It is no great secret that currency (FX) markets are said to react quicker than any market class to any market related news, and seem to price in market scenarios well ahead than for example equity and bond markets would. And the recent turn of events, primarily to central bank led news in the form of speeches, tone and optimism (or pessimism for that matter) is testament to just that, with the euro and the dollar swiftly reacting to Draghi (ECB) and Yellen (Fed) monetary policy press conferences.

Markets had been slowly gearing up for the 10 March ECB meeting and 16 March FOMC meeting, with FX markets slowly adjusting to markets expectations and asset managers positioning themselves accordingly in such a way so as to capitulate on the market led reaction during and post central bank announcements.

On one end, markets were eagerly awaiting ECB's Mario Draghi to be ultra-accommodative once again in the form of an expansion or extension of its current monetary stimulus.

Following the disappointing December 2015 ECB meeting, investors would not have been at fault this time round to shy away from adding excessive risk on the table in a 'once bitten twice shy ' attempt, but in hindsight would have been left kicking themselves had they anticipated the rally that would have ensued, at least in the short term, in both equity and credit markets.

With a reduction in deposit rates to a negative 0.40%, an expansion in the size of monthly asset purchases and, most importantly the announcement that the asset purchase program would be extended to euro denominated corporate bonds sent risky assets in delirium.

On the other end, markets had been highly expecting US FED Chairwoman Yellen to indicate the path of the successive interest rate hikes for the rest of 2016, with analysts and markets pricing in and assuming 4 rate hikes by December as a certainty.

US economic data remains persistently robust despite the frailty around the global economy per se and gave an indication that the FOMC would opt to act in isolation this time round, especially if you had to consider that US growth is generated by at least two thirds as a result of internal demand.

However, Yellen took the markets by surprise last week as she indicated that two rather than four rate hikes are expected by year end, indicating a more dovish than expected tone, which had multiple market repercussions. US treasuries and high yield bonds rallied on the news on the back of a lesser fear of interest rate hikes whilst the dollar weakened against most of its currency pegs.

And this news was well received by emerging market economies as a large chunk of their foreign debt is denominated in US dollars. In fact, emerging market high yield bonds have been rallying since as the cost of financing their debt has declined as a result of a weaker dollar. The same cannot be said however for European equities as much of the recent led rally was attributed to a stronger dollar. With the euro strengthening, this has placed undue pressure on the export led economies and has resulted in some bouts of weakness in European equity markets.

With the dust slowly beginning to settle post central bank euphoria, market attention will be once again turning to yet another data laden week. With economic indicators and market sentiment all over the place, it is anyone's bet whether data will disappoint or not, but as I opined in one of my earlier commentaries this year, the only certainty is that uncertainty and volatility is here to stay. 

This article was issued by Mark Vella, Investment Manager at Calamatta Cuschieri. For more information visit, www.cc.com.mt .The information, views and opinions provided in this article are being provided solely for educational and informational purposes and should not be construed as investment advice, advice concerning particular investments or investment decisions, or tax or legal advice.  

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