Morning Commentary: Gridlock is Good – Day Two

Foreign Exchange - Morning Commentary

Gridlock is Good – Day Two

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Alan Rose
Alan Rose
Foreign Exchange Head Trader
Yesterday, U.S. stocks were euphoric as the theme of "gridlock is good" persuaded investors to pile in as U.S. stocks rose over two percent.  After all, history has shown a strong pattern of equity outperformance in Q4 following an election that yields a politically divided Congress. Investors are assuming that the pattern will repeat once again. U.S. interest rates moved higher yesterday and the U.S. dollar reversed course from morning weakness and finished near unchanged overall.
 
We had cautioned yesterday that more time will be needed to gauge the impact of Tuesday’s election result. Today’s market reaction reflects the fact that there was little to no piggybacking the strong U.S. equity jubilation as one would have expected. Asian and European equities are mixed to unchanged and G7 interest rates are slightly lower in yield. The euro traded in a tight range and is nearly unchanged from where we left it last night.
 
We live in a different time and place historically and we are less confident that history and markets will perform as they once had. We will continue to keep a watchful eye on U.S. equities as a barometer that could impact all other asset classes but remain skeptical that yesterday's strong U.S. equity performance is a new trend.  We continue to advise both importers and exporters to be tactical and not strategic at this time as we anticipate foreign exchange markets to remain range bound overall for the short term.
HERE ARE THE KEY NEWS STORIES FROM OVERNIGHT:
  • China reported stronger than expected trade data for October, but this was primarily due to Chinese companies frontloading exports to avoid tariffs that will soon kick in. Exports rose by 15.6% YoY and imports rose by 21.4% YoY resulting in a trade surplus of $34 billion.
  • The Fed concludes its two-day meeting with a decision at 11:00 a.m. PST. Expectations are near zero that the Fed will move interest rates higher today. There is no press conference and there will be no new forecasts or dot plots…this will be the last Fed meeting without a press conference. Expectations are that the Fed minutes will continue to paint an economic picture of a robust economy and price pressures continuing to incrementally rise.
  • It could always be worse. Venezuela’s inflation rate is 833,997% for the past year and is on track to reach 1 million percent. This follows five straight years of recession.
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