We enter the week with wide swings in markets, led by the oil spike overnight.
The speculative frenzy that took oil from $91 to $119 late Sunday night was crushed by the European morning as a headline hit about Saudi making more supply available.
Stocks followed the inverse path of oil along the way — ultimately recovering from deep declines overnight, to close in positive territory on the day.
So, the markets went from full panic to relative calm in a single trading session — much like we saw from the Tuesday to Wednesday markets of last week.
Remember, after that severe risk-off day on Tuesday, Scott Bessent was in front of a camera the next morning addressing all of the points of fear regarding the potential for a prolonged energy crisis.
Today, was another talking down the temperature day — in this case, by talking UP supply.
It started with the Saudi supply news, then there was talk of a coordinated supply release from Strategic Petroleum Reserves (SPRs) of G7 countries. And both today and yesterday Trump officials talked about relaxing U.S. sanctions on Russian oil while the Hormuz Strait was shut.
So, the sentiment massaging worked again. Markets like it.
But the structural pain developing in Europe, we've been discussing, noticeably wasn't as reactive to the chatter of potential supply relief.
Why? The U.S. is (now) energy dominant (a net exporter). Europe is energy dependent.
Higher energy prices in Europe become a systemic financial risk across the euro zone at some point — as it begins to exacerbate the fiscally fragile (countries like Italy).
And with that, this is the key stress indicator to watch right now in Europe, and it didn't improve today, it worsened …
This chart (normalizing for unit of measure and exchange rate) reflects how much more Europeans are paying for energy (Dutch TTF Natural Gas) relative to Americans (Henry Hub Natural Gas).
As you can see the ratio is reaching the extreme of 2022. What happened in 2022, oil supply was used as leverage (and weaponized) in the Russia invasion of Ukraine. It spiked European natural gas prices to a ratio of 11.6X the cost of American natural gas.
Not coincidently, the European sovereign debt markets started showing stress in the middle of 2022, and the European Central Bank had to restart QE (QE by a new name, the "Transmission Protection Instrument") to stabilize bond markets of the weak euro zone countries.
The big question is, does the ECB have the tools and credibility to contain trouble this time (if it gets there).