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The World Economy’s Most Important Week of 2018 – World Cup begins?
Sunday 17, June 2018

The World Economy’s Most Important Week of 2018 – World Cup begins?

Eugene Stanley_1

The week of June 11th to 15th has been dubbed as the “Most important week of 2018” but not necessarily because it heralded the much awaited start of the World Cup of Football tournament (GO BRAZIL!!!) but more so because of the anticipated policy decisions of four major central banks.  The policy makers would have acted upon the assessment of the performances of their respective economies, so let’s review their decisions and the impact they had on financial markets.


 The Federal Reserve (Fed), as expected, raised interest rates by another 25bps on Wednesday for the second time this year and logged the seventh such increase since the current rate hiking cycle commenced in 2015.  Fed officials maintained their upbeat assessment of the U.S. economy as growth is expected to accelerate in the second quarter, as labor market strength continues and as inflation nears the 2 percent target.  The Fed is also prepared to tolerate a modest over-shoot of its inflation target and as such will continue its gradual approach to raising rates, perhaps with two more rate hikes of 25bps this year.  Initial market reaction saw a further spike in the USD but the key market move was further flattening of the U.S. yield curve to levels not seen since 2007, suggesting investors aren’t convinced that the U.S. economy will be able to continue to withstand increased Fed tightening.


The European Central Bank left rates unchanged on Thursday, but outlined an end to its bond buying program by the end of this year.  According to the statement, the ECB will reduce its current bond purchases of €30 billion a month to €15 billion in October through the end of December, when the purchases will end.  The ECB also said it would not adjust benchmark rates until at least the summer of 2019, perhaps as a result of some recent disappointing economic data.  Markets interpreted the mixed message as ‘dovish’ and the euro plunged the most since the “Brexit” vote.  Stocks and bonds rose after the meeting.


The Bank of Japan (BOJ) left its stimulus program in place and downgraded its assessment of inflation, according to a Bloomberg report on Friday.  In addition, the BOJ now expects the consumer price index to fall within a range of 0.5 percent to 1 percent, from around 1 percent previously.  Similar to the Fed, the BOJ has an inflation target of 2 percent and as such it is evident that the BOJ will maintain its quantitative easing posture for the foreseeable future, given the ongoing under-performance of inflation.   Market reaction was however muted following the Bank’s policy decision.


The Bank of China surprisingly decided not to increase rates, but perhaps justifiably so, as retail sales and investment data suggested a slowdown in growth of the world’s second largest economy.  Adding to the concern, President Trump is preparing to move ahead with trade tariffs on China.  The bank’s non-decision combined with the threat of U.S. tariffs sent Chinese equity indices to the lowest levels since September 2016 on Friday. 


Financial markets have been extremely volatile this year and perhaps will continue to be so.  An outright trade war looms on the horizon as trade tensions ratchet up following President Trump recent decision to move ahead with import tariffs on steel and aluminum from the European Union, Mexico and Canada. Trump is also planning to move ahead with previously announced tariffs on $50 billion of Chinese goods, despite a previously reported “trade truce” between the two countries.  Investors should therefore continue to monitor events as they unfold and maintain a cautious approach to investing. 


Eugene Stanley is the VP, Fixed Income & Foreign Exchange at Sterling Asset Management. Sterling provides financial advice and instruments in U.S. dollars and other hard currencies to the corporate, individual and institutional investor. Visit our website at Feedback:  If you wish to have Sterling address your investment questions in upcoming articles, e-mail us at:


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