BRUSSELS: Investors will shift focus this week from trouble spots such as Portugal’s biggest listed bank to a marathon testimony by the US Federal Reserve chair that could help chart a global path towards post-crisis “normalisation”.
Concerns over losses associated with the founding family of Banco Espirito Santo (BES) had threatened to rattle eurozone markets, but by Friday traders had decided that BES was unlikely to disrupt Portugal’s financial system or revive broader worries about the bloc’s weaker economies.
In any case, Fed chair Janet Yellen’s two-day appearance in the US Congress from tomorrow will dominate global markets, which want above all to know how long the Fed will leave interest rates low after an unprecedented period of cheap money since the financial crisis.
While October is likely to mark the end of the central bank’s money printing, investors are looking for hints of an interest rate hike early next year, which would signal a return to normality after the Great Recession and its aftermath. But much depends on the health of the US economy and its ability to bounce back from a disastrous first quarter.
The consensus has been for a rate hike in late 2015, but many economists are bringing forward their forecasts, with European-based banks including BNP Paribas expecting the Fed to hike near the middle of next year.
Others expect US interest rates to rise sooner.
“There’s a pessimistic view of the economy among some in the market, but a stronger jobs picture and rising inflation will prompt the Fed to act,” said Julian Jessop, chief economist at Capital Economics in London, who sees a rate rise in March.
The European Central Bank president Mario Draghi faces a different challenge in trying to revive the eurozone economy.
While losses on loans will not put BES at risk of running short of capital, ripples of concern forced Spain’s Banco Popular to call off a bond issue and Greece managed to place just half of its debt issue.
Portugal’s government assured investors that the country’s financial system was sound, steadying markets, although questions remain about the BES business empire.
“If this uncertainty about BES continues, then peripheral debt looks likely to underperform and more investors will look to reduce their exposure,” said Peter Chatwell, an interest rates strategist at Credit Agricole CIB, referring to countries such as Italy, Spain and Ireland.
“But I don’t think it is going to put material stress… on other peripheral countries,” he said. — Reuters
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