Morning Commentary: Markets Remain on Edge

Foreign Exchange - Morning Commentary

Markets Remain on Edge

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Alan Rose
Alan Rose
Foreign Exchange Head Trader
U.S. and global equities got a big boost of confidence and optimism earlier this week as Chairman Powell shifted gears from his earlier hawkish stance in October to downplay the potential for continued additional Fed rate hikes. Markets can apparently live with the notion of potentially just one more Fed rate hike which would keep the Fed funds rate and other U.S. interest rates at historically low levels.
While the U.S. economy has been able to power through, fueled by tax cuts and deregulation, other G7 and G20 economies have not been so fortunate. Economic weakness in Europe, and particularly in Germany, combined with a Chinese slowdown (see below) have investors and traders worried about the global economy. Oil prices continue to falter due to both oversupply and weak demand adding to the economic concerns.
U.S. and other central banks are finally terminating their QE experiments and the global economy will have to learn to live without all the extra liquidity. Trade friction and tensions remain high and need to be resolved; the U.S. cannot remain an island of economic strength with the global economy so interconnected before we too begin to see more economic weakness and headwinds other than just in housing and autos.
Markets are mixed today despite the Trump administration trying to put an optimistic face on the key meeting between President Trump and President Xi from China to put a framework in place and resolve their differences. The fact that Lighthizer and Navarro will attend the U.S-China dinner is not a sign of optimism to many observers. Markets will need another shot of cortisone this weekend to mask the economic weakness that is becoming more apparent to keep the optimists happy.
  • China reported its official November Manufacturing PMI and it was disappointing. Expectations were for a reading of 50.2, but the report came in at 50.0. Non-manufacturing fell to 53.4 versus expectations of 53.8.
  • Japan’s October UR unexpectedly rose from 2.3% to 2.4%. The job-to-applicant ratio fell from 1.64 to 1.62. The Japanese yen is nearly unchanged.
  • Korea raised interest rates as expected by 25 bps to 1.75%. This was the first rate hike since November 2017.
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