Market Update

The focal point of attention this week was the release of the Federal Reserve minutes, following Fed Chairman Jay Powell's statement last month about the Fed adopting a "patient" approach regarding future interest rate adjustments. This marked a significant departure from his stance in December, where he emphasized the necessity for "further gradual increases."
While the overall tone of the minutes leaned towards a dovish perspective, it left much to be desired in terms of the level of dovishness we were hoping for. The Fed policymakers acknowledged the strong performance of the US economy but also highlighted increased uncertainties, primarily stemming from China and Europe, as well as the tightening of financial conditions.
Interestingly, the discussion within the committee revealed varying opinions. Some policymakers believed that further rate hikes would only be necessary if inflation unexpectedly surged, while others argued for higher rates if the economy followed the expected trajectory. The notable absence in the discussion was any mention of potential rate cuts; the focus was squarely on whether additional rate hikes were warranted. Consequently, we might be witnessing a scenario akin to 2016, with an extended pause followed by subsequent rate increases.
However, a positive revelation was the Fed's intention to halt the shrinking of its balance sheet by the year-end, a process known as quantitative tightening, essentially the opposite of quantitative easing, where the Fed sells bonds instead of buying them. This decision was welcomed, considering concerns about the adverse impact of the Fed's QT (quantitative tightening) program on the economy.
Elsewhere, the European Central Bank's minutes indicated an acknowledgment among policymakers that the Eurozone economy is indeed slowing down. Consequently, they plan to assess the extent of this economic weakness during their March meeting to determine whether it justifies restarting their TLTRO (targeted longer-term refinancing operations) program.
In the UK, the pound's trajectory continued to be dictated by Brexit developments. This week, the pound strengthened as Prime Minister Theresa May aimed to secure a favorable Brexit deal during her meeting with EU leader Donald Tusk at the EU-Arab Summit. However, while this was positive for the pound, it had adverse effects on the FTSE-100, leading to a 0.80% decline as it lowered returns for exporters and diminished the value of overseas earnings.