Morning Commentary: A Small Olive Branch

Foreign Exchange - Morning Commentary

A Small Olive Branch

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Alan Rose
Alan Rose
Foreign Exchange Senior Trader
Bond and equity markets are attempting to find solid ground after last week’s violent decline in global interest rates, inversion of the U.S. 2yr/10yr yield curve and heightened volatility in equity markets. Additionally, last week’s very weak German and Chinese economic data brought about an “imported panic” to the U.S. as markets became increasingly fearful that economic contagion from abroad would hit our shores, leading into the markets’ demise last Wednesday.
But today is a new day and markets are continuing their corrective behavior from late last week, spurred on by stronger than expected U.S. retail sales and hope that Germany would provide extra fiscal stimulus to their economy. Adding to the short term hope and optimism is the fact that the U.S. will extend, for another 90 days, a narrow set of exemptions on the Chinese technology company Huawei. Markets have interpreted this news as incremental progress toward easing the trade war between the two geopolitical giants.
Global equity markets are all in green and G7 interest rates are all higher today. The inverted U.S. yield curve (2yr/10yr) that flashed bright orange on Wednesday is receding back into positive territory with the 10 year yield moving to 9 bps higher than the 2 year yield.  Last Wednesday the 10 year yield was 2 bps lower than the 2 year yield.  Commodity prices remain mixed and the Swiss franc and Japanese yen have lost a bit of their safe haven status.
Despite today’s short term optimism, markets will remain treacherous and volatile and it will take much more positive economic data and news to remove the fear and panic around a global recession and the contagion that could spread to the U.S. Fed Chairman Powell will be speaking this week at the annual Jackson Hole Symposium on Friday and his topic will be “Challenges for Monetary Policy.”  Markets will be highly attuned and sensitive to his language and insights as to how it will impact the future course of U.S. monetary policy.
  • Japan reported July trade data. Exports and imports both contracted once again but by less than consensus estimates. Ongoing trade tensions between the U.S. and China are impacting Japanese growth and trade along with rising Japanese – Korean trade tensions and a stronger Japanese yen. Markets are expecting a 43% probability that the Bank of Japan will cut interest rates at its September 19th meeting.
  • Economic contagion continues to spread globally as reduced trade volumes ensnare all Asian countries. Thailand reported Q2 GDP growth at 2.3% YoY which was the slowest pace since Q3 2014 and down from 2.8% in Q1. The Bank of Thailand is expected to cut interest rates at its September 25th meeting following up on its previous rate cut at its August meeting.
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