Morning Commentary: Just Under the Surface

Foreign Exchange - Morning Commentary

Just Under the Surface

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Alan Rose
Alan Rose
Foreign Exchange Senior Trader
Global equity markets remain generally upbeat, optimistic, and hopeful that the U.S.-China trade talks will have a positive and successful conclusion. Adding to the optimism of global equity markets have been a pivot by the Federal Reserve to the dovish side and building confidence that the Brexit negotiations will also result in a soft Brexit and do minimal harm to both the U.K. economy and the EZ. This change in tone and attitude in the equity markets occurred almost overnight in late December after December’s near panic selling by global investors as they were filled with angst and anxiety about future growth.
 
While global equities have garnered the most attention and have been the visible sign of this most recent shift in sentiment, G7 interest rates have badly lagged behind as concerns linger about future growth, earnings and a more dovish Fed. While not a key focus of our commentary and not getting a lot of front page coverage, basic raw material prices have overlaid and correlated with the positive shift in U.S. and global equities. Iron ore, copper, oil, gold etc. have all been surging since the beginning of the year anywhere from 10% to 20% on the expectation that the worst is behind us now.
 
Markets are always looking forward and investors remain hopeful that the worst of the trade wars and disputes are behind us as it has taken a toll on many major economies with many near recessionary levels. A return to normalcy in terms of supply chains and expectations is a key for business planning and investment. I am hopeful that the equity markets are reading the tea leaves correctly and that demand for raw materials reflects this optimism.
HERE ARE THE KEY NEWS STORIES FROM OVERNIGHT:
  • German economic data continues to reflect weakness and a loss of momentum and confidence. Germany barely escaped having two quarters of negative growth in Q3 and Q4 last year. Today’s German IFO business confidence survey was disappointing again as it came in at 98.5 which was below consensus estimates. This is the lowest reading in five years, but it was not a problem as German equities are higher and the euro is unchanged.
  • Canadian retail sales have now fallen for the second month in a row as they declined by 0.1% in December after falling by 0.9% in January reflective of a weakened consumer and lower gasoline prices. Retail sales grew by 2.7% in 2018 and by 7.1% in 2016.
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