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Cross-Asset Weekly

The Fed pulls a Powell put out of its bag

Basel, 11.01.2019
With the fierce sell-off in risky assets at the end of last year still in mind and the accompanying tightening of market based financial conditions, the Fed has toned down its language to mind the reactions from financial markets. Interest rate policy as well as its communication becomes more important as policy rates approach the neutral range. The Fed’s language has shifted to a more flexible stance (including balance sheet reduction) and much greater emphasis is put on the weak state of the global economy, where in particular the sharp slowdown in Chinese demand has led to a signficant downgrade in global growth expectations. It was an important step to remove market concerns that the Fed would blindly overtighten based on a strong labor market and rising wages fuelling domestic consumption. It could pave the way for a recovery in risk assets over the next quarters and together with Chinese stimulus measures being put to work should allow global growth to pick up in H2 2019.
Global equity markets recovered as the Fed allayed fears of overtightening. Even if many investors start to discount a trade war truth in February, equity markets will need to digest the 4Q18 company figures first, which will be released till mid-February. Many companies might lower their guidance for 2019 in light of recent economic trends. We thus anticipate a base-building process for equity markets in 1Q 2019, while our monetary indicators suggest scope for a recovery into late 2Q 2019.

This week’s highlights

Global Fixed Income
The Fed and China hold the key

Global Equity
The Fed brings back the punch bowl, at least for now

Economic Calendar
Week of 14/01 – 18/01/2019

Market Performance
Global Markets in Local Currencies

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Further information
Dr. Karsten Junius, CFA  |  Chief Economist

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