Morning Commentary: A Small Sigh of Relief

Foreign Exchange - Morning Commentary
A Small Sigh of Relief
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Alan Rose
Alan Rose
Foreign Exchange Senior Trader
As we approach month end and quarter end, markets are attempting to close a tumultuous month on an upbeat note. All of the major geopolitical hotspots and President Trump coming under an impeachment inquiry seem to have been absorbed by the markets for the time being as prices of various asset classes have stabilized. Safe haven assets like gold and the Japanese yen have been giving ground over the past three days.

While Asian equites were mixed today, European equities are higher and U.S. equities have opened slightly higher. G7 interest rates are following equities as they are steady to higher. Despite all the unknowns and increased uncertainty, U.S. equities are set to close out September higher by nearly 1.8%. U.S. 10-year bond yields have been on a roller coaster ride all month but, net-on-net, are higher by nearly 30 bps.   

As we pointed out last week, the month of October can be an extremely volatile time for U.S. equities. While most of that extreme volatility is in the distant past, one cannot assume that we will not see increased volatility with so many global events having uncertain futures. Key for the markets will be the U.S. - China trade talks set to resume on October 10th .  Markets will need to hear and see some positive results and outcomes from these discussions even if it is a small breakthrough. Too much is at stake for the global economy and the U.S. economy if these talks break down again.
  • The Central Bank of Mexico cut interest rates by 25 bps for the second straight month. A slowing Mexican economy and weakening inflation have provided cover for the central bank to begin the process of unwinding previous rate hikes beginning in 2015. The vote by the Central bank was 3-2 in favor of a 25 bp cut while two voting members opted for a 50 bp cut. It was the first 3-2 vote since 2014. The Mexican peso was mixed yesterday but is weaker today and down for the third day in a row.
  • EZ Consumer Confidence fell to a four-year low and confidence with the industry segment of the survey fell to a six year low as continuing weak economic data and the effects of the U.S. - China trade war take its toll on business and consumer sentiment. The euro made a new yearly low before recovering on the back of this data release.
  • U.S. economic data was mixed today. Personal Income for August met expectations by rising by 0.4% but Personal Spending only rose 0.1%. A byproduct of all the U.S. and global uncertainty is the fact that the U.S. savings rate is rising. The key PCE deflator registered no inflation for August, keeping the YoY rate at 1.4%. The core PCE deflator stayed steady at 1.8% YoY. Durable Goods orders for August surprised on the upside, rising by 0.2% against expectations of a decline of 1.1%. U.S. interest rates are near unchanged on the session.
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