• US Equities rose on Tuesday as the Fed repeated it will leave interest rates near zero for an extended period. The S&P gained 0.78%, reaching a 17-month high. This morning, Asian shares rose by 1-2% after the Bank of Japan loosened monetary policy.

  • The US Federal Reserve gave a slightly more upbeat outlook for the country’s economy, bur repeated that interest rates would remain close to zero for an “extended period”.

  • Rating agency Standard & Poor’s affirmed yesterday its ratings on Greece and ended its review for a downgrade, saying the government’s recent deficit reduction measures are supportive of the ratings.

  • The Bank of Japan loosened monetary policy by doubling the funds available for to banks for three- month loans, following government pressure for action to support the economy.

  • The World Bank raised its 2010 growth and inflation forecasts for China and recommended a tighter monetary policy as well as a stronger exchange rate to restrain inflation expectations and asset bubbles.

  • US housing starts and permits fell last month as winter storms disrupted construction, but figures were not as weak as expected.

  • German ZEW investor confidence dropped for a sixth month in March amid signs that the economy is struggling to expand and as Greece’s fiscal crisis shakes financial markets.

  • Crude oil rose above $82 a barrel after an industry report showed a steep fall in US gasoline stockpiles and a smaller-than-expected increase in crude inventories.

  • Today, the eco calendar contains the US PPI data, UK jobless claims and Bank of England Minutes.


Markets

Global bond markets had another positive session, helped by a dovish FOMC statement. Rallying stocks couldn’t prevent US yields to drop 3.3 to 4.7 basis points in a daily perspective, while German yields fell 2 basis points across the curve.

Earlier in the session, German bonds were initially under some modest downward pressure, as an easing of risk aversion linked to the half-hearted euro-group deci-sions drove intra-EMU yield spreads versus Germany somewhat tighter. The eco data had little impact: HICP inflation was in line with the flash estimate, core CPI too, but at new lows. The ZEW economic sentiment was marginally lower than in Febru-ary, but less than expected. The Irish tap of its 6- and 10-year bonds attracted strong demand. However, in the afternoon session, ahead of the FOMC, the Bund moved again higher, erasing first the morning losses and later on moving into positive terri-tory. S&P decided to remove Greece’s BBB- rating from the Creditwatch with negative implications as S&P has confidence that the austerity package will be enough to have the government attain the objective of a 4%-point cut in the 2010 deficit. So, short term risks on a downgrade receded. However, at the same time, S&P changed the stable outlook into a negative outlook, meaning that in a long term the risks are still on a downgrade. This helped peripherals to recover and spreads to narrow. The Bund held nearly stable. In the US bond market, bonds were already higher ahead of the FOMC and received an additional boost when the dovish state-ment was published, notwithstanding equities moving higher.

The FOMC concluded its meeting with the release of a statement that showed no real surprises. The FOMC was somewhat more positive on the economic outlook, in line with the published data and kept its inflation outlook, subdued for some time, un-changed. Importantly, the FOMC continues to anticipate that economic condi-tions,....., are likely to warrant exceptionally low levels of the federal funds rate for an extended period. We thought they would have tweaked their forward looking lan-guage to make it less strict and allow them more flexibility going forward. Keeping the phrase intact means that currently the FOMC is moving slower-than-we expected towards a first tightening of policy, which nevertheless is still likely before year end. Finally, Kansas Fed governor Hoenig dissented again, as he thought the extended period of time of exceptional low levels was no longer warranted. This time he ex-plained in more detail why. No other governor joined him though, which may mean that a compromise was struck between hawks and doves to remove the extended period language at a later meeting, probably the April 27-28 one, maybe on the con-dition payrolls growth had turned definitely positive. Markets reacted positively on the prospect of having for longer very low rates: equities gained moderately, but impor-tantly pushed the S&P above cycle highs. Bonds gained too, if moderately, with the belly outperforming the wings. For a detailed report of the FOMC decision

On the Forex market, the dollar was under downward pressure, ahead of, but also after the FOMC meeting, while sterling gained against the euro. EUR/USD trading has been volatile in recent sessions. Yesterday, the pair recouped Monday’s losses. While we were critical about the Euro group “decisions” regarding a support package for Greece, it seems the market did see some firmer commitment. The decision of S&P regarding Greece (see higher) was an additional positive for the euro, while the FOMC decision combined with stronger equities completed the picture. So while the pair closed about 100 ticks higher at 1.3764, it moved further north at the onset of European trade to 1.38. While this is constructive for the euro, from a technical point of view, we are still in a consolidation band. Only a break above 1.3850 area would be a technical significant move that would call off the short term alert on the euro.

EURUSD

EUR/GBP started yesterday’s session on a strong note, immediately testing the 0.9120 level, but euro selling kicked in and the pair dropped throughout the whole session to close at about 0.9030. We didn’t see any particular event that might ex-plain the rather pronounced price action, which was though from a technical point of view not very relevant. In early dealings today, the euro tries to fight back. Later on, sterling traders will look at the BoE Minutes for clues about the QE program. The MPC decided, probably unanimously, to keep its programme on hold, but it will be in-teresting to see how firm the commitment of several MPC members was. Any signs that the commitment was weak might be negative for sterling.

USD/JPY showed a number of intra-day gyrations yesterday, but closed only mod-estly lower at 90.31 versus 90.53 on Monday. The FOMC decision was the final fac-tor that ultimately led to the marginal daily gains of the yen, as the significance of the dovish decision apparently primed the advance of equities, traditionally a negative for the yen. Overnight, the BOJ loosened its monetary policy as it doubled the funds available for banks for three month loans. Initially the yen spiked up (USD/JPY down), suggesting that the loosening fell short of expectations. However, the spike was undone and the pair currently changes hands at 90.47, little changed from open-ing levels.

Today, the eco calendar is a bit less attractive as it only contains the US PPI data, weekly mortgage applications and euro zone Q4 labour costs. Germany will tap the market with a Jan2020 Bund auction (€5.0B 3.25%). In February, US PPI inflation is forecasted to have dropped by 0.2% M/M after rising by 1.4% M/M in January. On a yearly basis, PPI is expected to have risen from 4.6% Y/Y to 4.9%, while core PPI is forecasted to stay unchanged at 1.0% Y/Y. In the UK, jobless claims are expected to have risen by 6 000 in February. In January, UK jobless claims unexpectedly rose af-ter two consecutive declines, which raised fears that the pick-up was only temporary due to an extra rise in jobs ahead of Christmas. At its March meeting, the BoE de-cided to keep its asset purchase programme on hold and no press communiqué was released. Although we believe that the Minutes will show the decision was unani-mous, there probably remains a debate between keeping monetary policy on hold and restarting the asset purchases.

Fed chairman Bernanke will appear before the House Financial Services Commit-tee for a testimony on the link between Fed bank supervision and monetary policy, while Dallas Fed Fisher will talk about financial crisis responses. While Fed appear-ances immediately after FOMC meetings are interesting, mostly governors obey the black period, meaning that in the first days after the meeting they refrain from talking about issues that have been discussed at the FOMC meeting. In the euro area, ECB Weber and ECB & FSB Draghi will hold a speech or testify, but the former has spo-ken already quite a lot of times recently and Draghi might speak more on financial regulation and supervision.

Regarding trading today, the markets will chew further on the dovish FOMC meet-ing. At the basic level, it means the punch bowl will stay a bit longer at the disposal of investors. This bodes well for equities and risky assets in more general and shouldn’t be negative for the safe haven bonds either. However, German bonds are already priced quite expensive and therefore we remain cautious, also as formidable resis-tance is looming. The 10-year German yield is still above the 3.09%, which has been tested multiple times in recent months, but proved always too tough to break. In Bund terms, the contract high stands at 123.05, nearby and at least temporarily bro-ken in the wake of the FOMC meeting when official European markets were already closed. So, today might be an interesting session, also from a technical point of view.