CAC 40, FTSE MIB, IBEX 35, DAX indices on edge as bond yields soar ahead of ECB

European markets retreated today, July 23, as traders waited for the European Central Bank (ECB) decision and reacted to some important corporate earnings from the region.

In Germany, the DAX Index slipped by 42 basis points, while France's CAC 40 declined by 85 basis points. Despite the pullback, the DAX remains just 3.3% below its year-to-date high, while the CAC 40 is trading 3% below its all-time high.

The same trend is happening in other European countries, with the FTSE MIB, IBEX 35, and Stoxx 50 indices falling by over 0.50%. This trend mirrors what is happening in other markets, with US futures and key Asian indices falling.

European Central Bank to deliver a hawkish pause

A key driver for key European indices like DAX, CAC 40, FTSE MIB, and IBEX 35 today is the upcoming ECB interest rate decision.

Economists expect the bank to maintain interest rates unchanged at 2.4%. However, the bank will likely signal its readiness to start hiking interest rates as early as in September.

The bank’s concern is that inflation will start rising now that crude oil prices are rising, with Brent and the West Texas Intermediate (WTI) rising to $98 and $89, respectively. In a note, an ING analyst said:

“The ECB should keep the policy rate at 2.25%, but we do see a September hike as likely, especially as oil prices are moving higher again. One could argue for a front-loaded hike today, but over previous years the ECB has always fully telegraphed any policy moves in advance.”

The rising odds of an ECB hike explain why the bond market is struggling. In Germany, the two-year yield jumped to 2.87%, while in France, it jumped to 3.04%, its highest level since August 2024. In Italy, the two-year rose to 3.09%, while in Spain, it moved to 2.93%. 

These yields have been in an uptrend now that the US and Iran have restarted their war, with some analysts predicting that crude oil prices will continue rising in the near term. In a note on Wednesday, a Goldman Sachs analyst noted that oil prices may hit $120 if the escalation continues.

Earnings season continues

European indices are also reacting to earnings by some of the biggest European companies. TotalEnergies stock soared to its highest level since June 12 as oil prices soared. Its earnings showed that its net income soared by 102$ to $5.4 billion, pushing it to boost its dividends and buybacks.

Unicredit stock retreated even after announcing strong results. The company’s CEO told CNBC that it aims to complete the full buyout of Commerzbank later this year. Andrea Orcell said:

“With respect to the normal regulatory environment and antitrust, and what would allow us to take ownership of tendered shares and therefore exercise control, we think now potentially in Q4, maybe later, and that would mark the moment when we go in.”

BNP Paribas, on the other hand, reported strong earnings, with its net income rising to 4.35 billion euros, helped by its trading business. Its revenue jumped by 12% to 14.1 billion euros. However, its stock retreated as analysts flagged the rising costs following its AXA asset management business.

The other top laggards in Europe were big names like L’Oreal, LVMH, Banco Santander, and Schneider Electric.