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US Financial Markets Selloff as IMF Cuts Growth Outlook, Healthcare Vote Delayed

US Treasurys observed a steep selloff today as yields/swap rates increased 2-7 bps across the curve in a bear steepening pattern, with the yield on the 10-year note rising above 2.2% for the first time in nearly two weeks.  Investors received commentary from several Fed officials throughout the day, beginning with San Francisco Federal Reserve President John Williams’ remarks to Macquarie University in Sydney, Australia.  In his second of a trio of talks scheduled this week, Williams warned of the struggling growth projected in advanced economies in the absence of intervention from fiscal authorities.  Aging demographics and a slowdown in productivity were pointed to as key factors for long-term soft growth, with the recently stronger economic data expected to taper off.  Highlighting more delays in US fiscal policy implementation, today Senator Mitch McConnell announced that the vote on the new health care legislation intended to replace Obamacare would be delayed past July 4th due to the bill’s current inability to garner enough Republican support.  The news represents the latest in a series of setbacks which the Trump Administration has faced in its attempts to swiftly recast policy. As a result of Trump’s struggles to deliver on key reforms such as tax cuts and increased infrastructure spending, today the International Monetary Fund cut its forecast for economic growth in the US.  In April the IMF had projected a 2.3% growth rate in the US during 2017 and 2.5% the following year, but those forecasts have now both been reduced to 2.1%, no longer factoring in the previously expected fiscal stimulus. Presenting a more positive light on the US economy was the speech from Fed Chair Janet Yellen, who was in London, in which she expressed confidence in the financial stability of the large banks in the US and even went as far as to say that a financial crisis similar to the one in 2008 would likely not occur “in our lifetime.”  US bank stocks rose on the day alongside the energy sector, but those gains were overshadowed by a selloff in tech stocks, following a cyberattack which initially hit Europe but has since spread to the US.  All three major stocks indices are lower on the day, with the tech-heavy Nasdaq posting losses in excess of 1.25%.  Crude oil futures increased more than 2% on the day, bringing WTI back above $44.25/barrel and Brent just under $46.75/barrel.

In foreign markets, the euro rose as much as 1.5% following comments made by ECB President Mario Draghi at the ECB’s annual forum in Portugal.  Draghi delivered a slightly more hawkish tone compared to his past rhetoric, as he stated the view that inflationary pressures need to continue to build before phasing out asset purchases, while acknowledging stronger growth in the region with the “reflationary” effectiveness of the current monetary policy.  Draghi specifically cited falling oil prices, slow wage growth, and global uncertainties as contributors to lower inflation, but confirmed deflation is off the table.  “In the current context where global uncertainties remain elevated, there are strong grounds for prudence in the adjustment of monetary policy parameters, even when accompanying the recovery. Any adjustments to our stance have to be made gradually, and only when the improving dynamics that justify them appear sufficiently secure”, he stated.  The euro is currently trading near $1.135/EUR, its highest level since June 2016.  In Brazil, criminal charges were officially filed against President Michel Temer in relation to allegations of accepting a series of bribes from the former chairman of the world’s largest meatpacking company, JBS SA.  Bringing the case to trial would require a two-thirds vote from Congress and would add to the uncertainty surrounding the future of Brazil’s second president in less than 12 months.  The Brazilian real dropped nearly 1% in trading this morning.    

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