Market sentiment was rather positive ahead of the FOMC statement, with European equities rising and € credit spreads tightening. In the wake of the monetary policy decision, equities rose and bond yields eased further after Jerome Powell indicated that the Federal Reserve saw no need for drastic action in the face of Donald Trump's trade war.
Diplomatic efforts have intensified to stop the fighting between both Russia and Ukraine as well as Israel and Hamas. But a durable resolution to both conflicts will not be easy to achieve. The public disagreement in the White House between President Trump and his Ukrainian counterpart underlined the challenges.
We do not expect large, broad, and sustained US tariffs, but repeated threats of higher tariffs on key trading partners and a lack of policy visibility could weigh on business investment and hiring even if they are never imposed. More volatile markets require an increased focus on portfolio diversification and hedging approaches.
The major FX rates have remained relatively stable at the start of this week in contrast to the deepening sell-off in the equity markets. One of the biggest movers yesterday was the Nasdaq composite index which fell sharply by 4.0% and extended its decline since the high in December to almost 14%.
A drop in consumer sentiment brought fresh concerns about the US economic growth. Most major equity indices sold off and government bonds rallied, with the 10Y US Treasury yield dropping 11bp to 4.29%. Market digested news that Ukraine is going to sign a minerals deal with the US, and a confirmation from the US president that US tariffs on Canadian and Mexican imports will go up next week.
After a very quiet week, the local story is back in focus for markets. Today, we will see retail sales in Poland for January. Goods spending remains subdued, but has improved after a poor third quarter.
Germany voted over the weekend, and the results are broadly in line with expectations. The euro got a small boost from the CDU/CSU being able to form a coalition only with the SPD, without any smaller third party. There’s a lot on the table for markets this week, and we expect plenty of noise in FX.
