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

Danske Research Team's analysts report that global equities experienced a slight decline of approximately 0.5%, even with the European Central Bank's hawkish stance and significant shifts in yield curves. The bank attributes the comparatively mild reaction to the economy's strong fundamentals and the market's belief that a full-blown stagflation shock is not being priced in.

European and US futures are slightly higher, while Asian equities are softer. The only reason the market saw a decline of around 0.5% was due to the exceptional strength of the underlying economy. The event was primarily driven by two factors: the ECB communication and a 6% increase in oil prices to their highest level since mid-May.

These factors are closely intertwined, as the ECB's message was a direct result of the oil shock. Consequently, investor behavior and sector rotations largely reflected the same underlying driver. Importantly, investors are not anticipating a full-blown stagflation shock. If they were, energy and materials sectors would have performed exceptionally well, and there would have been a deeper defensive rotation.

Instead, defensive stocks only slightly outperformed cyclicals, and the broader market decline remained contained despite the two major shocks. Although Asian equities are lower today, both European and US futures are marginally positive.