Morning Commentary: The Politicization of Financial Markets

Foreign Exchange - Morning Commentary

The Politicization of Financial Markets

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Alan Rose
Alan Rose
Foreign Exchange Senior Trader
Equity markets are consolidating their strong gains from yesterday’s one-two punch of ECB President Mario Draghi’s dovish comments regarding future monetary policy and the announced meeting of President Trump and President Xi from China at the upcoming G20 meeting. Equity markets saw both of these news items as potentially bullish for future growth while the interest rate market remains much less confident as G7 interest rates remain near their recent lows. The U.S. dollar is consolidating its gains from yesterday.
 
President Trump is an unconventional and unorthodox President. As we enter the political season and the President kicks off his re-election campaign, it would appear everything and anything is fair game in terms of advancing the White House agenda and keeping the U.S. economic expansion ongoing. Trade wars, currency wars, and in particular, the unprecedented pressure on the Federal Reserve and in particular Fed Chairman Powell to bend to his will by cutting interest rates by making threats to demote or remove Powell if he does not cut interest rates today or at the next meeting on July 31.
 
Any move to cut interest rates by the Fed today will be seen as kowtowing to the White House, bending to political pressure and putting the Fed’s long history of being an independent institution at risk. If however, the Fed chooses to make a strong statement today of independence and keeps interest rates unchanged and pushes back against White House pressure through its statement or press conference, markets will react strongly. For what it is worth, the probability of a Fed rate cut today is at 23% with an 80% probability in July and a 95% probability in September. Continue to expect the unexpected.
HERE ARE THE KEY NEWS STORIES FROM OVERNIGHT:
  • Japan reported very weak May trade data as escalating trade tensions ripple through the global economy and supply chains. Exports and imports both contracted indicating a slowing of Japanese and global demand. Exports in particular were down sharply by 7.8% YoY and down for six straight months; another strong metric for a slowing global economy.
  • Canadian CPI for May came in well above expectations at 0.4% against expectations of a gain of 0.1%. YoY CPI jumped from 2.0% to 2.4%. While Canadian interest rates have moved sharply higher on the news, the Canadian dollar is fractionally stronger.
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