Good morning!

The rise in equity markets was almost unanimous yesterday after the strong employment data published in US made the case for stronger growth and lifted investors’ confidence; Dow Jones is now above 17,000 and the S&P500 is closer to 2,000. As was widely presented, the employment grew by 288k in June and the unemployment rate dipped to 6.1% from 6.3% in May. As such, equities posted strong gains, with the American indices touching new highs and the European stocks marking even stronger changes.

The mix of dovish ECB statements and surprisingly strong US data drove the depreciation of the EUR which for a short while dipped below 1.36 and closed slightly above this level. We consider this indicative of an adjustment in investors’ expectations with respect to the interest rate path in the US economy. Indeed, a number of research houses were fast in bringing forward their forecast of a change in Fed’s key rate; in some cases, the revised projections call for an increase in rate as soon as Q1 2015. In the same vein, after the unemployment data, the 10 year US Treasury yields rebounded strongly and approached 2.7%. However, most of the price losses were recovered, with the 10 year yield now standing close to 2.64%.

We see in the surprisingly positive US data as a threat for the low volatility that took hold of the markets lately with the likely candidates for corrections being the emerging markets and credit markets. Our position rests on the challenges posed by qualitative guidance on which Fed’s current monetary policy relies and the gap between Fed’s and markets’ interest rate forecasts. Since the quantitative targets were removed, Fed Governor Yellen repeatedly had to reassure the market that even as signs of stronger growth have emerged, much more needs to be done for an increase in rates to be justified; however, in the absence of quantifiable targets, each wave of positive statistics leaves investors wondering if Fed will wait for even more to happen. What’s more, the unemployment rate that came out yesterday met Fed’s year-end forecast; meanwhile, these forecasts are only published four times per year with the most recent update presented as recently as last month. Another data set that might drive upward revisions in growth was the one relating to trade which showed a stronger than provisioned shrinkage in trade deficit on the back of record exports; in contrast, inQ1, the trade balance made a 1.53% negative contribution to GDP growth.

On a more positive note, we highlight that even as signs emerged yesterday that rate change expectations might be reassessed, emerging markets proved resilient, probably reflecting the growing presence of the European investors hungry for yield and the belief that they should benefit from a stronger US growth. The Russian market was also supported by the speculation that some progress is achieved in the Russian-Ukrainian talks taking place in Berlin under the auspices of the German and French leaders.

An alleviation in geopolitical risks was also reported by Libya which announced that it took hold of two oil ports which have been under rebels’ control for the past year. Accordingly, the country said that it will resume exports as soon as possible. Elsewhere in the emerging markets space, Moody’s upgraded Peru by two notches to A3, driving bond prices higher.

Another noteworthy event was the ECB meeting and the additional details regarding the TLTRO that were announced yesterday. Noteworthy, Draghi anticipates that banks could raise as much as EUR1 trillion through this facility. Meanwhile, the European macro context continues to show large divergances in growth, with the Swedish central bank deciding yesterday a cut in rates given the mounting deflationary fears and Ireland announcing the return to growth (2.7% in Q1, from -0.1% in Q4 2013 although this figure was revised upwards from -2.3%).

With the US markets closed today, European stocks are likely to see a weaker session although the German factory orders and Eurozone retail PMI might drive the markets if data surprises.

Have a nice day!