Central bankers didn’t seem to have learned the lesson from the former Fed Chair, Ben Bernanke, when he first mentioned the idea of tapering the amount of money being pumped into the economy in May 2013.

Back then, the news sent risk assets south, and the volatility index surged 63% in less than a month, while U.S. 10-year Treasury yields climbed 25%.

Both, ECB’s Mario Draghi, and BoE’s Mark Carney sent a message to investors from Sintra, Portugal that the era of cheap money is closer to an end. This time the reaction was mainly felt in fixed income and currency markets.

Draghi’s comments were intended to signal more confidence in the economic recovery and not an immediate call to withdraw stimulus; however, bonds were sold heavily, and the Euro marched above 1.14, a new 52-weeks high. Similarly, Carney’s remarks, sent the Pound to 1.2972, recovering all losses prior to PM failure to win a majority, as he indicated the possibility of raising rates. I think going forward central bankers will be more careful and cautious when passing on similar messages. In other words, they should be uninteresting not to disrupt financial markets.

Although I’m bullish on the Euro on the longer run, I think the market’s reaction is a bit too exaggerated. I would rather wait for hard data to confirm the hawkish stance, especially inflation, because with the recent slide in oil prices inflation may remain low for a prolonged period. If Eurozone’s headline and core CPI disappoints on Friday, there’s a high chance that traders will book some profits.

Financial stocks are the biggest beneficiaries from the surging yields and the Fed’s upbeat assessment on the U.S. banking sector. The biggest U.S. banks are now able to boost shares buybacks and dividend payouts by almost 50% compared to 2016. This would likely lead to the continued rotation from bond proxies such as utilities to financials.

In commodity markets, gold recovered most of Monday’s losses to trade above $1,250 as the U.S. currency continued to weaken against its major counterparts. Meanwhile, crude prices were higher on both sides of the Atlantic despite U.S. inventories unexpectedly rose 118,000 barrels last week. The supporting piece of news from EIA was the 100,000 barrels decline in production last week, but it’s too early to jump to conclusions at this stage as it’s likely to reverse in the weeks ahead.

By Hussein Sayed, FXTM Chief Market Strategist (Gulf & MENA)

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