Morning Commentary: American Exceptionalism Increasingly At Risk

Foreign Exchange - Morning Commentary
American Exceptionalism Increasingly At Risk
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Alan Rose
Alan Rose
Foreign Exchange Head Trader
Since the end of the Great Recession, the U.S. economy has consistently outperformed its peer group of major trading partners. It was the first major economy to exit the Great Recession spurred on by extraordinary and unconventional monetary policy by the Federal Reserve while other countries lagged behind.  Most recently, the U.S. economy has advanced into a new gear driven by Republican tax cuts and White House deregulation efforts.

However, those economic gains are becoming increasingly at risk as a combination of factors are finally resonating with investors and causing anxiety and angst with U.S. and global equities. With one of the longest economic recoveries on record, markets are concerned that this recovery is getting long in the tooth and is at risk for a slowdown next year.

Economic data from China and Europe have been weaker than expected and continues to disappoint (see below). That, combined with continued monetary policy tightening by the Fed, weakening U.S. economic data in the housing sector, concerns about the tech sector, and global trade tensions, has changed the market dynamics so that there are more headwinds than tailwinds.

Markets are thin today as many investors, traders, and market participants have taken a four-day weekend so we don’t want to read too much into today’s price action. Global equities are lower and U.S. equities are scheduled to open lower once again. U.S. and G7 interest rates are lower again and have fallen consistently over the past two weeks. The U.S. dollar is higher against almost all the major and emerging market currencies as sharply lower oil prices and weak EZ PMI data have caused commodity-linked currencies and European currencies to falter.

Next week, the G20 meets with all eyes centered on the U.S. and China meeting hoping to find a framework for finding common ground to resolve the trade tensions between the two key countries. Fed Chairman Powell will be speaking next week and markets will be parsing his commentary and language for future signals about the course of Fed monetary policy. Next week will be a critical week for all asset classes.
  • Oil prices have crashed again today hitting a one-year low. Commentary about Saudi Arabia’s oil output hitting a record high combined with U.S. stockpiles growing have caused oil prices to crash since October. U.S. stockpiles of oil have grown for nine straight weeks and oil has fallen for seven straight weeks.
  • EZ PMI data was disappointing again and combined with other weak EZ data have investors concerned about the sustainability of the EZ recovery just when the ECB is about to end its QE program. EZ PMI for November fell to 52.4 against estimates of 53.0…this is the lowest level in the past four years with the German PMI being particularly weak.
  • South Africa raised interest rates by 25 bps to 6.75%...the market was divided as to whether the central bank would move rates today. The rate increase was no help for the currency as the South African rand is one of the weakest currencies today.
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