Morning Commentary: Markets - Coming to a Crossroads?

Foreign Exchange - Morning Commentary

Markets - Coming to a Crossroads?

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Alan Rose
Alan Rose
Foreign Exchange Head Trader
Markets remain buoyant and upbeat as the U.S.-China trade talks have been extended for another day and there is growing optimism regarding a successful conclusion to this round of trade talks. This optimism is continuing to fan “risk-on” trading. U.S. and global equities continue to see near term momentum continuing from Friday, and commodity prices and interest rates continue to feel the ripple effect of a short term change in sentiment.
However, last night's Republican and Democratic response to the continuing government shutdown shows little sign of any compromise as the effects of the shutdown continue to spread through the economy.  While the government shutdown is only marginally affecting the economy now, the polarized politics in Washington could have longer lasting effects on the economy and hurt growth even more. Congress needs to ratify the USMCA legislation this year, and if that legislation also becomes politicized and stalls out in Congress, it too could have downstream effects for the economy.
What all this means is that in the short term, the optimism surrounding a successful conclusion to the U.S.-China trade talks will probably continue to power the markets higher. However, the polarizing nature of Washingtonian politics is a potential drag for the economy and will keep markets volatile. Politics and a country’s economic performance can be a combustible formula both here and globally. Remain on guard.
  • EZ UR fell more than expected dropping from 8.1% to 7.9% in November. That is the lowest level of UR in the EZ since 2008. The euro is slightly stronger today trailing the outperformance of the commodity linked currencies.
  • The Bank of Canada meets later this morning and is expected to keep rates unchanged at 1.75%. The Canadian dollar has been on a roller coaster ride over the past few months reflective of rapid changes in oil and commodity prices. The Canadian dollar is higher for the seventh day in a row; markets will be paying very close attention to the Bank of Canada’s language regarding the economic outlook, growth, and inflation forecasts.
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