Market Talk – March 16, 2016

With both Asia and European markets were in pretty much a waiting station ahead of the FED, so it is probably worth us heading straight to where the action started! Even the events of the UK Budget were almost removed with talks of, “It could all change come June 23rd anyway” so why get too hot under the collar today! The net result of the Budget for the UK was a negative GBP -0.5% whilst stocks counter-balanced that with a +0.5% rise. Enter the FED.

No change but it was interesting to hear we now have a FED that is globally data dependant! Much discussion about the Taylor Rule and Phillips Curve which may make good TV but where does that leave us if they are now considering data globally! Todays measure of inflation or recent jobs declines are now questionable if comparing the dots to a world of negative interest rates and zero or negative growth. Tonight the market prices 30-40bp per year whilst the FED looks for 100bp; so much for narrowing the gap.

The reaction from stocks were positive with the DOW jumping over 125 points at one stage but eased back slightly to close up 75 at 17,325 (+0.5%). Was also refreshing to see that both China 300 (futures) and Hang Seng rallied on the news and was last seen +1% the pair.

Gold rallied over $40 (+2.3%) on the Fed announcement as short-covering and as alternative investment to the steep decline seen in short-term bond yields. The 2yr Treasury note yield dropped 10bp (from 0.95% to 0.85%) by the close of trading. The longer end also rallied (in price terms) but failed to measure the same pace as 2’s. Re-steepening the curve 2/10 closed +106bp. Ahead of the announcement we did see the spread between 5/10’s the narrowest (45bp) we have seen since 2007 – closed tonight at +53bp. As most of the European markets had already closed we will need to see the reaction of many peripherals tomorrow. However, in futures trading German 10yrs were last seen trading 0.3% (-1bp). European closes:- Italy 10yr 1.33% (-3bp), Greece 8,62% (+14), Turkey 10.04% (+5bp) and UK Gilts saw a parallel shift of 1bp lower across the curve to end 2’s 0.5%, 5’s 0.935% and 10’s 1.52%.