Economic data and Fed’s dovish tone dragged down core yields this week

  • Financial markets ended the week in a pessimistic mood amid a pickup in global growth concerns after the release of poor confidence indicators in the US and EZ. Also, the Fed’s dovish tone in its March meeting, coupled with a bulk of mixed reports regarding US-China trade negotiations, were drivers for markets. The optimism amid the announcement of further trade talks starting next week was offset due to US willingness to maintain tariffs on Chinese imports for a certain period of time, among other things. The EU summit, which took place this week, was key for discussions over Brexit issues and the state of EU-China trade relations.
  • As expected, the FOMC kept its interest rates unchanged and intensified its dovish stance, reducing markets expectations for a rate hike this year. Also the Fed revised down projections for 2019 GDP growth and inflation. Market reaction to the Fed’s dovish tone was in line with expectations.
  • Core sovereign yields fell further this week, hitting new lows. US Treasury yields declined sharply, with the 10Y yield hovering below 2.50% after the dovish Fed tone and disappointing confidence indicators in the US. The German 10Y Bund yield followed suit, declining sharply into negative territory (-0.03%), a level not seen since October 2016, dragged also by lower-than-expected PMIs in EZ and Germany. Peripheral risk premia widened this week with the sole exception of the Spanish risk premium ahead of today’s rating revision by S&P.
  • Developed equity markets were not able to find support from lower yields: US equity indices fell as trade-war fears resurfaced and the equity volatility VIX jumped to 17%, while European stock markets also fell with the banking sector underperforming. In contrast, Asian equity indices rose this week.
  • The USD was able to recover its lost ground after the FOMC meeting as trade noise weighed. Following this movement and amid weak economic indicators, the EUR, which surpassed the 1.14 EUR/USD level after the Fed’s dovish tone, ended weaker.
  • UK assets were highly volatile this week, with the GBP depreciating as fears over a cliff-edge Brexit resurfaced, despite the EU agreeing to a short delay in the Brexit deadline, thereby granting UK PM May’s request early in the week. Moreover, the Bank of England left its interest rate unchanged at its latest policy meeting, but acknowledged concerns over a no-deal Brexit scenario.
  • Finally, most EM currencies depreciated in the week. The pressure on the ARS and the TRY remained, the former despite the release of 4Q18 GDP in line with expectations and the latter amid the release of a higher-thanexpected fall in international reserves. The BRL depreciated amid idiosyncratic factors even after the Brazilian Central Bank left rates unchanged, as expected.

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