Morning Commentary: “Reason to Believe”

Foreign Exchange - Morning Commentary
“Reason to Believe”
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Alan Rose
Alan Rose
Foreign Exchange Head Trader
Markets are searching for a reason to believe that the equity market rout this week is just another correction in a continuing long term bull cycle. There have been numerous other short term stampedes out of equities going back to 2009 that were proven to be only buying opportunities for those that had a medium to longer term vision.  For today, it appears that some stability is at hand as both Asian and European equity markets are all in green, supported by some good fundamental news, and U.S. equity markets are opening higher.
Overnight, China posted its September trade data which showed another large surplus above expectations. But the numbers within the numbers showed that exports for September came in much stronger than expected at 14.5% against consensus estimates of 8.2%, and imports also were much stronger. Both pieces of data within the trade numbers imply a Chinese economy still beating strongly despite the Shanghai composite equity index down over 21% this year. There are concerns that the strong export showing this month was influenced by front-loading of exports ahead of the imposition of U.S. tariffs.
Expect equity markets to remain volatile in the near term which will play havoc with interest rates, fx, and commodity prices. Here are a handful of reasons for investors to remain nervous and anxious, which may keep them sidelined:
  • U.S. interest rates have been marching higher, and in particular over the past few weeks, sending 30-year mortgage rates near 5% which could stall out demand for housing. 
  • U.S. – China trade tensions remain highly elevated with both sides digging in for the long haul with potential repercussions for global growth and inflation. 
  • The U.S. Treasury needs to raise unprecedented amounts of money to finance our debt levels which will keep upward pressure on interest rates. 
  • Inflation expectations remain largely contained for now, but expectations in the future are for higher inflation due to wage increases and tariffs filtering into the economy keeping the Fed tilted toward further rate increase. 
  • Finally, the November elections add another piece of uncertainty to this short term mix of factors as to the composition of the next Congress.
Investors and traders should continue to expect the unexpected in the short term with high volatility and rapid changes in sentiment. Importers and exporters should continue to remain tactical in the short term and take advantage of any opportunities that come their way.
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