Morning Commentary: Uncertainty Rises

Foreign Exchange - Morning Commentary
Uncertainty Rises
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Alan Rose
Alan Rose
Foreign Exchange Senior Trader
Markets have been working off of an optimistic playbook since September with progress regarding the U.S.-China trade talks, two interest rate cuts by the Federal Reserve, and signs of improvement from the U.S. and global economies. Markets were looking decidedly upbeat to the end of the year as U.S. and global equities were reflecting that optimism and confidence as they continued to make new all-time highs; yield curve inversion has also disappeared.
But enough negative news over the past few days has thrown cold water on the upbeat assessment for the next few months. Markets have moved to a “risk-off” environment today with equities and interest rates heading south while safe haven assets (gold and certain currencies) are rising. Here is a short list of key factors that have shifted sentiment:
  • Starting yesterday, President Trump’s speech had no new details or information about a U.S.-China trade deal other than saying we were “close,” which disappointed many in the market. On top of that, he threatened “significant tariff increases” if there is no deal with China.
  • Unprecedented chaos and violence in Hong Kong has reached new levels sending the key HK stock index down nearly 2% overnight; this is rippling through to other Asian financial centers.
  • Emerging market currencies have been under pressure with the continued protests and violence in Chile rippling through Latin American currencies and affecting sentiment in the entire emerging market sector.
  • The first public impeachment hearings begin today which adds another log to the fire of uncertainty in the short term. On top of that, Fed Chairman Powell appears before Congress over the next two days. Markets are increasingly concerned that the Fed will stand pat over the next months and perhaps through the entire 2020 election year cycle.
For the short term, sentiment has shifted, but as we have all witnessed, markets are amazingly resilient to negative news. President Trump needs a trade deal with China as we head into the election cycle as manufacturers and farmers have been hit hard by the trade war and tariffs. He cannot afford to lose that voting constituency in the key Midwest states. We anticipate a signing of a Phase 1 deal down the road where sentiment will shift once again.
  • The Reserve Bank of New Zealand (RBNZ) kept interest rates unchanged at 1% as was generally expected although a small minority were looking for another 25 bp cut. The RBNZ stated that they expect interest rates to remain at low levels for a prolonged period but regards the current level of interest rates as adequately stimulatory for now. Kiwi interest rates were shocked by this news and have priced out further easings for the short term. NZ 2-year interest rates are up an amazing 17 bps today and the NZ dollar is up by nearly 1%.
  • U.K. inflation for October surprised to the downside as it fell by 0.2% which is the lowest level in three years. The YoY rate dropped from 1.7% to 1.5%. Cheaper gasoline and electricity prices were the main cause of the improvement in inflation. U.K. interest rates are down, but the British pound is nearly unchanged.
  • U.S. headline inflation for October came in stronger than forecast at 0.4% bringing the YoY rate up to 1.8% from 1.7%. Higher gasoline prices along with stronger rent increases caused the inflation rate to move higher. However, core prices remained benign at 0.2% with YoY core prices dropping from 2.4% to 2.3%. The U.S. dollar is slightly stronger overall but within recent ranges.
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