Morning Commentary: “Hope Springs Eternal”

Foreign Exchange - Morning Commentary

“Hope Springs Eternal”

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Alan Rose
Alan Rose
Foreign Exchange Senior Trader
The divergence and battle between equities and interest rates seems to have hit a temporary stalemate. While U.S. and global equities correlated strongly in December, equities took off in January and February while interest rates remain suppressed as the interest rate markets were more concerned about weak growth, anemic inflation, and another dovish Fed pivot. Over the past few days, there seems to be some equilibrium between the two, and both sides have priced in enough news for the time being leaving a stalemate for the short term with price action contained to narrow ranges.
Today is the first day of baseball season and hope springs eternal - the slate is clean for all of your favorite teams as their win/loss record is 0-0. Whatever happened last season (unless you are a Red Sox fan) is forgotten, and fans are hopeful that each team’s front office put a plan in place to improve the team with the acquisition of some veteran players alongside the promotion of promising rookies. But, there needs to be a strategy and plan in place for all of this to bear fruit.
Poor plans and strategies equal poor outcomes. You cannot sacrifice long term pragmatism and game plans for short term fixes and expediency, which brings us back to the markets and how countries manage their economy and their finances.
The Turkish stock market has fallen nearly 11% over the past four days and the Turkish government has essentially imposed currency controls ahead of the upcoming local elections. Foreign banks and investors are being turned away by local banks to convert their Turkish lira (TRY) to prevent a further fall in the Turkish lira. The TRY is down an amazing 4.75% today and banks are unable to find counterparties for foreign exchange trades raising swap rates to nearly 1,200%. Last summer, the TRY fell nearly 40% before the government was forced to substantially raise interest rates to nearly 25%. Hope springs eternal, but you better have a rock solid game plan in place first!
  • The British pound (GBP) is weaker again today as the inability of Parliament and the government to reach a consensus on a series of Brexit votes continues to weigh on the GBP. PM May has pledged to quit as Prime Minister once the negotiations are concluded, but this seems to have only set off a period of intense internal politicking in her party and within Parliament.
  • U.S. Q4 growth was downgraded from 2.6% to 2.2% which was near expectations. Consumer spending, which makes up nearly 70% of GDP, came in weaker than forecast at 1.7%. Q4 GDP 2017 to Q4 GDP 2018 saw growth reach 3.0% - that is the fastest growth rate since 2005. Q1 GDP 2019 is projected to grow by only 1.5%.
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