Morning Commentary: High Noon Approaches

Foreign Exchange - Morning Commentary
High Noon Approaches
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Alan Rose
Alan Rose
Foreign Exchange Head Trader
We begin a new week in a similar scenario as last week with global equities all in red territory. The continuous drumbeat of recent negative and disappointing economic news and the prospects of weaker global and U.S. growth continue to squeeze out all the optimism that was driving the markets from early October. The DJI is on track for the worst December since 2015, and the DJI and S & P are having their worst years since 2008. Despite the economy remaining on solid ground overall, investors are anxious, nervous, and fearful.
If there was not enough to fret about, we have two key events this week that could either provide a change in direction and sentiment for equities or add further negativity to an already pessimistic scenario. On Wednesday, the Federal Reserve will announce its interest rate decision, and the market probability is 74% that the Fed will raise interest rates for the ninth time. Language and future guidance will be key and will require all the skills of Fed Chairman Powell to thread the needle that balances all the appropriate risks to keep the economy on track and provides confidence for the markets and investors.
The other key event in the U.S. is the possibility of a government shut down by the end of the week. Compromise will be key for Republicans and Democrats to find middle ground with the President insisting that the funding of the border wall be the center piece of this negotiation. The needed compromise on this issue is just a precursor to the more acrimonious discussion regarding the extension of the U.S. debt limit in early March of 2019.
U.S. exceptionalism (above trend growth) is increasingly at risk due to a combination of factors from abroad and domestically that are beginning to bite into our economy with increasing signs of weakness in housing and automobiles. The U.S. dollar is also potentially at risk to weakness if the markets lose confidence in Washington to do the right things. This week will be another important test for the U.S. dollar.
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