Strategists develop worst-case scenarios for stocks and bonds
European stock indices fell by 20%. Spreads on junk-rated loans have risen from levels recorded during the 2020 crisis. The euro fell to just 90 cents.
Financial markets are waiting for negative forecasts if Russia completely cuts off gas supplies to Europe.
Now supplies are limited as the main pipeline is closed for 10 days due to maintenance, and concerns are mounting about whether Moscow will resume supplies. Many investors are wondering: how bad things can end?
In answering this question, Wall Street strategists attempted to imagine a scenario that would have been unthinkable in normal times. There are so many variables, such as the duration of any outage, the extent of supply cuts, and how far countries might go to ensure energy efficiency, that any forecast is speculation at best.
“It is not known how the shocks that started in Germany, Poland and other Central European countries will affect the rest of Europe and the world,” said Joachim Klement, head of strategy, accounting and sustainability at Liberum Capital. “There is simply nothing to replace Russian gas.”
In an analysis this week, UBS Group AG economists detailed what they think will happen if Russia cuts off gas supplies to Europe. This would result in a reduction in corporate earnings of more than 15%. The market decline will exceed 20% within the Stoxx 600 index, and the euro will drop to 90 cents. The quest for safe assets will see benchmark German bond yields drop to 0%.
“We emphasize that these are only estimates and are by no means a worst-case scenario,” wrote Arend Kaptein, chief economist at UBS. „It’s easy to imagine economic problems leading to more negative growth impacts.”