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Barnabas

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Economic events of the coming week

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Monday: The Final estimate of May’s Industrial Production data will be released in Japan, with the last print indicating a moderate 0.8% annual increase. Data will also be provided on the Eurozone’s Industrial Production, which analysts expect will see a 1.2% monthly decrease. Tuesday: Consumer Price Index data will be released in Italy and the U.K. In Germany, the ZEW Survey will see light, with analysts expecting some moderation in both the Current Situation component, as well as ‘Expectations’. In the U.S., the Empire State Manufacturing Survey will be released, as well as June’s Advance Retail Sales. Additionally, Fed Governor Yellen will give a Semi-Annual Testimony to Senate. Wednesday: China will release data on its rapidly growing Retail Sales, as well as less so Industrial Production and Gross Domestic Product. The U.K. will see the release of some labor market statistics, among these are Jobless Claims and the International Labor Organization’s Unemployment rate. In the U.S. the weekly MBA Mortgage Applications will see light, as well as the Producer Price Index and June’s Industrial Production. Thursday: The Final estimate of June’s Consumer Price Index for the Eurozone will be released. In the U.S., the weekly Housing Starts print will see light, recently being a hair over one million monthly. Also due is the weekly Initial Jobless Claims, still above but close to 300K. Friday: The University of Michigan’s Consumer Confidence Index and the Conference Board’s Leading Index will be released. Join Anyoption and take advantage of the volatility of the markets ..Start Trading TODAY!

Portugal raises global concerns

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Equity markets took a slight beating last week as Portugal's second largest bank, Banco Espirito Santo, reported that it held 1.18 billion Euros in loans, securities and other items of its parent company Espirito Santo International. The update was provided after Santo International failed a payment on one of its commercial paper. In spite of the Portuguese central bank attempting to attempted to reassure markets that Santo International's solvency is "solid", the following day saw Banco Espirito Santo downgraded by both Moody's, as well as Standard & Poor's rating services. Moody's did say that the downgrade should not affect the Portuguese government bond's rating, recently revised to Ba2. At this point, however, concerns of a run on the banks in Portugal induced a pessimistic sentiment in equity markets. The Spanish IBEX 35 Index lost 1.94% between Thursday and Friday. The German DAX lost 1.45% between the two days, and the French CAC40 lost nearly 1%. U.S. equity markets were less affected, however, they did gain some fuel from the aforementioned dovish minutes. Join Anyoption and take advantage of the volatility of the markets ..Start Trading TODAY!

Fed sees QE ending in October

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According to June's meeting minutes, released last week, the Fed is expected to end the third round of the quantitative easing in October, should the economy evolve as the Federal Open Market Committee members anticipate. Following a prolonged period in which the Fed has purchased 85 billion Dollars’ worth of assets every month, the Fed's expectation for the end of easing is an historical landmark in U.S. monetary history. With this forward guidance clearly paved, the minutes addressed FOMC members' view of the U.S. and global economy, and the way that translates to future policy.

Among the factors the Fed members' had in mind, it was noted that consumer spending had been supported by household net worth rather than income gains. One plausible explanation would argue that this increase in household net worth is backed by the aforementioned easing, leading to inflating asset prices. On the other side of the equation, the fact that income gains were held back might be the result of this monetary easing not trickling down to the real economy, leading to an increase at the labor markets' demand side. Regarding this, Fed members express a view by which a pickup in income would be the one to support a sustained income in consumer spending. Undoubtedly, welfare effects do not last forever.

Committee members' view of the economy as recovering in some aspects, yet still problematic in others naturally translated to ambiguity regarding the way those members see the federal funds rate, in the future. Among these issues, most participants were said to expect the federal funds rate to remain below their long term objectives at the end of 2016. Half of these participants associated the low level of the federal funds rate with insufficient inflation. Other participants expressed concern of a combination consisting, inter alia, of "lower equilibrium real interest rate, continuing headwinds from the financial crisis and subsequent recession". As Yellen said once, monetary policy is not a panacea. Recently, it also needs to cope with growing resilience by the problems it wishes to solve, as well growing side effect. 

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Economic events of this week

Join Anyoption and take advantage of the volatility of the markets ..Start Trading TODAY! Monday: Preliminary estimates on Japan’s Industrial production data are due and analysts expect an annual increase of 1.5%. In the Eurozone, M3 Money Supply data will be published. The U.K. will gain a glimpse of housing-price-fuelling Mortgage Approvals. Preliminary figures of June’s Consumer Price Indices throughout the Eurozone. Indications will be dispersed regarding the U.S. supply side, with the release of the MNI Chicago Business Barometer. Also due in the U.S., May’s Pending Home Sales and Dallas Fed Manufacturing outlook. Tuesday: The Tankan Business Conditions forecast will be released in Japan. China will see the release of the official and the HSBC’s, manufacturing Purchasing Managers’ Indices. The Markit Manufacturing Purchasing Managers’ Indices will be published in Spain, Italy, France and the U.K alongside the Eurozone aggregate figure. Additionally, labor market data will be released in Germany, in addition to aggregated Eurozone figures. In the U.S., final estimates of June’s Purchasing Managers’ Index will be published, as well as ISM Manufacturing data. Wednesday: Japan will publish data on its monetary base, recently indicating the number of Yens circulating in the economy to increase by an annual 45.6%. In the U.K., Nationwide House Prices data will be published. Labor market data will be published in Spain, analysts expect to see a 155K decrease in the number of Unemployed. In the U.S., the weekly MBA Mortgage Applications Index will be published, as well as June’s ADP Employment Change and May’s Factory Orders. Thursday: The day will kick off with a plethora of Purchasing Managers’ Indices for the service sectors from the Eurozone. The ECB is scheduled to announce interest rates. Analysts, however, expect no change of these, following the previous month’s drop of rates. In the U.S., May’s Trade Balance data will be published, following by June’s Change in Nonfarm Payrolls. Also due is June’s Unemployment rate, currently at 6.3%, as well as the weekly Initial Jobless Claims. Friday: In Germany, May’s Factory Orders data will be published, recently presenting a 6.3% annual increase. Join Anyoption and take advantage of the volatility of the markets ..Start Trading TODAY!

Abenomics is not going as planned

Last week presented a good opportunity to review the implications of Japanese Prime Minister Shinzō Abe's ultra-expansionary monetary policies. On Monday, the Nation's Central Bank Governor, Kuroda, addressed Japan's Association of Corporate Executives, noting that Japanese inflation currently sits at 1.5%, when adjusting for price increases stemming from April's consumption tax hike. Kuroda expressed hope that rising inflation would push individuals towards higher expenditure levels as he stressed that "we need to achieve a world in which people engage in economic activities based on the assumption that two percent inflation is a given". 

When the Nation’s Consumer Price Index was released the following Thursday, it indicated that Japan’s Annual inflation has increased by a noteworthy 0.3% over the previous month’s print. Sadly, inflation’s closing in on Kuroda’s target did not seem to encourage Japanese consumer sentiment. Alongside with the publishing of the CPI, May’s Household Spending presented an 8% annual contraction, versus merely 4.6% in April. 

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Glum U.S. GDP data

When the advance estimate for the growth of the U.S. economy was published on April 30th, it presented a mild 0.1% annualized increase. That was a negative surprise in an economy hoping to see some recovery. The second estimate of the same figure, which was published a month later, was considerably worse as it suggested the U.S. economy was contracting by an annualized 1%. The first contraction in 12 quarters was not the end of it. Last Wednesday, when the third estimate was published, it indicated a contraction of 2.9% at the nation’s product, the worst figure in five years. Breaking down the negative change at the headline figure reveals that most of it was due to a drop in the personal consumption as that receded from a 3.1% annualized increase in the second estimate, to just 1% in last week’s data.

Preliminary estimations argued that weak consumer spending in the U.S. during the quarter was the result of adverse weather conditions, encouraging hope for a recovery in the following quarter. However, that was countered by the fact that most of the downward revision of consumption was listed in nondurable rather than durable goods, which does not need to be re-stocked. 

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Economic events of the coming week

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Monday: Preliminary figures on June’s Markit Purchasing Managers’ Index will be released in Japan, throughout the Eurozone and in the U.S. The HSBC Manufacturing Purchasing Managers’ Index will be released in China. May’s Existing Home Sales are due in the U.S., where analysts expect a noteworthy increase to 4.73 million dwellings sold, versus 4.65 million in April. Tuesday: The IFO Survey will be published in Germany. In the U.S. demand side, the Consumer Confidence Index and May’s New Home Sales data will be released. On the supply side, the Richmond Fed Manufacturing Index will see light. Wednesday: June’s Manufacturing Confidence Index will be released in France. Italy’s Consumer Confidence Index will be released. Surging in recent months, the index levels are similar to those on the eve of the great recession. In the U.S. are the weekly MBA Mortgage Applications is expected, May’s Durable Goods Orders and the Q1 National Account’s third estimate. Thursday: The French Consumer Confidence Index is due to be published, recently not as solid as that of Italy's, however. The bank of England’s Carney is due to speak in London on the central bank’s financial stability report. The weekly Initial Jobless Claims will see light in the U.S., in addition to Personal Income and Spending. Friday: May’s Jobless Rate will be published in Japan, in addition to the Job-To-Applicant Ratio and various Consumer Price Indices. Preliminary figures on Spain’s Consumer Price Index will be released. Also due are the Eurozone’s Consumer Confidence Index, German Consumer Price Index and the University of Michigan’s Consumer Confidence Index. Join Anyoption and take advantage of the volatility of the markets ..Start Trading TODAY!

Maybe it is the economy that is unclear

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The press conference's Q&A enabled reporters to tackle Yellen on the matter. When confronted with the fact that market pricing for interest rate is lower than the consensus of Fed members, Yellen said that each Fed member has a "considerable band of uncertainty" around his forecast. When questioned by what extent is the monetary policy driven by financial stability, Yellen said that she does not see stability as an important factor in shaping monetary policy at the moment. Reporters kept pushing the inflated asset bubble premise, as they suggested that the S&P 500 is at a record high. Yellen replied that she “does not see valuations outside of historical norms for equity prices broadly". Ultimately, Yellen was asked if there would be a considerable period between the end of the bond purchases and the first hike of the federal funds rate and specifically, whether March's six-month assessment is still good. To this, Yellen concluded with an undeceive response that there is "no mechanical formula whatsoever for what a considerable time means".

Evidently, the perception that everything is relative seems to be very valid in financial markets nowadays. It is easy to see why an additional 10 billion dollars tapering can be a step backwards. 

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Stocks gain on Fed’s lack of clarity

Last Thursday’s Federal Open Market Committee (FOMC) rate decision seemed to be good on U.S. equity markets and asset markets in General. The NASDAQ Composite Index added 0.7% to its value following the announcement and the Dow Jones added 0.6%. This is somewhat surprising given the announcement of an expected, yet non-trivial, 10 billion dollars reduction of the Fed’s asset purchase program. Further digging into press release accompanying the decision, one would note that the Fed is quite content with growth in economic activity, saying it had rebounded in recent months, and that business fixed investment, which is considered pro-cyclical, has resumed its advance. So one has to wonder, if the economic data is suggesting a more hawkish monetary policy, why are equity markets gaining? QE3's tapering had been quite consistent since it started in December of 2013. In that sense, last week's 10 billion addition was not a surprise. That leaves us with the future path of the Federal funds rate. Regarding this, there is the fact that the announcement saw the Fed’s longer term rate projection sliced from 4% to 3.75%. Regarding rate expectations, last week's announcement had very dull content. Investors could have been concerned of Yellen following BoE Governor Carney’s path, by suggesting that a rate hike could occur sooner than markets currently price. Additionally, Yellen's comment from March, that the gap between the end of QE3 and the Fed raising rates should amount to about six months, was still her most recent guidance. Regarding financial stability, the recent month's rally in equity markets, amid historically high valuations, is another reason to question the current monetary policy. Join Anyoption and take advantage of the volatility of the markets ..Start Trading TODAY!

Economic events of this week

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Monday: The Final estimate of the Eurozone’s Consumer Price Index will be released. Analysts expect for it to remain at a moderate annual 0.5%. In the U.S., the Empire Manufacturing survey and May’s Industrial Production data will be released. Tuesday: May’s Consumer and Producer Price Indices are scheduled for release in the U.K. The ZEW survey will be released in Germany. In the U.S., May’s Consumer Price Index, as well as Housing Starts and Building Permits data will be published. Wednesday: Japan will publish May’s Trade Balance data, where analyst consensus sees the deficit widening to over a trillion Yen. The U.S. is due to host the weekly MBA Mortgage Applications. The day will also see the all-important FOMC rate decision published – analysts expect the FOMC to order QE3 tapered by another 10 billion dollars, setting it at a monthly 35 billion. Thursday: April’s All Industry Activity Index will be published in Japan. May’s Retail Sales data will be released in the U.K. In the U.S., both the weekly Initial Jobless Claims, as well as May’s Leading Index will be published. Friday: Advance figures of June’s Consumer Confidence will be released in the Eurozone.

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Normalizing global monetary policy

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Carney’s support of a more hawkish Bank of England policy quickly translated to the local sovereign bond market. The 2-year Britain Government Bond traded at levels reflecting around 0.82%-0.83% yield during the start of Friday’s session, versus 0.72% at the end of the previous day. The idea of less Sterling infused into the markets has also strengthened it against the dollar by an approximate 0.6%, to a level of 1.694. When this will translate to an actual policy change is a broad question. The Bank of England’s Official Bank Rate has been fixed at 0.5% for more than five years. All analysts currently surveyed on Bloomberg expect the BoE to keep rates unchanged at its upcoming rate announcement, on June 10th. On the other hand, the aforementioned rise in BoE rates means that investors see that taking place sooner or later. Economic conditions in the U.K. are generally more upbeat than those of other developed economies. For instance, the local Consumer Price Index was last published to indicate a 1.7% year over year increase of prices, after being just shy of 2% in recent months. The same cannot be said regarding many countries in the rest of the Eurozone, with a Eurozone aggregate print indicating a 0.5% annual increase of prices. The bottom line is that the path to normalizing global monetary policy goes through at least one central banker declaring economic settings as reasonable. Mark Carney may just be that central banker. Join Anyoption and take advantage of the volatility of the markets ..Start Trading TODAY!

Not everyone is dovish in the E.U.

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The ECB’s decision to cut interest rates, on June 5th, helped push the notion that monetary stimulus has yet to become a thing of the past, and that the only monetary tone at the European Union is a dovish one. The dovish approach is willing to stimulate the economy through accommodative monetary policy, even at the expense of the risk of inflating a financial bubble or two. It also made global central banks, such as the Fed, more cautious in regards with dispersing hawkish forward guidance. Evidently, with the ever-more-important role monetary policy took in shaping economic activity in recent years, comments going against the stream are prone to be retorted with a violent capital market response. This premise, however, was countered last Thursday by Bank of England Governor Mark Carney, who delivered a rather hawkish speech At the Lord Mayor’s Banquet for Bankers and Merchants of the City of London. In his speech, Carney mentioned strong indicators regarding the United Kingdom’s economy, such as the Bank of England’s staff projection of an annualized 4% increase of GDP. On the other hand, Carney described the economy as "over-levered" and its housing market as having a potential to "overheat". Additionally, the weak Sterling was insinuated to lead current deficit to a record level. Deeming necessary a remedy to the above situation, Carney moved on to note of "great speculation" regarding the exact timing of the first rate hike. The tone then turned rather hawkish as Carney said that the decision for the first rate hike is becoming "more balanced" and that "it could happen sooner than markets currently expect".

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A new player

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The Dollar’s status as the world’s reserve currency knew its difficulties. Towards the late 1960’s, the number of dollars worldwide far exceeded the amount of gold at the Fed’s vaults. This led the Fed to announce it will no longer be able to convert dollars to gold at the aforementioned ratio, or any other, effectively departing from the gold standard. Another act often considered to counter the depart from the gold standard was an agreement signed between the U.S. and Saudi Arabia in 1973, by which Saudi Arabia's oil sales would be denominated in U.S. dollars. Naturally, this incentivized oil purchasers to hold U.S. dollars, thus creating the "Petrodollar System".


The Dollar’s status was further brought into question in recent years, as the Fed’s dovish monetary policy resulted in a surge of dollar notes entering circulation, or rather the vaults of various foreign entities. Primary central banks responded to the Fed’s actions and sought to weaken their own currency, in order to preserve their local industries competitive exporting edge. Most notable among these were the ECB and Bank of Japan. 

In 2008, at the beginning of the financial crisis, the People’s Bank of China chose to peg its currency, the Renminbi, to the dollar at a fixed rate. The Renminbi strengthened from 6.83 CNY to the USD in June 2010, to around 6.21 nowadays. Additionally, China increased the amounts of gold at its vaults in recent years, paving to road to speculation that the Renminbi could someday replace the dollar as the world’s primary reserve currency. Many of the worlds' central banks either already shifted portion of their reserves from USD to CNY, or are planning to do so. Nigeria and South Korea are two examples.

Many of China's recent deals to purchase energy, including the giant natural gas deal signed last month with Russia, are rumored to be denominated in CNY and not in USD, effectively circumventing Petrodollar. However, it is hard to imagine the Renmibi taking the crown as the world's top reserve currency without China further opening its capital market. A global interest in Renmibi could lead to its appreciation, which would work against Chinese exporters. That means that gaining the status of a reserve currency, which was very lucrative in the past, seems nowadays more as a honey trap. 

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Fast forward to modern times

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In the 19th century, the GBP took the center stage as a globally used currency. Originating as commodity money, by the time it became globally accepted, it did not consist of any precious metal, but appeared in the form of Bank of England notes baring the right to be converted to gold, known as the “gold standard”. The fact that Britain was by far the most predominant global economic force at the time made the Pound globally accepted. At some point, it started making sense to use the Pound not only as currency, but as a mean of reserve - thus establishing the Pound as a “reserve currency”. When many global central banks began doing so, it enabled the BoE to issue more notes, without fearing the subsequent inflation.

No empire reigns forever, and the Second World War left the United Kingdom battered and bruised. The U.S. used this as an advantage at the 1944 Bretton Woods Conference, and set the dollar as the world’s primary exchange currency, by fixing its rate with that of 44 Allied nations, and setting a gold standard of 35 dollars per an ounce of gold. This act made the dollar the new global reserve currency, a status maintained up until this very day. 

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Brittle safe havens

Recent weeks' strengthening of the USD against the EUR, alongside the decrease of U.S. yields, has strengthened the dollar's status as the world's financial safe haven. While gold and other precious metals have always seemed to retain their value, the same had only applied to few selected currencies. Today we will review some of the process of consolidating monetary systems, and place the dollar's status in context. 

Currency is often defined as any physical mean that is used as a medium of exchange. Historically, many currencies existed only within a local scope, but the rise of global trade necessitated a medium of exchange that would be generally accepted and would be able to maintain its value. In the ancient world, precious metals were the obvious choice, mostly being conveniently minted to “standard” weights. These weights became synonymous with their value as currency. The ambiguity between the money and the commodity it was made of led to defining it as "commodity money". Two such examples of commodity money were the Chinese Tael and Greek Drachma. 

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Economic events of this week

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Monday: Japan’s Ministry of Finance will release data on Capital Investment during Q1. April’s Mortgage Approvals data will be released in the U.K. Analysts expect to see the boiling market slightly cooling down, with an expected 64.5K approvals, versus 67.1K last month. The final estimation of Markit Manufacturing Purchasing Managers’ Index for May will be released in the U.S. Also due is the Institute of Supply Management’s Manufacturing Index.  

Tuesday: More data will be provided regarding the U.K. real-estate market, with the release of the Nationwide House Price Index. Unlike mortgages, however, analysts see this indicator continuing its rampant 10.9% annual increase. The Eurozone’s April Unemployment rate, and preliminary May Consumer Price Data are also due. In the U.S., April’s Factory Orders data will be released. 
 
Wednesday: Preliminary indications regarding the Eurozone’s Gross Domestic Product in Q1 will be released. In the U.S., the weekly MBA mortgage applications report is also due, following a negative 1.2% decline released previously. Also expected in the U.S. is May’s ADP Employment Change and April’s Trade Balance.  

Thursday: April’s Factory Orders data will be released in Germany. Analysts expect the month to present a 1.4% monthly increase, following a 2.8% monthly decline in March. On the monetary front, the Bank of England is expected to announce its official bank rate, but analyst consensus tilts towards no change taking place. The ECB is also due to publish rates. Draghi’s dovish tone has certainly shifted analyst consensus to see the ECB to take SOME action. Concluding the day, the weekly Initial Claims will be released in the U.S. 

Friday: U.S. labor market statistics will be released in the shape of May’s change in Nonfarm Payrolls and Unemployment rate. 

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Economic truths are seldom one-dimensional

Digging into the different subcomponents of the GDP reveals a clearer image. The “inventory” component accounted for most of the negative headline figure, as it alone trimmed no less than 1.6% of it, after chipping off a mere 0.6% in the original estimate. One possible interpretation for this is that businesses expected muted future demand, and were de-stocking in order to avoid being left with merchandise. Another interpretation would be that demand was larger than expected at the start of the quarter, and that alone has led to the de-stocking. 

The latter explanation is supported by the fact that the "personal consumption" component has contributed an annualized 2.1% to the product. Naturally, in this case, diminishing stock inventories would need to be filled, leading to an unavoidable increase of future GDP. Also supporting the premise that the negative print was a one-timer was the fact that Government expenditure was revised downwards to chip 0.15% off the nation's product.


The weekly Initial Jobless claims was released at the same time as the GDP. Unlike the GDP, Initial claims indicated increasing demand at the labor market as it saw exactly 300K weekly claims submitted, from a previous print of 326K. The following day even saw the U.S. Bureau of Economic Analysis report of a 0.3% increase in April’s Personal Income. Additional positive indicators published on Friday included the Chicago Business Barometer rising to a level of 65.5 from a previous print of 63.0, as well as the University of Michigan’s Consumer Confidence Index presenting an upbeat print of 82.5, from a previous 81.9. Combining the above with the fact that equity markets traded noticeably higher depicts the fact that economic truths are seldom one-dimensional. 

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The winter’s final backlash

Forecasts for the second estimate of the U.S. Q1 Gross Domestic Product, released last Thursday, were not excessively optimistic. The preliminary estimate for the figure, released on April 30th, saw the U.S. economy expand by an annualized 0.1% during the quarter. However, as the effect of bad weather settled in analysts’ economic models, it dragged their estimation for the second print to a contraction of 0.5%. When the second estimate’s data was actually published, it presented an annualized 1% decrease of GDP. The recent datum marked the first quarter in three years in which the U.S. economy presents a contraction. Surprisingly, the effect the bad news had on the markets was somewhat limited. Expectations of the Fed prolonging its aggressive monetary activity were not evident in the U.S. bond yields, as the 10 year presented little change immediately after the publishing. U.S. equity Markets also exhibited with a rather muted reaction with the NASDAQ clearing the day at a 0.5% gain, and the Dow Jones adding 0.4%. Join Anyoption and take advantage of the volatility of the markets ..Start Trading TODAY!