Good Morning,

Markets continue to be driven by expectations, primarily expectations of the shape, form, size and timing of the world’s leading central bank’s next move(s). And the current situation we are living in right now is no exception, as the debate about the US Federal Reserve’s timing of an interest rate hike from all-time lows, continues to dominate global capital markets. Markets had been discounting a March-April 2015 rate hike for weeks as stronger than-expected payrolls and the unexpected fall in the unemployment rate resulted in an uptick in US bond yields. However, analysts and economists began having second thoughts mid-way throughout last week as the FOMC minutes were seen somewhat dovish, pushing yields lower. The minutes had in fact highlighted uncertainty about foreign growth, low wage rises and a stronger USD. As a result, last week saw analysts’ marked lengthening/postponing of expectations in the commencement of tighter fiscal policy in the US.

Having said that, we remain aware that the Federal Reserve’s main focus will be on in its internal economy. A number of key US economic data releases will be of particular importance this week, namely a flurry of Fed speeches coupled with the beige book and retail sales.

The ECB will be undoubtedly following every move the Fed takes. On one end, the ECB’s council members who have long been against large-scale sovereign bond buying have welcomed the recent weakness in the currency. Never the less, the market continues to expect more swift and concrete action by the ECB; persistently soft growth and inflation data continue to point towards additional measures, perhaps a widening of the term of its asset purchase programme is due over the coming months.

Global equity markets had a somewhat lacklustre week last week as news of Germany’s IP drop and the IMF warnings on a potential recession in the eurozone pushed indices markedly lower. In the interim, there was some relief for equities following the FOMC minutes which helped the S&P to post the biggest intra-day increase so far in 2014, however, this positive momentum was not seen in the eurozone, which continued to lose ground.

Following the announcement of Aloca’s earnings results last week, earnings season will accelerate this week with the big US banks taking centre stage (with no earnings announcement yesterday on Columbus day in the US, albeit US markets were open, today’ sentiment from earnings releases will remain key and will dictate market direction for most of the week). If Alcoa’s results are a sign of what is to come, we could well see an uptick in risk appetite over the next weeks. However, if the economy is not recovering and earnings season fails to surprise to the upside, yields will surely remain low for a longer-than-expected period. Meanwhile, in the run up to earnings season, bank spreads are slowly improving once again on the back of a stronger fundamental backdrop. In the interim, we cannot rule out increased volatility spreads around the expected release date of the Asset Quality Review later on this month. However, overall, we have seen a marked improvement in bank fundamentals mainly on the back of stronger capital ratios.

Meanwhile, over the week-end, Russia’s Putin ordered Russian troops to return to their bases following military exercises in the Rostov region, close to the Ukrainian border. On a related note, markets will be closely monitoring the possibility of dialogue between Putin and Poroshenko in a summit in Milan later on this week.

Have a nice day!