Morning Commentary: A Little Bit of Hope Goes a Long Way

Foreign Exchange - Morning Commentary
A Little Bit of Hope Goes a Long Way
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Alan Rose
Alan Rose
Foreign Exchange Senior Trader
Investors and traders remain highly attuned to the state of U.S. – China trade talks. Any nuanced statement from either side can sway market sentiment instantaneously towards pessimism or optimism. For today, equity markets are cautiously optimistic on overnight comments from China that appears to set a slightly different tone going forward.

China has indicated that it won’t immediately retaliate against the latest U.S. tariff increase announced by President Trump last week and have emphasized ways to deescalate the trade war. Particularly reassuring for many market participants was the statement by China that it wished to resolve the trade dispute with a “calm” attitude. China has hit back against each previous tariff increase by the U.S., so not responding in kind this time may signal a change in strategy and a small olive branch to resume talks.

Equity markets in Europe have responded in a positive manner and U.S. equities have opened ~1% higher. However, skepticism remains strong as many market participants still envision a very long and drawn out negotiation which will continue to take its toll on the global economy.  G7 interest rates remain nearly unchanged and the U.S. dollar remains strong especially against many emerging market currencies. As continued economic fallout impacts both the U.S. and China, hopefully cooler heads prevail and enough new common ground can be found to restart productive trade talks.
  • U.S. Q2 GDP was revised lower from 2.1% to 2.0%.  Q1 GDP came in at a very healthy 3.1% but many economists are now forecasting GDP below 2% in Q3 and Q4. While declines in exports and inventories were negatives for this report, the U.S. consumer continues to remain strong. Consumer spending, which makes up nearly 70% of GDP, grew by 4.7%, topping all forecasts and is the largest quarterly gain since 2014.
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