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As discussed earlier in our special topic, Donald Trump will once again dominate headlines in the second half of the year. Investors will want to see some progress in “Trumpanomics” and some progress on repealing Obamacare. 

All eyes and ears will also be on the Federal Reserve (Fed) for the next 3 – 6 months. Uncertainty remains as to whether the Board will raise rates for the third time this year from the current 1.25%, and secondly, whether it will begin reducing its balance sheet anytime soon.  

Comments by Federal Open Market Committee (FOMC) Chair Janet Yellen indicated the recent rise in interest rates reflected the progress made by an economy which is expected to reached target employment and normal inflation levels over time. The Fed believes the recent dip in inflation is due to temporary factors and that the run of softer data should end soon. 

Balance sheet reduction of approximately US$10bn a month continues to be on the table, but it is possible that the pace of balance sheet normalisation could slow if data does not meet expectations. The US dollar has continued to fall as result of this uncertainty and the recent failure by Trump to successfully repeal Obamacare. 

The European Central Bank (ECB) has also joined the Fed in winding back some of its emergency policy from the Global Financial Crisis. ECB Chairman Mario Draghi has indicated that the ECB may start tapering some of its bond purchases. ECB bond buying has kept bond yields lower than would otherwise be the case for countries such Spain and Italy

The Fed and ECB’s policy has been supportive for financial markets since the Global Financial Crisis. So far the Fed has been able to get one foot out of the “exit” and the ECB is heading for the “exit”. It remains to be seen what overall impact the final exit will have on financial markets that have grown accustomed to Central Bank support.  

We will continue to monitor the global situation closely and provide another update should any further material events occur. 

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