Morning Commentary: “A Long Time Ago, in a Galaxy Far, Far Away”

Foreign Exchange - Morning Commentary
“A Long Time Ago, in a Galaxy Far, Far Away”
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Alan Rose
Alan Rose
Foreign Exchange Senior Trader
There was a time, in the not too distant past, when equity performance was highly, positively correlated with GDP growth. In today’s world, with ultra-low or negative interest rates, there are few options for investors than equities. Equities seem to have a permanent Teflon coating to negative economic data while the bond market reflects the angst of weaker growth, political turmoil, and a failure to close the U.S.-China Phase 1 deal on trade.

Weakening or anemic economic data from Japan, China, Australia and Germany overnight have pushed interest rates down for a second day in a row while global equities are only fractionally in the red. Trade talks between the U.S. and China have hit a snag; China is demanding tariff rollbacks and the U.S. is demanding detailed timelines from China on when and how they will purchase U.S. agricultural goods. Markets remain hopeful and continue to look beyond these short term hurdles to an eventual signing of Phase 1 as the abandonment of trade talks and further self-inflicted economic wounds are beyond a mere mortal’s comprehension at this time.

Continue to expect this market dynamic between equities and bonds with the U.S. dollar caught in the crossfire between these two events and other geopolitical hotspots including Washington political turmoil. This leaves the U.S. dollar (DXY) steady to stronger in the short term supported by the highest G7 interest rates and an economy that will not quit; service sector and consumer demand are still supporting the economy while manufacturing and agricultural are faltering.  Emerging market weakness also adds to U.S. dollar strength.
  • Japan reported weak Q3 GDP data as expectations were centered on a 0.9% gain but instead fell to 0.2%. This was partially offset by an upward revision to Q2 growth from 1.3% to 1.8%. The Japanese yen is higher on the session as all safe haven assets are slightly stronger.
  • China reported weak October industrial production and retail sales. They were expected to rise by 5.4% and 7.8% YoY but instead grew only by 4.7% and 7.2%, respectively. In addition, fixed asset investment fell to 5.2% YoY which is the lowest level on record since 1998. Downside risks remain for the Chinese economy, but there is no election for President Xi in 2020 so he can continue to play the long game regarding the trade negotiations.
  • Aussie interest rates and the Aussie dollar collapsed overnight on the back of a very weak October jobs report. Consensus estimates were calling for a 15,000 gain, but instead, there was a decline of 19,000 with a downward revision to September data. Both full time and part time jobs declined, and the UR rose a tick to 5.3%.
  • Germany barely avoided a technical recession by posting a 0.1% gain in Q3 after posting a -0.1% in Q2. The economy grew 1.0% YoY while the entire EZ grew by 1.2%.
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