Market Review – Fundamental Perspective 15 December 2017

Most Asian equities declined overnight whilst the USD came under pressure after Republican Senator Marco Rubio threatened to oppose the tax legislation unless Senate leaders agree to a larger child tax credit. In a busy day of central bank meetings, the BoE and ECB meetings were largely uneventful keeping policy unchanged as widely expected.
The Bank of England MPC left monetary policy unchanged in a unanimous 9-0 vote. In our view, this highlights that the BoE is now in a ‘wait and see’ mode after the November hike. The BoE acknowledged that progress was made in regards to the first stage of Brexit negotiations and would use the February meeting as a chance to adjust forecasts based on Brexit progress.
At the EU summit, European leaders voiced support for PM Theresa May after a key Brexit vote defeat, which saw 11 members of her own party vote against her.
We continue to expect the BoE to next hike in November 2018, but will likely reassess our view after the February inflation report.
The ECB also remained on hold at the December meeting, as widely expected after the APP extension announced in October, but revised its 2018 inflation forecasts to 1.4% from 1.2%. President Draghi characterized euro area growth as ‘strong’ and stated that there has been a big drop in economic slack.
Nevertheless, Barclays Research “…continues to think that the ECB will exit its stimulatory policies faster than consensus expectations…”.
Norges Bank and Bank Indonesia also kept rates unchanged, while the Bank of Turkey disappointed markets hiking rates by 50bp (vs. 100bp expected) taking USDTRY higher on the news above 3.8800
Elsewhere, INR rallied after exit polls showed Prime Minister Narendra Modi’s party looked set to retain power in his home state of Gujarat, a result that is key to sustaining momentum ahead of India’s national elections early 2019.

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