Weekly Market Update

03/07/2017

Mixed messages from Central Bankers caused confusion and sparked panic amongst investors last week, resulting in losses for both equities and bond markets. Comments by the European Central Bank, the Federal Reserve, the Bank of England, and the Bank of Canada fuelled concerns that the period of historically low interest rates and unprecedented central bank bond buying would soon come to an end.

Mark Carney sought to clarify his position on interest rates, setting out his view that he would vote to tighten monetary policy if business investment began to rise offsetting weaker consumption. This was in direct comparison to his previous statement indicating that it was not the right time for higher rates. These conflicting messages caused volatility as markets desperately tried to interpret the dialogue.

A similar pattern occurred within Europe as ECB President Mario Draghi’s stated that the central bank would be prudent to gradually adjusting its monetary stimulus to the economic recovery. Markets immediately interpreted his remarks as a sign that the bank was preparing to reduce its monetary stimulus and tapering would start soon. However, the following day the ECB was quick to defend that investors had misjudged his remarks.

Markets are currently pricing in a 53 per cent probability of a UK rate increase in December, a 61 per cent probability of a US increase in March 2018 and a 57 per cent probability of a June 2018 increase in Eurozone rates. However, with the exception of the US, given current growth rates and political uncertainty there appears limited scope for monetary tightening in the near term.

The results of the Fed’s stress test, demonstrated a marked improvement in the health of the US banking sector. All 34 of the largest US banks were found to have built up sufficient capital buffers to safeguard against catastrophes, as well as improving their management procedures. However, this was not enough to stop the IMF cutting US growth forecasts, citing President Trump’s current inability to follow through on tax reforms and infrastructure spending plans.

The Financial Stability Report published by the Bank of England, recommended that Britain’s major lenders set aside more of their capital to protect against economic downturn. The BoE is anxious that consumer credit is growing too rapidly, and has instructed lenders to set aside a further £11.4 billion over the next 18 months to minimise the risk of triggering another credit crisis.

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