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Market Comment | Expectations on monetary policy drove the markets during the week


  • The ECB decided to maintain its monetary policy stance unchanged, but changed the wording slightly, introducing a small tweak that could be the prelude to additional changes in the coming months (see BBVA Research note). Inflation has been revised significantly upwards this year to 1.7% YoY on increasing energy prices, but the ECB has barely changed its broad view on core inflation. The EUR appreciated and German government bond yields increased, after Mario Draghi’s remarks admitting that the probability of “lower” rates has decreased and that there is a lesser sense of urgency about easing monetary policy. The banking sector also benefited from lower expectations of looser monetary policy. (Official statement). Moreover, the reaction of the money market rates suggest markets are bringing forward the the ECB rate hike.
  • Sovereign bond yields increased significantly amid increasing odds of a rate-hike in next week’s FOMC meeting (market implied probability at 100%) also boosted by today’s US payrolls data (better than expected, despite the sluggish increase in earnings, see). As a result, the USD appreciated and US Treasury yields rose (pushing up other sovereign bond yields significantly), with no negative impact on equities, which are hovering around their historical highest level.
  • The oil price was also a very significant driver in financial markets during the week as it plummeted on doubts about the effectiveness and the persistence of OPEC measures to maintain the price (see). Under these circumstances, commodity currencies depreciated during the week.
  • Equity indices showed a good performance globally during the week, backed, among other factors, by positive economic data in China as foreign exchange reserves rose unexpectedly in February (see). In EZ, equity markets retained their positive mood as political tensions eased in France (according to latest surveys) ahead of the first elections in the EZ next week (the Netherlands). The fact that there were no negative surprises in EZ GDP growth 4Q16 (1.7% YoY see) also helped.
  • The GBP depreciated against the USD amid political uncertainty, when Theresa May received a setback to her Brexit plans, as the Lords (the upper house of the UK parliament) voted to amend Brexit legislation, including the requirement for ministers to bring the final Brexit deal back to parliament for final approval (see). The GBP recovered some of its losses after the UK government revised its growth forecast for this year upwards (see).


BBVA Research suggest the following reading list:

  • ECB exit strategy need not mimic the Fed’s (see)
  • CDS markets signal rising fear of euro breakup (see)
  • Demand and Supply of Populism (see)
  • Revisiting the Paradox of Capital: The Reversal of Uphill Flows (see)


Update 17 CET 10 March, 2017

Table 1

Source: Bloomberg, Datastream and Haver

* With one day delay


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