Good Morning,

Following relatively dovish comments in Wednesday’s FOMC meeting, spreads tightened, whilst credit and equity markets rallied. This came on the back of similar performances in both asset classes only a fortnight ago when the ECB announced market-friendly measures to combat inflation, or more so, the lack of it. Spreads continue to tighten against benchmark bonds and total returns continue their uptick, as primary markets are taking advantage of market conditions and seem to be satiating demand. The asset class has been massively aided by the gradual decline in benchmark bonds such as the German Bund and US Treasuries. All in all, the first half of the year has proven remarkable for the asset class, with year-end performance targets being reached, almost, within 5 months and a half, despite the headwinds with which it had to contend, such as the EM crisis, Ukraine/Russia conflict and European parliamentary elections, with nothing seemingly coming in the way of this asset class, at least till year end. On the flipside of things, economic growth is set to remain low for a long time as well, although this should generally benefit the asset class given its defensive characteristics.

In Germany, Chancellor Merkel and her Finance Minister Schäuble have rejected claims on the possibility of easing deficit rules. In a Bloomberg report, German Chancellor Merkel rejected her deputy’s suggestion to ease the Stability and Growth Pact rules in the euro area, saying that governments already have enough leeway under current rules. The former also stated that she had spoken with Deputy Chancellor and Economy Minister Gabriel before the cabinet meeting and that they agreed that there was no need to change the Stability Pact, and that the existing rules contained sufficient flexibility to overcome the current problems.

Meanwhile, Reuters agency reported on Wednesday that the IMF will once again be knocking on the ECB’s door to be more pro-active in combating deflationary risks, following an IMF assessment of the euro zone. Reuters has quoted the report, citing that "the draft from the euro zone mission restates more strongly the request previously made to the ECB to do more to fight the risks of deflation", adding that "it doesn't mention 'quantitative easing' but it does talk about bond purchasing programmes".

Wednesday’s FOMC decision came in line with expectations as the Committee decided to continue tapering the pace of monthly asset purchases by $10bn to $35bn and there were no changes made to the statement's forward guidance on the fed funds rate. Moreover, the Committee’s economic assessment was upgraded broadly in line with expectations. Reports indicated that the description of the economy generally improved from the March statement and the Committee's forecasts changed as expected, with unemployment down and inflation up. A number of aspects were however slightly more dovish than expected. Although the median funds rate projections for 2015 and 2016 moved up a bit, expectations for a first rate hike are for 2016. Furthermore, Yellen's comments on inflation in the press conference were somewhat dovish to say the least. In particular, Yellen signaled some willingness to let inflation overshoot the 2% target if the employment side of things continue to surprise to the downside. These remarks differed slightly in tone from her April 16 remarks at the Economic Club of New York.

Against this backdrop, Emerging markets continue to be well bid. However, investors remain cautious about the current Iraq situation and the possible repercussion it can have within the EM-space if things get out of control, not to mention the short-term effects in the price of oil and how this has impacted large corporations so far.

Finally, one can’t not comment about the World Cup. With Spain eliminated and England on the brink just 8 days into the competition, one only begins to wonder what’s in store for the world of football, and if a South American nation will take the top honour, following their strong showing, overall, so far. Despite the weak start for their standards, Brazil remain one of the firm favourites, despite a large number of surveys pointing towards a victory by European powerhouse Germany and an outside chance for the team in Oranje too.

Have a nice day!