Morning Commentary: For Every Action, There is an Unequal and Opposite Reaction

Foreign Exchange - Morning Commentary
For Every Action, There is an Unequal and Opposite Reaction
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Andrew Kositkun
Andrew Kositkun
Foreign Exchange Head Trader
Equities around the world find themselves in a sea of red once again as concerns in the Middle East rattle the markets.  Yesterday, Iraq’s parliament voted to remove US troops from the country, to which the US Administration has threatened heavy sanctions should Iraq actually force US troops out. 

Moreover, in Iran, the rhetoric has turned even more hostile with President Trump warning Iran of major US retaliation “in a disproportionate manner.”  So far, the most significant action out of Iran has been the announcement that it would no longer abide by uranium enrichment limits as set out in the 2015 nuclear deal.  Ultimately, this really should not be a surprise to anyone and is, frankly, more symbolic than anything else. 

While this announcement effectively ends the 2015 nuclear deal, Iran will continue to cooperate with the United Nations’ nuclear watchdog and plans to return to full compliance to the deal’s original terms once US sanctions are lifted.  As part of the announcement to end compliance with the 2015 deal, Foreign Minister Javad Zarif also made it clear that all steps in withdrawing from the accord can be reversed.  

Notably, Iran’s first official reaction to the Soleimani was to take action on its nuclear agreement, as opposed to direct military action.  While Iran’s move has escalated tensions, on balance, it can be argued that this was a positive step as anything Iran can do that is short of military action should reduce the risk this escalates into a direct war between the US and Iran.   
  • As would be expected, oil is one of the biggest movers in the markets today with Brent futures rising ~3.1% to ~$71 a barrel before giving back those gains.  Oil has been rallying since October, despite limited evidence of a pick-up in global growth.  With Brent futures sitting around where they were after Saudi energy facilities were attacked, further oil price gains are likely limited without a major supply disruption.   
  • Further progress has been made on the Phase 1 deal between the US and China with China reportedly sending top negotiator Liu He to Washington on Jan. 15 to sign the agreement.  Economically, PMI data out of China came in a bit disappointing at 52.6 versus the last print of 53.2 but remains in expansionary territory. 
  • European data came in better than expected with German retail sales coming in at 2.1% MoM versus expectations for a 1.0% print.  Additionally, Eurozone services and composite PMI data both beat expectations with services coming in at 52.8 and the composite survey printing 50.9. 
  • The House of Commons returns from its Christmas recess and will begin debating the Brexit bill.  With an 80 seat majority, the Conservatives are widely expected to pass the bill.  Additionally, Labor meets to set a timeline for selecting a new leader.  Data-wise, services and composite PMIs both beat expectations. 
  • US services and composite PMI were both revised up to 52.8 and 52.7, respectively.  
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