Big Picture: The correction on the equity markets in the advanced economies was vicious last week. As many of these markets had recently reached new highs, a correction could perhaps have been expected at some stage, but the discussion always is whether such a move is, indeed, just a correction or the beginning of a longer-term downward move. We see it as a temporary step back. The turn in advanced economy equity markets was isolated across global markets, while most data suggests the economic recovery is continuing.
Rates: ECB President Mario Draghi stepped up the central bank’s verbal efforts to stem euro strength over the weekend. He warned that a strengthening of the exchange rate would trigger further monetary stimulus. It seems that some combination of low inflation outcomes and a firmer euro could trigger easing. In this case, a rate cut would be the most likely first step, which could include taking the deposit rate into negative territory. Separately, a small asset purchase programme – based on ABS – is a distinct possibility.
FX: The minutes of the FOMC´s March meeting were more dovish than expected. They underlined that the Fed considers that US policy rate hikes are still some way off. This weighed on the dollar. Data have gone from being weaker than expected to being broadly in line with market expectations. Therefore, they have failed to change the sentiment on the US dollar. We continue to think that the US economy will rebound with more force going forward, and this should start to provide support to the greenback.