Morning Commentary: Are you an Optimist or a Pessimist?

Foreign Exchange - Morning Commentary
Are you an Optimist or a Pessimist?
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Alan Rose
Alan Rose
Foreign Exchange Senior Trader
News over the past 24 hours has largely been colored by whether you are forward looking or looking to the past for guidance as to the future state of the global economy. There is truth in both camps. Despite a regular barrage of positive headlines regarding an upcoming trade deal between the U.S. and China, they have not even agreed on a site or a date yet for the two respective leaders to meet. Yesterday, news broke that the proposed November signing of a Phase 1 document will most likely be pushed back into December.

For now, optimists are holding the winning hand as markets have returned very quickly to a “risk-on” environment after a brief period of consolidation yesterday. Overnight headlines from China that both parties have agreed to roll back tariffs on each other’s goods in phases as they work toward a de-escalation of the trade war have spurred on another strong global stock market rally accompanied by higher G7 interest rates and stronger energy and commodity prices. The U.S. dollar is mixed with safe haven currencies slightly weaker while the Chinese yuan continues to appreciate on its multi-day run.

For those that lean toward the notion that the global economy remains in trouble and will potentially need more stimulation, we have news and data that support that camp. German industrial production for September fell below market expectations at -0.6%. This is the 11th month in a row of declines and brings the YoY decline to -4.3%. The Bank of England (BoE) met and kept rates unchanged at 0.75%, but there were two dissenting votes for rate cuts and the outlook was skewed to the downside. The BoE downgraded growth for 2020 to 1.2% and also downgraded GDP for 2021 on continuing Brexit concerns; the 1.2% GDP for next year would be the worst since the Great Recession.

Since markets are almost always forward looking, there continues to be reasons to be optimistic about the U.S. – China trade talks and Brexit progress. But, both of these macro issues remain very fluid and could change rapidly between now and early December when the rubber meets the road. In between now and then, economic data, the impeachment inquiry/hearings and other political developments will keep the markets volatile.
  • Europe continues to see ongoing concerns about future growth. Both the IMF and the EU warned of weaker growth ahead. The IMF said that Europe should make contingency plans for fiscal stimulus as downside risks build. The EU cut both growth and inflation forecasts for 2020 and 2021 and said that risks remain “decidedly to the downside”.
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