Europe: Italian, German shares slide as EU agrees on gas rationing

EUROPEAN shares fell on Tuesday, with those of Germany and Italy leading declines across major euro zone bourses as European Union countries approved a weakened emergency plan to curb their gas demand, while retail stocks slid after Walmart’s profit warning.

The move comes after Russia’s Gazprom said it would cut flows through the Nord Stream 1 pipeline to Germany to a fifth of capacity, seen as retaliation against Western sanctions over Russia’s war with Ukraine.

Energy ministers approved a proposal for all EU countries to voluntarily cut gas use by 15 per cent from August to March with compromise deals to reduce the cuts for some countries.

“Europe is clearly preparing for the occasion that they would be fully cut off from Russian gas,” said Teeuwe Mevissen, senior market economist at Rabobank.

The move reverberated across assets, with eurozone bond yields tumbling and euro falling 1 per cent.

The IMF cut its eurozone growth outlook for 2022 to 2.6 per cent from 2.8 per cent in April, reflecting inflationary spillovers from the war in Ukraine, with Germany seeing its 2022 growth outlook cut to 1.2 per cent from earlier forecast of 2.1 per cent.

Credit Suisse also cut its 2022 inflation adjusted economic growth forecast for the euro area to 2.3 per cent from 2.4 per cent, expecting the sharpest contractions in Germany and Italy.

“Even if rationing is avoided – the surge in gas prices driven by supply uncertainty will depress activity further,” Credit Suisse European economist Veronika Roharova said.

Data on Monday showed Europe’s biggest economy, Germany, was likely on the cusp of a recession.

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German shares have fallen 17.6 per cent for the year, underperforming a broader pan European Stoxx 600 index which is down 12.6 per cent.

Italian shares have lost more than 20 per cent with a domestic political crisis adding to woes. Investors also braced for a likely 75-basis-point interest rate hike by the US Federal Reserve on Wednesday.

Worries about monetary policy tightening hitting economic growth and fears of an energy supply crunch have seen the Stoxx 600 mark losses in five of the last six months.

On the day, the Stoxx 600 was flat.

A rally in defensive sectors such as healthcare, food and beverages and a 2.9 per cent jump in Unilever after upbeat results, were offset by a slide in retailers and Swiss bank UBS following a profit miss.

Retail stocks lost 4.2 per cent to log its worst day in nearly four months, hit by a profit warning from top US retailer Walmart Inc, which cited surging prices for food and fuel affecting discretionary demand.

However, Lindt & Spruengli gained 5.7 per cent after the Swiss chocolate maker raised its 2022 sales guidance and unveiled a 1 billion Swiss franc (S$1.45 billion) share buyback programme. REUTERS