- The Federal Reserve yesterday reaffirmed its commitment to continue quantitative easing until it sees substantial improvement in the US labour market situation.
- Chinese PMI data for March was stronger than expected and confirms that the Chinese economy continues to grow nicely.
- Both the Fed news and the strong Chinese data have been supporting risk appetite overnight with both US and Asian stock markets trading higher. The good news is overshadowing the continued worsening of the situation in Cyprus.
The global financial markets continue to show a remarkable resilience to the continued worsening of the situation in Cyprus. One of the key reasons is that the Federal Reserve is providing an effective ‘backstop’ and that the global economy seems to continue to recover. We received confirmation of both overnight.
In connection with yesterday’s FOMC meeting, the Fed reaffirmed its commitment to continue quantitative easing until it sees meaningful and substantial improvement in US labour markets. There was little change in the message from the Fed, but markets can take comfort from its continued commitment to effectively support aggregate demand. That could mean that any negative shock from Europe would likely be counteracted by the Fed if it jeopardized its commitment to push down US unemployment. Market resilience to the constant flow of bad news out of Cyprus should be seen in the light of this.
We also received confirmation on the global recovery this morning, which is certainly helping investors to look on the bright side. Chinese (flash) PMI data for March rose to 51.7 from 50.4 in February, and somewhat above the consensus expectation of 50.8. This is obviously good news for the Chinese economy and indicates that the Chinese economy is still growing at a healthy speed. The data also gives some optimism ahead of the release of eurozone PMI data and the US Philly Fed PMI data later today.
Asian stocks are trading higher this morning. We also saw nice gains on the US stock markets in yesterday’s trading. The ‘risk on’ message is also heard in the other markets – in the currency markets the yen and the dollar are weaker against the euro and in the bond markets US Treasury yields have inched up a bit.
Finally, the situation in Cyprus remains bleak as the government tries to put together a ‘Plan B’, but so far there has been little support from the EU. It now seems that the banking system and local financial markets will remain closed well into next week.
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