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Domino Effect

04 May 2017 by lberuti

As expected, the FED left interest rates unchanged yesterday. There was no real surprise in the FOMC statement, but there was just about enough for the market to ramp up the odds for another tightening next month – the probability of a hike in June now stands at 90% -. With unemployment rate at 4.5% and inflation close to 2%, the objectives of the FED are met, and there is not much standing in the way of additional tightening in the coming months. Investors, who have flocked to buy Emerging market sovereign debts because these bonds were, until recently, the only ones still offering some yield, sensed that there might be sooner rather than later safer alternatives to park their cash. In anticipation of outflows from emerging debts which will inevitably result in FX swings and mechanically inflate the debt of emerging countries, the risk premia of emerging sovereigns were marked wider across the board today, while the risk premia of European countries traded tighter as the threat to the euro caused by Mrs Le Pen is fading fast after a shambolic appearance on French TV yesterday night.