As risks of economic slowdown and monetary tightening persist, market sentiment continued to deteriorate over the month, European equities extended losses over recessionary fears. Over the month of September, the European STOXX 600 index lost 6.57% (9.02% in US$ terms).

The concerning issue of energy crisis in Europe continued to worsen. Gas deliveries via Nord Stream have not resumed since late August, the leakage found in both Nord Stream 1 and 2 late in the month further complicates the situation. Repairs to the pipeline will be a complex task, gas deliveries through the pipes will likely remain suspended at least over winter. Although Europe is not at immediate danger of a complete shutdown given the high levels of gas storage, a complete shutdown of all gas supplies from Russia is still in the cards. Europe may still experience energy shortage, and the economy is expected to take a hit from the situation.

Economic fundamentals continue to disappoint, issues largely stem from the energy uncertainty, as well as the stubbornly high inflation, with the latter hitting a new record high of 10% YoY in September. In response, the European Central Bank have raised rates by 75 bps in September, and reiterated their resolve in reigning in inflation, ECB President Christine Lagarde explicitly told markets to expect the Bank to continue raising rates in the coming few meetings. With the economy on the cusp of recession, and facing more monetary tightening ahead, we maintain our underweight view on European equities in the short term.