Morning Commentary: Dysfunctional Politics Impact Business Confidence

Foreign Exchange - Morning Commentary

Dysfunctional Politics Impact Business Confidence

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Alan Rose
Alan Rose
Foreign Exchange Senior Trader
Markets are attempting to close the week out on an upbeat and positive note. President Xi from China has indicated that important progress has been made between the U.S. and China regarding trade talks and that talks would continue next week in Washington. Markets remain hopeful that President Trump might allow more time to negotiate a final trade agreement. Markets are in a mild “risk-on” mode with European equities outperforming, interest rates moving higher, and commodity prices on the rise. The U.S. dollar is mixed with commodity-linked currencies outperforming while European currencies are weakening.
 
We regularly write about how politics and economic performance are thoroughly intertwined and how the two are inseparable. Regarding our title for today, I am not talking about the United States. Yes, we have our own brand of dysfunctional and divisive politics in Washington D.C. with Republicans and Democrats finding little common ground and much of the country polarized. However, the constitutional foundations that our Founding Fathers put in place, combined with a healthier and stronger version of capitalism than other countries, allow for much greater political stability and for enhanced economic performance.
 
Europe, politically, has continued to evolve with many of the most important governments within the EZ led by multi-party coalition fractured governments that remain generally weak and ineffective and result in irregular and frequent changes in the leadership of the countries. Spain just announced that it will have its third election in four years. Italy has had 66 governments in the 74 years since WWII. A lack of political stability and consensus on how to boost the economy are all factors that impede economic performance. Italy is in a technical recession and Germany just barely escaped one. The euro, the second most important currency to the U.S. dollar, reflects this weakness and has just made a new low for 2019 today.
HERE ARE THE KEY NEWS STORIES FROM OVERNIGHT:
  • U.S. economic data was mixed this morning but U.S. equities are opening stronger and interest rates are higher. The Empire Manufacturing report for February beat expectations rising to 8.8 from 3.9 in January. However, Industrial production for January, a key metric for the market, weakened sharply by -0.6% against expectations of a small decline. Capacity utilization also weakened by more than expected. The U.S. dollar has given back some of its gains on the weaker economic data.
  • The GBP is outperforming other European currencies on the back of stronger than expected retail sales. Month over month retail sales rose 1.4% versus expectations for a 0.2% rise. 
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