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Leaning on Yellen

It’s a tall order to expect Fed Chair Janet Yellen to be able to rescue markets from what has been a turbulent week. The best that can be hoped for is an acknowledgement that things have changed fairly dramatically since the Fed increased rates less than two months ago and that she concurs with the market pricing that suggests the first half of this year is not the time to be increasing rates. Although the better tactic may be to remain bullish on the economy in the hope that good news may be taken as good news, rather than the old “bad news is good news” approach which has run its course. But even this may be a stretch in the current environment, given the bearishness currently pervading markets.

Yesterday saw some dramatic widening out of credit spreads in many forms. For the single currency, what was noticeable was the rise in yields in peripheral markets in Europe, such as Italy which has seen yields rise 30bp over the past week. German yields have pushed lower by around 5bp over the same period. This would have been a recipe for euro weakness in the depths of the euro crisis, but as we pointed out yesterday, the euro has been acting more as a safe haven of late, rather than being weighed down by previous correlations or obsessions.

For today, ahead of Yellen, we have the release of industrial production data in the UK, where output is seen pretty flat after the decline in the previous month. But that is more than likely going to be over-shadowed by the push and pull of overall market sentiment and the greater inter-play between bond, credit, equity and FX markets.

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