Morning Commentary: Market Dissonance

Foreign Exchange - Morning Commentary
Market Dissonance
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David Atkinson
David Atkinson
Foreign Exchange Sales Manager
Global equities are broadly higher this morning by 1-2%, which helps offset the dips we saw on Monday.  US equities are starting off the day rather flat.  The US dollar is stronger today as well.  This is not the normal relationship as USD strength is more correlated with risk aversion (usually from US investors selling foreign funds and bringing them back home), while stocks going up are more broadly associated with risk-seeking behavior.  Government bonds are no help in breaking this down today as they are fairly flat on the day around the world.

One interesting trend is gold.  After getting near $2100 in early August, it has dropped off to just under $1890 this morning.  There is an interesting analysis of what is going on here in Bloomberg this morning.  If you plot a chart of gold prices against the 10-year Treasury breakeven rate – a market-based measure of anticipated inflation – you see a good amount of correlation.  This would suggest that gold markets in early August tended to think that the policy reactions to the economic collapse in response to Covid-19 were going to be effective.  By that same measure, the struggles in Washington for a fourth stimulus package have led to gold dropping off a bit.

On a global scale, you can argue both sides based on today’s data.  In the UK, composite PMI fell to the 3-month low and the Eurozone equivalent was right on the cusp of expansion and contraction.  The US data came in as expected, but more in expansion territory.  Moreover, there was a rebound in US mortgage applications last week.  Data these days has a push-pull effect on sentiment as different countries and sectors seem to alternate movement, sort of like LA traffic when different lanes are in a traffic jam.

Moving to Asia, there was a 4.2% drop in Australia’s August retail sales.    Coupled with weaker iron ore prices, the Aussie dollar is lower this morning, as is the New Zealand dollar after their central bank – the Reserve Bank of New Zealand – kept their base rate at 0.25% and announced continued asset purchases.
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