Morning Commentary: Volatility – Here to Stay

A daily summary and commentary of events and factors that affect the global markets, with a particular emphasis on the foreign exchange markets.

Volatility – Here to Stay Share this story: Alan Rose Foreign Exchange Senior Trader

Markets remain highly emotional and volatile as they careen from doom and gloom to optimism, whether intraday or interday. December saw one of the most volatile months in U.S. equity history as intraday and interday volatility spiked to near record highs. While January has a very different tone and vibe than December, markets continue to remain volatile and emotional as there are way too many issues and competing forces that have an impact on the global economy in the short, medium, and long term.   Yesterday saw a slew of negative news and reports (IMF downgrades to 2019 growth, weak U.S. December existing home sales, etc.) that led the market to believe that slower global growth lie ahead with equities and interest rates faltering. Today, much of that is in the rear view mirror as the market focuses on a new set of variables that is leading them to be optimistic and upbeat.   The U.S. Senate has agreed to hold votes on competing bills tomorrow to end the government shutdown. While neither the Republican or Democratic proposal is expected to gain the 60 votes needed to pass, this process could be the start of negotiations that find common ground to end the shutdown. There are still way too many moving parts to this process, including a Presidential buy-in, but it is a start and markets are reacting with U.S. equities higher along with higher interest rates and commodity prices.   The other piece of news that has turned markets more optimistic is Brexit. Now that Parliament is playing a larger role in this negotiation and opposing sides and forces are putting forth amendments, there is hope to extend the Article 50 deadline beyond the March 29th  deadline and eventually lead to a soft Brexit or even another referendum on Brexit. Again there are multiple moving parts to these developments but for now the British pound reflects this near term optimism as it is up for the third day in a row and up by nearly 5% since the middle of December. HERE ARE THE KEY NEWS STORIES FROM OVERNIGHT: The Bank of Japan met last night and left interest rates and monetary policy unchanged as expected. The one noteworthy item in their announcement was another downgrade to their inflationary outlook for FY 2019 with inflation expected to decline to 0.9% from 1.4%. The Japanese yen is weaker on this news combined with the “risk-on” environment in the markets. Canada reported a very weak November retail sales figure exceeding market expectations. Retail sales declined by 0.9% which was the weakest reading in the past seven months and exceeded market expectations of a decline of 0.6%. The Canadian dollar is near unchanged as competing forces for today have investors and traders a bit perplexed.

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