These are the ominous expectations that are expected to occur in the financial markets if Russia cuts off all gas supplies to Europe: European shares will fall 20%, while the difference between the yield of sub-investment-grade bonds and their American counterparts of the same term will widen, surpassing the crisis levels in 2020, while the euro exchange rate will fall. to 90 US cents.

Fewer shipments are being sent with the main pipeline shut down for 10 days for maintenance, and concerns are mounting over whether Moscow will increase flows again. Several investors are asking: How bad could this situation get?

In response to this question, strategic analysts in various financial institutions in the United States have tried to forecast numbers in a scenario that would not have been imagined in normal circumstances. There are many variables that govern this scenario, such as how long the flows will be blocked, the size of supply cuts, and to what extent countries will rely on energy conservation, all of which is still speculation that no one knows for sure at best.

no alternatives
“The most significant unknown is how the shock that began in Germany, Poland and other Central European countries will affect the rest of the continent and the world,” said Joachim Clement, Head of Strategy, Accounting and Sustainability at Liberum Capital. “There is simply no available alternative to Russian gas.”

In this week’s analysis, economists at UBS laid out a detailed view of what they see happening if Russia halts gas shipments to Europe. They explained that this would reduce companies’ profits by more than 15%, and the market sell-off would exceed 20% of the shares of companies listed on the “Stoxx 600” index, while the euro would drop to 90 cents. They wrote that a rush into safe-haven assets would push the benchmark German Bund yield to 0%.

Arnd Kapten, chief economist at UBS, wrote: “We stress that these forecasts should be viewed as rough estimates, not a worst-case scenario in any way. We can easily imagine economic disruptions leading to more negative growth outcomes.” .

Currency at risk
The markets are already taking some damage into account. The euro hit a two-decade low, parity with the dollar, and German stocks have lost 11% since last June. The biggest loser is German gas giant Uniper, whose share price has fallen 80% this year as it seeks a government bailout.

To be sure, many investors say there is reason to believe that Russia will restart gas supplies, when maintenance of the Nord Stream 1 pipeline ends on July 21. But as UBS points out, if European countries start to rationalize the use of gas to fill stocks, the damage to economic growth will be great.

“Europe is currently in a vicious cycle, with higher energy prices hurting the European economy, causing the single European currency to fall. A weaker euro in turn makes energy imports more expensive,” said Charles-Henri Monshaw, chief investment officer at Banque Syz. As confirmed.

Another concern, says Prashant Agarwal, portfolio manager at Pictet Asset Management, is that central banks will not be able to do much to help the economy fend off inflation, which is already at its highest levels in a decade. He said, “I am not sure whether central bank tools will succeed in this scenario. In the past, they had a great opportunity to remedy the situation because inflation was low.”

Here is a selection of the views of other strategic analysis institutions:

“BNP Paribas”
Strategic analysts, including Sam Linton Brown and Camille de Courcel, wrote that a complete disruption of gas supplies would send the Euro Stoxx 50 index to 2800, down nearly 20% from its current levels.

They also recommend hedging assets such as stocks of high-quality companies and buying options contracts on a falling European stock index. They write that the automobile, industrial and chemical industries will come under pressure.

Nomura International PLC
Currency analyst Jordan Rochester has urged clients to short the European single currency since last April. He wrote that if Nord Stream 1 does not resume operations, the euro could fall to 90 cents from the dollar over the next winter.

He added, “We believe that Europe may fail to build up enough gas reserves for the winter, and this may lead to forced energy rationing. If this is not an economic crisis, then what is?”

JPMorgan Chase & Co.
According to strategic analysts at JPMorgan Chase & Co led by Matthew Bailey, if Russia halts gas supplies, movements in European corporate bond spreads will be larger than those seen during the first wave of the Covid pandemic in 2020.

They wrote that spreads on investment grade debt could rise as high as 325 basis points. For sub-investment grade bonds, the spread can widen to up to 1,000 basis points.

Goldman Sachs Bank
The euro is already reversing much of the decline, but the currency could fall again by 5% if market prices are estimated at a full Nord Stream 1 shutdown, said Goldman Sachs strategists, including Christian Mueller-Glesman. They also recommend defensive (basic) provisions, while retaining significant weight in cash and key commodities.

Bank of America
Last week, Bank of America lowered its previous bullish forecast for copper, warning that in a worst-case scenario – in which Europe would run into a large-scale gas deficit – it could drop prices to around $4,500 a ton.