Morning Commentary: Irrational Exuberance Part Deux?
A daily summary and commentary of events and factors that affect the global markets, with a particular emphasis on the foreign exchange markets.
Irrational Exuberance Part Deux?
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Alan Rose Foreign Exchange Senior Trader
Yesterday, the S&P 500 and the NASDAQ both closed at their highest levels ever with the DJI within one percent of its all-time high. Equity markets continue to be driven by the prospect of lower interest rates and low inflation, hopes for a resolution to the long simmering trade dispute between the U.S. and China, and a conclusion to Brexit.
Former Fed Chairman Alan Greenspan coined the phrase “irrational exuberance” to explain this phenomenon of rising equity prices back in 1996 (dot-com era) when equity prices became uncorrelated to economic fundamentals and were rising at a fervor pitch. His use of the phrase was a potential warning that the Fed might need to raise interest rates to deflate extraordinary market levels.
But is this enthusiasm in U.S. and global equities in today’s market supported by economic fundamentals? The global economy is slowing and the U.S. economy is also slowing with declining job growth. U.S. factory activity contracted for the second straight month in September hitting a 10-year low, and there have been increasing signs that the manufacturing slowdown is spreading to the labor market and negatively impacting consumer spending. The move to impeach President Trump is also gaining momentum and is creating more uncertainty.
It is well above my pay grade to question the how’s and why’s of what is motivating equity prices to continue to rise in the face of weakening economic fundamentals. I pay very close attention to price action and price discovery to determine changes in market sentiment. For now and in the short term, it would appear that the psychology that is driving equity prices will continue as the Fed is not in a position to change those dynamics as market expectations are nearly 94% for another Fed rate cut tomorrow.
HERE ARE THE KEY NEWS STORIES FROM OVERNIGHT:
The U.K. is now set for its third general election since 2015. PM Boris Johnson won the backing of opposition Labor leader Jeremy Corbin for an election to take place between December 9 and December 12. The vote is set to be a proxy referendum on EU membership and is likely the last chance voters will have to voice their opinion. The election looks like it is Boris Johnson’s to lose as he has a strong lead in the opinion polls of nearly 10%. The British pound has had another volatile session but is nearly unchanged from last night’s closing levels.
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