August on fears that Moscow is squeezing energy supplies.

Europe’s benchmark electricity price jumped more than 25% on Monday to pass €700 per megawatt-hour for the first time, around 14 times the seasonal average over the past five years.

Jim Reid of Deutsche Bank told clients that the energy crisis had intensified.

Starting in Europe, the energy crisis intensified yet further, after news over the weekend that Nord Stream would be shut for maintenance at the end of the month introduced fresh fears it would not re-open.

European natural gas prices ratcheted +14.59% higher to €280/MWH, a record high. German power prices surged +18.60% to another record as well, closing at €663 and breaching €700/MWH intraday for the first time ever.

This summer’s heatwaves have already strained Europe’s energy supplies. Such high prices will hurt households badly, while disruption during the winter months could be devastating for business activity.

Tapas Strickland, a director of economics at National Australia Bank, says:

“Europe’s dire energy situation suggests the peak of inflation is not here yet and the risk remains that high inflation is sticky for longer without further aggressive central bank action.

“No surprise then to see the dollar at near multi-decade highs against a falling euro and British pound.”

While energy shortage fears hit the euro, the dollar is in demand. Traders are anticipating the Federal Reserve will continue to lift US interest rates to battle inflation, despite the slowdown in the global economy.

Wall Street saw its worst day since June last night, with the Dow Jones Industrial Average dropping 2% as the summer rally fizzled out.

Also coming up today

The latest surveys of purchasing managers across Europe will show the damage caused by soaring energy prices and extreme weather this summer, including low water levels on the Rhine.

August’s flash purchasing managers surveys are expected to show that eurozone factories shrank again this month, while the services sector struggled.

Michael Hewson of CMC Markets has the details:

Surging energy prices, along with sharply declining water levels on the Rhine have cut the rug out from the manufacturing sector in Germany with today’s August flash PMI expected to see a further decline from 49.3 to 48, while services activity is also expected to slip further from 49.7 to 49.

In France the picture isn’t any better, although the services sector is benefitting from a bit of a tourism boost, however the forest fires could well pull economic activity here down quite a lot more. In manufacturing economic activity is likely to slip to 49, from 49.5, while services could slip from 53.2 by a lot more than the 53 that is currently being forecast.

In the UK, the picture is slightly better, but the PMI survey could show a slowdown in growth.

With August being a slow period due to holidays, we could well start to see economic activity on the PMI level start to slide into contraction territory, from 52.1 for manufacturing in July and from 52.6 for services in July.

The agenda

• 9am BST: Eurozone flash manufacturing and services PMI survey for August

• 9.30am BST: UK flash manufacturing and services PMI survey for August

• 11am BST: CBI survey of industrial trends

• 2.45pm BST: US flash manufacturing and services PMI survey for August

• 3pm BST: Eurozone consumer confidence survey for August

• 3pm BST: US new home sales for July