Despite weak economic data and mediocre earnings, stocks have rallied sharply on expected additional monetary stimulus from the European Central Bank (ECB). Last Thursday, Mario Draghi announced that the ECB was looking into additional monetary stimulus measures. Risk markets around the globe rallied on the view that monetary policy would remain easy and additional stimulus was possible. On Friday of last week, the Peoples Bank of China (PBOC) cut interest rates for the sixth time this year to combat slowing growth and deflationary pressures. Chinese growth this year is on track to be the slowest in 25 years.
I continue to expect that risk markets will post decent performance for the next few weeks as the factors that have led to the recent rally should remain in place. I expect U.S. treasury bonds to be under pressure at the long end of the yield curve as monetary policy stimulus and central bankers focused on accommodation will keep investors skittish about rising rates.
This week we hear from the Federal Reserve on monetary policy and the state of the U.S. economy. I am not expecting any surprises from the Fed, but the minutes may shed some insight on their current thinking.
Additionally, pay attention to any new information on the debt ceiling, as we should hit the cap in the next two weeks.
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