Morning Commentary: Market Psychology – Is it too Negative?

Foreign Exchange - Morning Commentary

Market Psychology – Is it too Negative?

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Alan Rose
Alan Rose
Foreign Exchange Head Trader
While we spend a lot of time dissecting and analyzing economic data to determine the path of multiple asset classes (including fx), truth be told, market psychology plays an equally important part in that formula. Market psychology is very mercurial and changeable, and once the gears shift from optimism to pessimism or vice-versa, the momentum behind market moves can be self-reinforcing for short or long periods of time.
We are in such a period of time now. Beginning in March 2009, U.S. and global equities largely shrugged off almost all negative economic or geopolitical news and powered ahead for nine years on the back of QE. But finally in the beginning of October 2018, global equities began to run out of optimism and could no longer shrug off reality as a multitude of factors coalesced to squeeze all the optimism out of the market and replace it with pessimism.
What began as a market correction now appears to be much more than that. Almost all news is somehow interpreted as negative now and is a reason to sell and move into cash. How long this pessimism and negativity will last is anybody’s guess, but it too will run out of fuel and equities will bottom at some point.
Overnight, Asian equities piggy-backed the U.S. sell off; Europe initially followed suit but during the European session, European equities found their footing and have clawed back much of their losses. U.S. equities have also opened higher.  As U.S. equities have sold off since October, U.S. interest rates have reflected that change in sentiment and have come down in yield. The U.S. dollar is net-on-net higher than the beginning of October but is struggling recently as U.S. short term yields have faltered.
We remain concerned about a slowing of the U.S. economy and for a weaker U.S. dollar going forward; we believe that importers will need to be more proactive about covering their positions than in the past.
  • German business confidence for December faltered again with the key IFO business sentiment index dropping to 101.0 from 102.0 and was below consensus estimates. This continues a pattern of weak Q4 data and suggests the German economy is weakening.
  • U.S. Housing starts rebounded in November and beat expectations rising by 1,256,000. This is the best pace of starts since August; housing permits (indicator for future starts) rose to a seven-month high. Single-family starts fell to their lowest level since May 2017 and dropped for a third straight month. Multi-family starts (apartments and condos) rose by 22.4% offsetting the single-family downturn.
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