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Market Report – 19 December 2016

As expected, the Federal Reserve decided to raise its benchmark interest rate last Wednesday and upped its expectation for the number of rate hikes in 2017.

The move, which markets saw a 100% probability of, will increase the target of the federal funds rate, which banks use to lend to each other overnight — by 25 basis points, to a range of 0.50% to 0.75%.

This is the second rate hike in a decade. By continuing to lift rates from near zero, the Fed is slowly ending the era of unprecedented monetary policy support and giving the economy room to advance without it. A higher fed funds rate will lift rates on products such as credit cards and mortgages and test the extent to which consumer spending and business investment can propel the economy without Fed stimulus.

GBP

Sterling has steadied from two straight weeks of losses against the U.S Dollar today after further hints the government is looking at ways to smooth its exit process with the European Union.

Trade minister Liam Fox said yesterday that Britain may need a transitional agreement to bridge the gap for business during negotiations with the EU, but it should not ‘’buy back’’ into too many of the bloc’s negotiations.

EUR

Ailing Italian bank Monte dei Paschi on Thursday formally approved a last-ditch attempt to raise 5 billion euros ($5.21 billion) by year end through a new debt swap offer and a share issue.

The bank, which is expected to need state support, said in a statement the minimum price for the share sale – which has not been underwritten by a consortium of banks – had been set at 1 euro per share.

Sixty-five percent of the share sale will be reserved for institutional investors in Italy and abroad. The bank also said it will extend a debt swap offer to include a 1 billion-euro hybrid financial instrument known as Fresh 2008.

USD

The Federal Reserve will wait six months before raising interest rates again, according to a survey of top economists. Suggestions that policy makers will maintain a cautious approach to tightening policy until they see the economic package President-elect Donal Trump has promised.

Treasuries swung between gains and losses, rallying on a report that China’s Navy seized a drone deployed by a U.S. oceanographic vessel in the South China Sea, only to pare gains as Federal Reserve officials raised their outlook for interest-rate increases. Traders will be monitoring developments after Trump lashed out at China over the weekend while China’s Communist Party-affiliated Global Times mocked Trump’s demeanour as “lagging far behind the White House spokespersons.”

Net Dollar long positions are at highs not seen since the start of 2016, as the Bloomberg image below demonstrates –

Rest of the World

The Singapore dollar is likely to slide to levels seen in the aftermath of the global financial crisis as the Monetary Authority of Singapore resumes easing policy in April, according to an analyst who’s correctly predicted the last three central bank decisions.

The authority, which uses the currency as a tool to manage the economy rather than interest rates, is set to lower the centre of the band within which it steers the local dollar as Singapore’s export-driven economy feels more pain from China’s slowdown in 2017

Ukraine will nationalize PJSK Privatbank following a failed rescue bid by the billionaire owners of the nation’s biggest lender. The former Soviet republic’s government will acquire 100 percent of the bank based in the eastern city of Dnipro in a transaction coordinated with the International Monetary Fund, according to a statement posted on the cabinet’s website late Sunday.