- As expected, the FOMC raised the Fed Funds rate by 25 bps to the 0.75%-1% range (see). With its outlook unchanged, it seems that the committee will adhere to its strategy of gradual normalization (two additional rate increases this year). Despite the hike, both the USD and Treasury yields declined, suggesting that the market had anticipated a more gradual tightening cycle than the current statement revealed. The declines in US yields also dragged down European sovereign yields, while supporting equity indices.
- The EUR strengthened markedly during the week, backed by the market’s doubts regarding the ECB’s QE exit strategy, as some ECB members opened the debate. Particularly, Ewald Nowotny’s commented (see) that the ECB could raise its deposit rate before the key lending rate, while he suggested that the Fed’s exit strategy might not be a reference for the euro zone. Moreover, the EUR appreciated also due to the easing of political uncertainty, after the Dutch populist party was defeated in the elections. Furthermore, the prospects of a Le Pen victory in France weakened, on the back of a decrease in bets implying odds of a victory in the French presidential race.
- Oil prices curbed their recent downward trend during the last part of the week on reports that US oil inventories had declined by more than previously expected and the IEA’s monthly report suggested a potential oil deficit in the first half of 2017 (see). Following these reports, oil-sensitive stocks rose, pushing up equity indices across the board.
- Meanwhile, during this week EM currencies benefited from both slightly higher oil prices and a weaker USD, especially the MXN, which appreciated significantly after Peter Navarro, head of the White House National Trade Council, said that he saw Mexico as part of a regional “powerhouse” (see).
BBVA Research suggest the following reading list:
- Why Robert Shiller Is Worried About the Trump Rally (see)
- A blind spot masks the danger signs in finance (see)
- Fed embarks on a beautiful policy normalisation (see)
Update 18 CET 17:30 March, 2017
Source: Bloomberg, Datastream and Haver
* With one day delay
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