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US monetary policy to remain accommodative


Asoka Wöhrmann, co-CIO of Deutsche Asset & Wealth Management, on the recent decision of the Federal Reserve to scale back its asset purchases modestly…

The Fed is not rushing for the exit. Monetary policy is likely to remain highly accommodative for a long time.

Based on our forecast of the economy strengthening in 2014, we expect the U.S. Federal Reserve Board (Fed) to scale back asset purchases further and probably end them by the second half of next year. The Fed will not begin raising rates until late 2015 at the earliest.

We don't see a huge move in US Treasuries prior to year end as markets have already discounted the effect of tapering on asset prices. The focus will now shift to the question of if the economy is indeed recovering at a faster pace. In this scenario rates should gradually move higher if further tapering is announced.”

We do not expect a complete decoupling of longer dated German government bonds from rising yields in the US. The short-end of the curve will remain at low levels given that the ECB is in a different state of its monetary cycle. The muted market reaction is an indication that the room for rising yields in the short-run is rather limited.

The decision is modestly positive for Developed Markets equities. Since the economy is becoming more self-sustainable, corporate earnings are expected to grow. This will allow equity markets to re-focus again on improving corporate fundamentals.

We do not expect that volatility in the Currency Markets will heighten that much. We expect a sustained revaluation of the US Dollar especially against the Yen and the British Pound.

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