Speaking on Friday, Federal Reserve Boston President Eric Ronsegren sparked a selloff across bond markets. Ronsegren being considered a ‘Dove’ made giving an OK to a gradual increase of interest rates convey a message that many other members at the Fed are also comfortable with tightening policy. “If we want to ensure that we remain at full employment, gradual tightening is likely to be appropriate,” he said. Failure to continue on the path of tightening, alternatively, was seen creating risks of a shorter, rather than lengthier recovery.
Yield of the policy sensitive U.S. 2 year government bond, which moves inversely to its price, progressed rapidly on Ronsegren’s commentary, testing 0.8% levels during the day, though it eventually settled at 0.78%. Selling pressure was very strong with equity. The S&P 500 lost no less than 2.5% on Friday, Hitting a bottom 2127.81 points meant the lowest for the U.S. index since July 8th. The Dow, similarly, fell over 394 points on Friday, to 18,085.45. Losing 2.2% Tue-Fri, meant the worst week for the U.S. industrial index since the selloff at the start of the year. After hitting a monthly low, the VIX index surged as equity tumbled, rising to as much as 17.5 points, its highest since June’s Brexit awes have led it to over 26 points.
Draghi casts doubt on ECB’s future QE
To some extent, Friday’s turmoil didn’t come without warning. Investor concerns, namely, were set in the European Central Bank’s rate announcement, Wednesday, where president Draghi failed to meet investors’ expectations for more accommodation by the ECB, or even guidance of such. When asked on the matter Draghi even went on to state that an extension of the bank’s Quantitative Easing program wasn’t even discussed.
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