Cautious Yellen boosts risk

Global markets rallied during the beginning of the week and the S&P 500 approached a 10-month high after Federal Reserve President Janet Yellen delivered a broadly optimistic speech on the health of the US economy and the outlook for US interest rates. The US top central banker said that “positive forces have outweighed the negative”, and downplayed the risks surrounding the US economy, despite last Friday’s weak jobs report.

"My overall assessment is that the current stance of monetary policy is generally appropriate. At the same time, I continue to think that the federal funds rate will probably need to rise gradually over time to ensure price stability and maximum sustainable employment in the longer run".

In sum a rate hike should come soon, but not too soon. Markets heaved a sigh of relief as pricing now suggests a rate hike is on for next September, as opposed to a July or possibly a June hike. The news was welcomed by investors who were keen to take on more risk. As prices rise, bond yields went lower – the yield on the US 10-year Treasury fell back to just a few basis points off this year’s low as expectations of a rate hike were dialed back.

In Europe, polls which – on Monday – seemed to indicate a buildup behind the UK’s Leave campaign in the approaching Brexit vote were reversed on Tuesday as yet another round of polls showed the opposite. The pound sterling whipsawed, reversing the previous’ day heavy losses, showing just how much sentiment in the currency market is based on the current news flow. The referendum is scheduled for the 23rd of June. Banks such as JPMorgan and RBS have said they will be staffing their trading floors overnight as the Street braces for a boost in currency trading volumes.

In corporate news, Ralph Lauren Corp. unveiled a wide-ranging overhaul aimed at restoring and ensuring future profitability, but which will hit the company’s bottom line hard this year. The company is reducing merchandise sold to department stores and is also closing some of its own stores. The luxury apparel and accessories maker warned Tuesday that sales in the current fiscal year would fall around 12% after having already slipped 3% to $7.41 billion in the past 12-month period ending April 2nd.

Royal Dutch Shell rallied as it outlined plans for growing free cash flow and returns. The company also plans to leave up to 10 countries in a bid to cut costs after acquiring BG Group. The news appealed to investors and shares rose by around 3% on the day.

Tuesday also marked a €450,000 payday for Jérôme Kerviel, former trader at Société Générale who was accused of making market bets that brought France’s second-largest listed bank to the verge of collapse in 2008. The payout is partly a performance bonus for 2007 and compensation for what a French labour court ruled as an unfair dismissal. Société Générale have already said they will appeal this decision. The case is separate from another ruling which starts next week, where a civil case will decide on how much Mr. Kerviel should pay the bank for the alleged losses.

This article was issued by Andrew Martinelli, Trader at Calamatta Cuschieri. For more information visit, www.cc.com.mt . The information, views and opinions provided in this article are being provided solely for educational and informational purposes and should not be construed as investment advice, advice concerning particular investments or investment decisions, or tax or legal advice. Calamatta Cuschieri Investment Services Ltd has not verified and consequently neither warrants the accuracy nor the veracity of any information, views or opinions appearing on this website.