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Bond Update: Key Trigger is Emerging Markets

Markets began to worry on higher core yields for US, EU and Japanese government bonds after the Fed held all options open and clarified that they were not promising anything.

The fear of higher yields is greater than what the Fed announced. The worst hit markets are the emerging markets. A spillover to global equity markets will happen if there is a continued sell-off in emerging markets and corporate bonds.

However, if this were to happen too quickly for the market to absorb, volatility will kick in and hit emerging market currencies, bonds and equities.

The correlation patterns for risk off/risk on trades are not applicable at the moment, damaging balanced funds and strategies and hedge abilities. The iTtrax Europe Crossover Index has opened this morning at 480, while emerging market bonds are looking cheaper.

Bernanke Hints at QE3 Exit

Forex Overnight: EUR trading mostly under pressure

The EUR is trading weaker against most of the major currencies this morning as investors cut down on risks after US Fed Reserve (FED)president, Bernanke, hinted at scaling back stimulus measures if the economy sustains momentum. In addition to that, Chinese manufacturing data has been disappointing and raised concerns about the global economy.

Markets are now looking towards manufacturing and services Purchasing Managers’ Index (PMI) data from European economies for further directions for risk management.

At 05:00 GMT, the EUR has declined 0.4 percent versus the USD to trade at USD 1.3256 while it has marginally weakened against the GBP to trade at GBP 0.8583. 

The AUD fell 0.4% against the USD amidst a decrease in demand for high yield currencies after the release of manufacturing activity in China contracted more-than-forecast in June.

Macro Update

Fed has announced that their monetary policy will remain unchanged and that they expect to alter pace of asset purchases later this year. The benchmark interest rate within the range of 0 – 0.25% is kept and has not changed the size of its asset purchase program.

However, Bernanke has indicated that the central bank might start scaling back its massive stimulus measures later this year and end the program by mid of 2014 if the economy continues to sustain momentum. 

Fed officials raised their economic growth forecast for the US economy in 2014 to cover a range 3 - 3.5%. They also expect unemployment to fall to a range of 6.5 - 6.8% in the same time period. This differs from an earlier projection range of 6.7 – 7 %. 15 of 19 participants on the FOMC anticipate the first rise in interest rates to occur in 2015 or later. 

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