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What Do You Need To Know About ECB Day?


22 July 2021

Futures in the United States are trading higher today, following a strong rebound in stock markets after the bears took control on Monday. Concerns about the Delta variant rising and wreaking havoc on economies around the world have been outweighed by optimism about corporate earnings. Until now, 15% of the S&P 500 companies have reported second-quarter earnings, with 88% exceeding earnings forecasts and 84% exceeding revenue expectations.

Stock traders should keep in mind that the European Central Bank will hold a two-day meeting today following the release of its latest monetary policy statement.

ECB Meeting

It should come as no surprise to investors that the main agenda item for today’s ECB meeting will be the outlook for inflation and strategies for effectively combating it. Investors should understand that, while interest rates are expected to remain unchanged, the central bank’s forward guidance will be extremely valuable. Forward guidance, the tone and language used by officials to explain the central bank’s future policies, has become an important tool in times of volatility and uncertainty.

The ECB has raised its inflation target to 2% and stated that it is prepared to take proactive measures to limit its rise. What investors should pay attention to, however, is what potential anti-inflationary policies mean for future policy rates and the massive stimulus provided by bond purchases. The central bank’s communication should abate concerns by playing in the sweet spot of not sounding too hawkish by tightening the policy rate sooner and hindering recovery, while still being in a position to hamper consumer prices from growing any further.

Investors should pay close attention to today’s meeting because a similar situation exists in the United States and could provide early indications of how the Fed will come across in its monetary policy statement, which is scheduled to be released on Wednesday.

Data Ahead

The weekly unemployment claims are also set to be released by the Labor Department today. The number of claims is expected to fall from 360,000 last week to 350,000 this week. Furthermore, stock traders will be watching tomorrow’s Flash Manufacturing Purchasing Managers’ Index closely to get an update on the economy’s production, prices, inventories, new orders, and employment. A reading of 50.0 or higher indicates expansion. The reading in June was 62.6, exceeding the forecasted 61.5.

Cryptocurrencies

Bitcoin, the benchmark for digital coins, has been trading higher following the remarks by Elon Musk, CEO and founder of Tesla, at a conference arranged by the Crypto Council for Innovation. Investors should note that Elon Musk is one of the strongest supporters of cryptocurrencies and his comments on the subject have sent crypto markets spiralling in the past.

The billionaire stated that he himself owns Bitcoin, Dogecoin, and Ethereum, while both SpaceX and Tesla have Bitcoin on their balance sheets. Following his remarks, the price retraced above the $32,000 mark and is currently trading at nearly $32,016 as of 12.10 a.m. EST. Musk stated that he is using the “pump but don’t dump” strategy and that Tesla would resume accepting Bitcoin as a mode of payment once mining moves to means that are more environmentally friendly.

Furthermore, investors should keep in mind that real interest rates are negative in many parts of the world, and Tesla’s bank balances in Europe provide negative returns, which drive him “crazy,” and he would rather convert those figures into Bitcoin.

Gold and the US Dollar

The price of gold has dropped to its lowest level in more than a week as investors’ risk appetite has recovered, as evidenced by a significant rally in equity markets in yesterday’s session. As a result, Treasury yields have risen. These events have a negative impact on gold because it is an asset that investors use to hedge risk against uncertainty.

On the other hand, the dollar index, which measures the performance of the dollar in relation to other major currencies, has also fallen. Quantitative easing by the Fed has hampered its growth because of a growth in the currency supply within the economy. Having said that, tapering of the stimulus is inevitable and, hence, is likely to fuel appreciation of the US dollar in coming months.

Oil

Oil prices jumped by nearly 4% yesterday despite an unexpected rise in stockpiles since May. Economists had expected oil inventories to drop by 4.5 million barrels, while in reality; the stockpiles surged by 2.1 million barrels last week, settling at 439.7 million barrels. The jump in prices is likely fuelled by a rise in the risk appetite of investors.

Brent crude oil settled at $71.95 per barrel and U.S. West Texas Intermediate settled at $70.04 per barrel as of 12:25 a.m. EST.

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