Dovish twist to ECB forward guidance

Danske Research Team Danske Bank A/S

Market movers today

Today's key releases are the preliminary PMIs for the euro area, the US, and the UK for July. We are looking for whether we are seeing a peak in manufacturing and price pressure, which have been major themes in the first half of the year.

This morning, UK retail sales for June are due out. Consensus is looking for a modest increase.

The 60 second overview

ECB decision: Yesterday's ECB meeting was the first following the strategic review published earlier this month. On bond buying nothing is changed and the PEPP is still set to expire in March next year. The largest change was on forward guidance, where the ECB now needs to see inflation reach 2% well ahead of the end of its projection horizon before considering hiking monetary policy rates. This wording is compared with the June statement saying 'to the end of the forecast horizon' a dovish shift on forward guidance and EUR yields subsequently declined with periphery outperforming core. For details see more here: Flash ECB Research: Stepping up on inflation ambitions, but not on tools, 22 July.

Coal: Thermal coal (coal which is burnt in power plants to produce electricity) is probably this year's best performing asset class so far, with price increases of 80% on Australian exports and 44% on South African. This puts price levels at their highest since 2009. Of other asset classes only oil is close with Brent crude 44% higher. An explanation for the rally primarily stems from China with local production down following covid-restrictions as well as a drought in the southern part of the country leaving little to no hydroelectric production. Global electricity demand is according to the International Energy Agency set to grow by 5% this year and 4% next year (-1% in 2020). Renewable energy sources are only expected to cover around half of the increase in net demand.

Equities: As indicated in pre-market trading both European and US indices ended yesterday in positive terrain with European stocks outperforming. The S&P500 returned 0.2% on a generally quiet day in both fixed income and equities during the US session after the previous days have been dominated by stronger than expected Q2 earnings for US firms. This morning futures point towards a positive opening in both European as well as US markets, despite Asian indices ending the day lower.

FI: A quiet day in US treasuries with yields in general marginally lower and curves slightly flatter. EUR investors reacted to the ECB meeting by sending yields lower and Bund yields declined by around 3bp ending the day at -0.43% with periphery outperforming.

FX: As expected, the ECB meeting was a non-event for FX markets. The EUR initially found its clue from relative EUR fixed income performance but during the press conference the single currency stabilised at close to unchanged levels for the day. Looking ahead, we strategically favour more EUR/USD downside but emphasise that this is much more a play on USD real rates, global inflation exposure and global cross asset moves than it is a play on ECB monetary policy. Also in the rest of FX majors space yesterday proved a quiet session.

Credit: On the back of a strong earnings season so far, the credit markets seems have shrugged off any Delta-variant related fears. Yesterday the bullish sentiment continued with itraxx main tighter by 1bp to +47bp and xover tighter by 3bp to +235bp.

Author

Danske Research Team

Danske Bank A/S

Research is part of Danske Bank Markets and operate as Danske Bank's research department. The department monitors financial markets and economic trends of relevance to Danske Bank Markets and its clients.

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