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Market Comment | Volatility increased sharply this week on US political uncertainty

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  • Financial markets showed a signal risk-off sentiment after news of a potential investigation of Trump’s administration (see) added more uncertainty in US politics, and fuelled concerns about further delays in US reflationary policies. VIX jumped from its recent subdued level and stock prices dropped strongly across the board – especially in the banking sector. However, this risk-aversion faded as the week went by.
  • Brazilian assets suffered sharply on policy uncertainty triggered by bombshell news about the current president (see), according to local media that may put at risk long-awaited economic reforms. The BRL plummeted, as did the Bovespa equity index. Nonetheless, there was no significant contagion, so far, in other countries.
  • The USD reached a fresh six-month low (see), while UST yields declined significantly and US stocks dropped moderately. Moreover, Fed rate hike bets continued to recede (June’s hike is priced but expectation for end-of-year level is diminishing), thereby also playing a role in the decline of the USD and of UST yields.
  • Against this backdrop, the EUR appreciated significantly, boosted by encouraging economic indicators (see). In bonds, European sovereign bond yields declined significantly, without differentiation between core and peripheral curves.
  • The ECB also published the accounts of its monetary policy meeting (see), revealing that the ECB’s Peter Praet had warned ECB members to be particularly cautious about publicly discussing plans regarding its monetary policy stance. In this regard, the ECB’s Couré stressed in an interview (see) the current positive economic conditions in the Euro zone and bet on a slight change in wording to avoid an excessive gradualism that could cause a “forceful” market adjustment.
  • Oil prices rose appreciably during the week (see) after US crude oil inventories declined for the sixth week in a row. The combination of higher oil prices, USD depreciation and lower investor risk appetite left EM currencies with a mixed performance. In line with our forecast, some central banks changed their key interest rate such as Mexico (+25bps, see) and Chile (-25bps, see).

BBVA Research suggest the following reading list:

  • Adding a piece to the productivity puzzle: Management practices (see)
  • Emmanuel Macron and the battle for the eurozone (see)
  • Is Chinese Growth Overstated? (see)

 

Update 15.45 CET 19 May, 2017

Table 1

Source: Bloomberg, Datastream and Haver

* With one day delay

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