European Markets Rise, ECB Expected to Change Guidance

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Principal Points

• Stocks in Europe advance on renewed market optimism, major European bourses all finish higher
• The ECB is meeting today to discuss a tweak in its inflation target, part of the first policy change in almost two decades

Markets across Europe rose broadly on Wednesday after a series of upbeat quarterly financial reports lifted the overall mood. The gains helped further erase the losses from the heavy selling on Monday with travel and leisure stocks leading the rally.

The pan-European Stoxx 600 benchmark rose 1.65%, or 7.36 points, to 453.97, nearly recovering the loss from the Monday sell-off. The travel and leisure sector was largely responsible for the upside swing as it gained 3.7%. All major bourses across the old continent finished the day in positive territory as investors shrugged off concerns that the Delta variant of coronavirus could dent the economic recovery.

Spain’s IBEX35 surged 2.50%, followed by the French CAC40, up 1.85%. The UK’s FTSE100 and the German DAX added 1.70%, and 1.36%, respectively. Stocks in Europe extended their gains from a day earlier, suggesting market participants felt comfortable betting on the risky asset class.

Wednesday’s European trading session was boosted by a second-quarter earnings report from several big companies across sectors. Mercedes-Benz maker Daimler AG added 1.10% despite warnings that the global chip shortage could hurt car sales in the second half of 2021. Switzerland’s third-biggest bank Julius Baer posted a net profit of $657mn for the first half of the year, up 23% from a year ago. The bank’s stock gained 2.21%. Swedish outdoor and transportation equipment manufacturer Thule Group soared 12.2% after a better-than-expected second-quarter earnings report.

Anticipation for ECB’s Decision Today

On Thursday, the European Central Bank is expected to convene for its policy meeting in Frankfurt. ECB’s rate-setters earlier in July unanimously agreed to tweak their monetary policy strategy. The forward guidance would include a new inflation target of 2% designed to avoid the risk of prematurely scaling back monetary stimulus. The slight move from just below 2% to 2% would allow the central bank to tolerate both overshooting and undershooting the inflation target.

“We recognize very specifically that the proximity to the effective lower bound requires forceful or persistent monetary policy action,” ECB President Christine Lagarde said earlier in the month as she stressed the need for sticking to the current pandemic stimulus.

Investors expect the European Central Bank to maintain its dovish tone while leaving the interest rate unchanged near zero.

In US stock market action, the three major equity gauges on Wednesday all pushed higher led by increased risk appetite. The Dow Jones Industrial Average gained 0.83%, and successfully recouped the losses from the steep Monday drop. The S&P500 and the Nasdaq Composite jumped 0.82%, and 0.92%, respectively.

Similar to their European peers, Wall Street stocks were lifted by strong earnings figures. Coca-Cola raised its full-year sales and profit guidance as it bet on strong demand from reopened restaurants, sporting events, and other social venues.

In Washington, Senate Republicans blocked the $1tn bipartisan infrastructure deal on Wednesday. The vote failed, with 49 in favor and 51 against, far from the 60 needed to move the bill forward. Despite the setback, President Joe Biden remains certain that the economic package will be given the green light early next week.

Bitcoin and the cryptocurrency market attempted to stage a comeback rally on Wednesday but fell short as the buying momentum fizzled out relatively quickly. During an event called “The B Word” aimed to promote Bitcoin, Elon Musk, Jack Dorsey and Cathie Wood spoke about Bitcoin’s features and its role in society. While they praised the digital currency, the price of Bitcoin could not gather enough steam to sustain a clean break above $32,000. Bitcoin’s price gravitated toward $31,500 to $31,700 and ended up nearly 8% on the day.