Morning Commentary: 2019 – Starting Off on the Wrong Foot

Foreign Exchange - Morning Commentary

Starting Off on the Wrong Foot

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Alan Rose
Alan Rose
Foreign Exchange Head Trader
Markets are beginning the New Year on a pessimistic note. Weak Manufacturing PMI data from China (indicating economic contraction) combined with soft final EZ PMI’s have sent global equities into another downward tailspin. Markets are in full “risk-off” mode as we begin the New Year with interest rates and commodities following suit and all moving in lock-step lower. The U.S. dollar is stronger across the board today with the exception of the Japanese yen which continues to power ahead as U.S. interest rates continue to fall.
U.S. 10-year yields are down for the fourth day in a row and have fallen almost 60 bps since the beginning of October. U.S. 10-year yields are currently at 2.66% and that’s the lowest level since February 2018. U.S. 2-year yields have fallen almost 50 bps since the beginning of October and are currently at 2.49%.
Markets are always looking forward; interest rates are declining despite the four Fed rate increases in 2018 and expectations for two more Fed rate increases in 2019. The market continues to price in the increasing risks of a global slowdown that will also impact future U.S. growth. In the past two weeks, the probability of the Fed cutting interest rates in January 2020 has risen from 10% to 30%.
Momentum and psychology can be just as important as economic data; something needs to change in order for the markets to stabilize. In the U.S., Washington politics and resolving the trade war with China are important keys for the markets as is Federal Reserve policy. U.S. jobs data is this Friday combined with Chairman Powell speaking at a symposium with Ben Bernanke and Janet Yellen. “Hope is a good thing, maybe the best of things.” Let’s hope for a change in the market dynamics and psychology.
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