Equities: Oil shock and ECB hawkishness keep selloff contained – Danske Bank

Danske Research Team notes that global equities fell around 0.5% despite a hawkish European Central Bank message and sharp yield curve moves. The bank attributes the relatively mild reaction to exceptional underlying economic strength and a market view that a full stagflation shock is not being priced, with only marginal defensive outperformance and Asian equities softer while European and US futures trade slightly higher.

Stagflation fears not fully priced

"A remarkably contained equity response. Equities fell yesterday but given the relatively hawkish ECB message and the sharp moves at both the front and long end of the yield curve, the selloff could easily have been much more severe."

"The only reason global equities declined by merely around 0.5% was the exceptional strength of the underlying economy."

"The session had two dominant drivers: the ECB communication and another 6% rise in oil prices to the highest level since mid-May. The two are difficult to separate, as the ECB message was itself a direct consequence of the oil shock. Investor behaviour and sector rotations therefore largely reflected the same underlying driver."

"Crucially, investors are not pricing a full stagflation shock. Had they been, we would have seen much stronger performance from energy and materials, as well as a considerably deeper defensive rotation. Instead, defensives only marginally outperformed cyclicals, while the broader drawdown remained contained despite the two major shocks."

"Asian equities are lower this morning, but both European and US futures are marginally in the green."

(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor. Know more.)