Morning Commentary: Dysfunction Junction

Foreign Exchange - Morning Commentary

Dysfunction Junction

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Andrew Kositkun
Andrew Kositkun
Foreign Exchange Head Trader
A risk off tone has been the general characteristic of markets to kick off this week.  This poor sentiment has been driven by much weaker than expected economic data out of China and the EU. 
In Europe, industrial production data also came in worse than expected and was compounded by a downward revision of the prior print.  The most recent disappointing data print reaffirms concerns for downside risk for Q4 GDP as uncertainty remains in global trade and headwinds from China, Italy, France and Brexit. 
In China, imports dropped 7.6%, the worst reading in nearly 10 years, and implied a softening in the domestic economy.  Additionally, exports fell 4.4% as headwinds from the continuing trade war continues to weigh on demand.  Markets are now watching the end of January when Chinese Vice Premier Lui He, China's top trade aide, is set to visit the US and continue trade talks.  It has been reported that Lui will meet with Trade Representative Robert Lighthizer and Treasury Secretary Steven Mnuchin with the latter indicting that the government shut down won't interfere with this meeting. 
In the US, the partial government shutdown is now in Day 24, making this shutdown the longest one in history.  It has been reported that some key Republican senators up for reelection in 2020 have called for the government shutdown to end. 
Market consensus has been that government shutdowns don't impact the markets or the greater economy.  However, previous shutdowns have all been shorter and we are now in unchartered territory.  As this current shutdown drags on, the greater the negative impact should be as consumer confidence takes a hit.  Lastly, the implications for the impending debt ceiling debate later this year cannot be overlooked.  With political gridlock at an elevated level, the possibility for a fiscal mistake has been raised.  
  • This week brings another healthy dose of Fed speak with 6 different Fed officials scheduled to speak.  Recent comments from the Fed have taken on a dovish tone, with an emphasis on data dependency and a reiteration that the Fed is not on a preset path. Markets will be keen to hear a similar message again this week.
  • After much back and forth, including a delay in December, the UK Parliament is set to vote on PM May's withdrawal agreement tomorrow.  While the EU has sent in a letter assuring that the backstop, if triggered, is just a temporary measure, not much has changed since the vote delay in December, leading the markets to expect a government defeat and focus on the margin of defeat with media reporting the government could lose by over 100 votes.    
  • Current tensions between the US and Turkey were raised on a Trump tweet stating that the US would “devastate Turkey economically” if they were to attack the Kurds in Northern Syria.
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