Morning Commentary: How Quickly Market Sentiment Shifts

A daily summary and commentary of events and factors that affect the global markets, with a particular emphasis on the foreign exchange markets.

How Quickly Market Sentiment Shifts Share this story: Alan Rose Foreign Exchange Head Trader

It was just a mere six days ago that U.S. equity markets were making all-time highs. Concerns about a too rapid rise in U.S. interest rates and a continuing strong U.S. economy propelled by extraordinary data last week appeared to be taken all in stride as U.S. 10-year yields broke above key levels to 3.20% and higher. The U.S. dollar was making monthly highs piggybacking the strong data and higher U.S. interest rate differentials. That was so last week!   Somehow the pendulum has shifted quickly away from all the optimism and confidence to one of finger pointing at the Fed among other issues. There are a lot of Monday morning quarterbacks out there now second guessing the Fed’s actions when it was just last week that the Fed was being praised for their measured approach. Whether it is a too rapid increase in U.S. interest rates or ongoing concerns about a long drawn out trade war with U.S. and China plus a myriad of other factors, sentiment has clearly shifted to see U.S. equities fall for five straight sessions.   Since last week, U.S. equities saw persistent profit-taking.  Finally, as price action broke through key technical levels yesterday, it finally triggered an avalanche of stop loss orders yesterday. The U.S. equity rout spilled out onto the global stage with Asian equities sharply lower (Chinese equities at four-year low down by 5.2%) and the U.S. dollar lower as the market began to price out future Fed rate increases.   Asset classes of equities, interest rates, commodity prices, and foreign exchange rates are all strongly interconnected and yesterday’s U.S. equity stampede has sent a chain reaction through all of them. The key question for the markets is whether the U.S. equity performance yesterday is just another correction (like many in the past years) or a warning sign of something more serious about the U.S. and global economy. More time will be needed to assess those questions. HERE ARE THE KEY NEWS STORIES FROM OVERNIGHT: There is a bit of good news today that might help lower the anxiety levels in the market. U.S. CPI for September came in softer than expected at 0.1% with the YoY rate dropping from 2.7% to 2.3%. Ex-food and energy rose by only 0.1% and the YoY rate remained at 2.2%. U.S. interest rates are actually higher on the day despite the benign inflation and the global equity rout.

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