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Market Comment | Equity volatility remained subdued despite doubts about China’s stability

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  • Financial markets were steady and showed historically low levels of volatility both in equities and in interest rates during this week, as reflected in minor changes in sovereign bond yields and stock prices. The expected outcome of the French election (Macron won the Presidency by a wide margin) and the mild recovery of oil prices (OPEC hints at extra cuts in supply see) after last week’s sharp drop contributed to calm financial markets despite the lingering uncertainties in China extended by the slightly disappointing trade data (see), amid first signs of liquidity squeeze concerns.
  • The EUR lose some ground this week, after the high levels reached right after the results of the first round of the French election, while the USD appreciated – despite higher political uncertainty (see)- backed, among other things, by Trump’s (partial) victory in the house of representatives vote (see), which could increase the odds in favour of the reflationary policies advocated by the Trump administration.
  • US monetary policy also supported the USD as a June rate-hike is fully priced in by markets (despite today’s disappointing prices data & retail sales that dragged down US yields and USD (see), after the Fed’s Kaplan said that “the base case for removal of accommodation is three times this year” (see) and the Fed’s Rosengren even favours three more hikes in 2017 (see).
  • Greek assets rallied during the week, as the country’s sovereign bond yields declined significantly (reaching their lowest since 2012) and its equities appreciated signally, after the country’s authorities legislated reforms to unlock new bailout loans, which may well be approved by euro zone finance ministers at their next meeting (see).
  • The BoE kept its monetary policy unchanged (see), with a slight deterioration in its growth forecast for the UK caused by a potential consumer slowdown.

 

BBVA Research suggests the following reading list:

  • Reading the footprints: how foreign investors shape countries’ participation in global value chains (see)
  • Stick with winning stocks but be ready for a twist (see)
  • R-Star and the Draghi rules: Correctly measuring the equilibrium interest rate for policy use (see)

 

Update 16 CET 12 May, 2017

Table 1

Source: Bloomberg, Datastream and Haver

* With one day delay

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