Morning Commentary: Markets Are in Need of a Compass

Foreign Exchange - Morning Commentary

Markets Are in Need of a Compass

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Alan Rose
Alan Rose
Foreign Exchange Head Trader
Markets lack direction and continue to chop around over the same turf over and over again. There are just too many medium to longer term factors that are creating uncertainty for investors and traders at this time and only seems to allow for very short-term spurts of activity based on the most recent headlines or tweets. On-going concerns about the U.S.-China trade war, NAFTA, Brexit, Federal Reserve policy, emerging markets, and Italy etc. are all weighing on investors psyche and leaving many of them watching from the sidelines until there is more clarity.
One interesting factor regarding U.S. interest rates has been the whipsaw nature of the yield on the U.S. 10-year bond trading back and forth within a narrow range over the past six months. U.S. 10-year yields collapsed to almost 2.80% near the end of August on concerns about emerging market countries and currencies spreading contagion and undermining the global recovery. Since then, U.S. 10-year yields have rebounded strongly and are pushing towards YTD highs of nearly 3.10%.
As part of the ongoing trade friction between the U.S. and China, China has been a net seller of U.S. Treasuries in four of the past five months. This bears monitoring as China is the biggest holder of U.S. Treasuries, and since we are running enormous budget deficits, we are dependent upon foreign investors to buy our Treasury debt to fund the deficits.  If this pattern should continue, combined with further Fed rate increases along with a reduction in the Feds balance sheet, interest rates will keep marching higher and could impact the U.S. economy and the stock market. This bears watching, along with all the other factors, and could change the market dynamics once again.
  • China has ruled out weaponizing its currency to boost exports because it would do too much damage to the economy stated the Chinese Premier. Instead, China will promote further economic reforms and tax cuts to keep the economy from faltering during the current U.S.-China trade disputes.
  • The British pound got a brief boost higher on the back of higher CPI inflation and hit a 2-month high against the U.S. dollar. August CPI rose by 0.7% against expectations of a gain of 0.5% bringing the YoY rate up from 2.5% to 2.7%. U.K. interest rates are up the most on the session, but the British pound faltered on the back of some more negative Brexit headlines.
  • U.S. Housing Starts for August came in better than expected at 1,282,000 and there was a slight upward revision to July’s numbers raising them to 1,174,000. Building permits, a future barometer of housing activity, did weaken and came in below expectations. U.S. interest rates are fractionally higher on the session.
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