The Bank of England acts to avoid a meltdown … a loss of faith in the British government … someone sabotages gas pipelines in Europe … historic European energy bills

Before we jump into today’s Digest, a reminder not to miss this afternoon’s Market Shock 2022 event at 4 PM ET.

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Yesterday, the Bank of England had to step in to stop a meltdown in the British gilt market (British bonds are called “gilts”)

From CNBC:

Yields on U.K. government bonds, known as “gilts,” were on course for their sharpest monthly rise since at least 1957 as investors fled British fixed income markets.

In response to this mass gilt exodus, the Bank of England announced it is suspending its gilt sales next week and will begin temporarily buying long-dated gilts in order to calm the chaos.

From the Bank of England (BoE):

The purpose of these purchases will be to restore orderly market conditions. The purchase will be carried out on whatever scale is necessary to affect this outcome.

So, what prompted this?

Britain is facing historic inflation, a major economic slowdown, and soaring energy costs. To try to ease the economic pain for citizens, a few days ago, the newly-elected Liz Truss government announced the most aggressive tax cut plan in 50 years.

Now, on hand, given the challenges we just highlighted, it’s logical to think “tax cuts will help cash-strapped citizens.”

The problem is that this puts the U.K. government under massive financial strain.

The tax cuts, amounting to nearly 45 billion pounds, come at a time when the U.K. government is already shelling out more than 60 billion pounds to subsidize gas and electricity bills for households.

And since tax cuts mean “reduced revenues” for the U.K. government, how is Liz Truss planning on financing this?

Lots of debt…during a time of climbing interest rates, massive energy subsidization, and high inflation.

It has the makings of a good ‘ole fashioned credit crisis.

British currency traders certainly thought so, and they stampeded out of the pound, sending it to its lowest level again the U.S. dollar in multiple centuries’ worth of history.

Economists around the world rebuked the move. For example, former U.S. Treasury Secretary Larry Summers said that U.K. has now lost sovereign credibility.

The situation was deteriorating quickly, forcing the Bank of England to leap into action. In response, the yield on the 30-year gilt fell more than 100 basis points.

The reaction here in our own equity markets was…interesting

Stocks soared yesterday. And why?

It pretty much reduces to “foolishness.”

Wall Street wanted to believe that the BoE’s dovishness would rub off on Federal Reserve Chairman Jerome Powell and the other Fed presidents, resulting in the elusive “Powell Pivot” that everyone wants so badly.

It makes little sense…

Britain was teetering on the edge of a full-blown credit crisis meltdown. That forced its central bank to step in to prevent a 2008-style financial implosion…

That’s crisis control – not a dovish pivot.

And yet, Wall Street chose to see dovishness. But not only dovishness – contagious dovishness. Like a happy virus that might waft across the Atlantic, find Powell & Co., and bring an end to this great tightening nightmare.

The foolishness has worn off as I write Thursday at lunchtime. The gains from yesterday have disappeared and the S&P has fallen back beneath its June-low.

Wall Street is back to seeing the situation clearly: BoE’s actions yesterday didn’t fix anything – for them or us.

They’re still caught in between the Truss government’s quantitative easing and the BoE’s quantitative tightening (not included the panic bond purchases). The official name for their strategy should be “quantitative contradiction.”

And here in the U.S., all of our market overhangs remain.

Hopefully, stocks will have shaken off some of their losses by the time you read this.

Returning to Europe, their energy situation is getting worse thanks to what appears to be a planned attack on the Nord Stream pipelines

It’s not yet clear what’s happened, but intentional sabotage seems to be behind damage to the Nord Stream 1 and 2 gas pipelines. These are the pipes that carry natural gas from Russia to Europe.

From The Washington Post:

Danish and Swedish authorities detected underwater explosions Monday and reported three breaches on the Nord Stream 1 and 2 gas pipelines, pouring tons of methane into the Baltic Sea.

Seismologists in Denmark and Sweden said the two blasts they detected did not appear to be earthquakes, landslides or other natural activity.

The incidents “are not a coincidence and affect us all,” E.U. foreign policy chief Josep Borrell said. “All available information indicates leaks are the result of a deliberate act.”

He called the disruption “utterly unacceptable.”

Repairs could take a week – if the repairs happen.

The speculation is that this is part of Russia’s continued weaponization of energy. As such, the Kremlin is not acting expeditiously to fix anything.

This morning, reports emerged that Sweden has discovered a new leak in the pipeline. It just means further delays and more pain for Europe.

Meanwhile, yesterday, Kremlin-run Gazprom warned Europe that another gas route through Ukraine is at risk of being shut off

The Russian oil giant threatened to kill gas flows through Ukraine because of a legal dispute over transit fees. If this happens, only one route will remain – the TurkStream pipeline.

Here’s MarketWatch with what this means for Europe:

Now there’s a large chance of Europe being left without any Russian gas for much of the winter.

Benchmark Dutch front-month futures soared 12% to €209 per megawatt hour on Tuesday morning, up from €180 per megawatt hour the day before. U.K. gas futures for October were up 23% to £315 per megawatt hour.

Any way you look at it, Europe faces a painful and expensive winter

As one illustration, the Associated Press recently profiled the Hungarian burger chain Zing Burger. Some of its stores have suffered a 750% increase in electricity bills since the beginning of the year.

How many extra burgers does it take to break even with that headwind?

And here’s Reuters discussing the elevated cost impact on family budgets:

…Energy bills will jump 80% to an average of 3,549 pounds ($4,188) a year from October, regulator Ofgem said on Friday, calling it a “crisis” …

Forecasters expect bills to be just below 6,000 pounds through next year as the cap is raised further, meaning households could be paying nearly 500 pounds a month for gas and electricity, a higher sum than rent or mortgage for many.

As of August, European governments had spent more than $270 billion to protect households and companies from these rising energy prices. But where things go from here is unclear.

From the AP:

With costs high and energy supplies tight, Europe is rolling out relief programs and plans to shake up electricity and natural gas markets as it prepares for rising energy use this winter.

The question is whether it will be enough to avoid government-imposed rationing and rolling blackouts after Russia cut back natural gas needed to heat homes, run factories and generate electricity to a tenth of what it was before invading Ukraine.

These are truly extraordinary times. We’ll keep you updated.

One final reminder to join us today at 4 PM ET for the Market Shock 2022 event

If you’re looking for an “advance warning” system about major market moves – both bullish and bearish – that’s the focus of this afternoon’s event.

Interestingly, the person behind this system isn’t a Wall Street banker or expert investor. But he’s been able to sidestep every major market downturn over the past few years.

You’ll learn how in today’s Market Shock 2022 event. Reserve your seat here and we’ll see you at 4 PM ET.

Have a good evening,

Jeff Remsburg