Morning Commentary: Divergences As Far as You Can See

Foreign Exchange - Morning Commentary

Divergences As Far as You Can See

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Alan Rose
Alan Rose
Foreign Exchange Senior Trader
Yesterday, the S & P 500 and NASDAQ had their highest closings ever. This is quite a remarkable story given all the pessimism and negativity in Q4 when U.S. and global equities tanked as concerns mounted about an impending global economic slowdown. The Fed’s dovish pivot in January, along with other central banks expressing the need to continue to provide liquidity, provided the spark for U.S. and other global equity indexes to rebound sharply.
But that optimism and euphoria has not carried over to all other asset classes. U.S. interest rates and equities have diverged starting in November. Back in the middle of November, U.S. 10-year interest rate yields were near 3.25%. Today we are sitting at 2.53% despite the exceptional U.S. equity rebound. The fuel that provides the impetus for U.S. equities is the same fuel that keeps interest rates suppressed.
Many other global equity indexes continue to lag well behind their previous highs and behind the strong U.S. equity recovery in 2019.  The previous highs for many European and Asian equity indexes occurred many years ago and these indexes have failed to regain their footing. The key Chinese Shanghai Composite index, while rebounding in Q1, is still nearly 40% below its previous high in 2015. Many European equity indexes remain 10-15% below their previous highs.
What all this means for the U.S. dollar is difficult to say. U.S. exceptionalism regarding growth, earnings, and optimism continue to allow for equities to outperform and, in the short term at least, eclipse all the other concerns about U.S. debt, deficits, dysfunctional and polarized politics in Washington etc. The Fed’s dovish pivot resulting in lower U.S. interest rates has not hurt the U.S. dollar as weaker economic data from abroad continues to raise concerns. Importers and exporters should be encouraged to remain tactical in a foreign exchange market continuing to look for answers.
  • The Australian dollar has been pummeled overnight as it is down nearly one percent on the back of weaker Q1 CPI. Headline inflation was expected at 1.5% YoY but instead rose only to 1.3%. Australian 2-year interest rates are down a remarkable 15 bps to 1.32% overnight as the market begins to price in easing by Reserve Bank of Australia.
  • The euro is weaker again today on the back of softer than expected German business confidence readings in April. Headline readings fell to 99.2 versus expectations of a reading of 99.9. Business expectations also fell below consensus estimates. All G7 interest rates are down on the session including U.S. interest rates.
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