Morning Commentary: A Small Sliver of Hope

Foreign Exchange - Morning Commentary

A Small Sliver of Hope

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Alan Rose
Alan Rose
Foreign Exchange Head Trader
Last week’s U.S. equity markets were generally euphoric on the back of the U.S November election that yielded gridlock in Congress and a divided political government. After all, history has shown that equities have generally outperformed in Q4 when Congress was divided and investors were excited and hopeful that the White House and Democrats in the House would be able to work together on a number of key issues that had bipartisan support that would energize the economy.
 
Last week, we had cautioned about getting too caught up in the moment as there are just too many significant and important issues still hovering over the market that remain unresolved. Future Fed policy, dysfunctional EZ politics centered on Italy’s budget and future German leadership, and trade wars are just some of the issues that are eating at investor’s medium to longer term confidence going forward. As we start this new week, markets are once again exhibiting anxiety, angst, and fear as the near term momentum from last week fades.
 
Yesterday, U.S. equities were driven sharply lower as technology stocks plummeted and dragged down all other sectors and rippled across all asset classes. Oil prices continue to collapse and have now fallen for a record 12 straight days. The sharply lower oil prices combined with anxiety about U.S. and global equities and future growth and earnings have caused oil and commodity linked currencies to weaken sharply with the Mexican peso down the most since Friday by almost 1.77%.
 
But hope springs eternal. The mere mention of a news headline overnight that the U.S and China would resume trade talks again has helped the market regain its footing and provided a small ray of optimism for U.S. and global equities. Many currencies have corrected off of their lows (euro was at 16-month low) and G7 interest rates have stabilized. We are in uncertain times and while history often repeats itself, I am concerned that the next weeks and months ahead will see increased volatility until some of these key issues get resolved.
HERE ARE THE KEY NEWS STORIES FROM OVERNIGHT:
  • Germany’s ZEW (investor confidence measure) for November came in slightly better than forecast at -24.1, but there is little optimism about a strong pick up from the current slowdown. The numbers within the numbers were weak despite an improvement in the overall reading. Q3 GDP is due on Wednesday and is expected to show a decline of 0.1%. The German DAX is down 14% since May and is down in the past three months.
  • The U.K. reported their September jobs report with job gains near expectations of 23,000. The UR rate ticked up from 4.0% to 4.1%. Most importantly though, average weekly earnings accelerated to 3.2% over the past three months…the highest rates of regular pay growth since December 2008. U.K. interest rates are higher and the British pound is outperforming today.
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