Morning Commentary: “It Takes Two Flints to Make a Fire” - Louisa May Alcott

Foreign Exchange - Morning Commentary
“It Takes Two Flints to Make a Fire” - Louisa May Alcott
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Alan Rose
Alan Rose
Foreign Exchange Senior Trader
Our headline comes from the opening quote to my Bloomberg terminal this morning. This quote is quite appropriate given the escalated nature of the trade war between the U.S. and China and the potential downstream effects for the world economy as the two largest economies dig in for what appears to be a long and protracted economic and political battle. How big this fire will get will depend on whether the U.S. and China can reach a compromise and avoid an escalated battle potential causing a global market and economic meltdown.
After yesterday’s emotional, negative response by U.S. equities and interest rates to the ratcheting up of tariffs on both sides, markets are attempting to stabilize today. A tweet by President Trump overnight about trade and the possibility of talking with Chinese President Xi at the upcoming G20 summit in Japan in late June has brought out the optimists again who believe there will be an agreement in the short term.
While Asian equities piggybacked the strong reaction in the U.S. and finished in the red, European equities are all in green territory prompted by President Trump’s tweet, and U.S. equities are scheduled to open higher. G7 interest rates are not so optimistic and are flat lining today while commodity prices are higher reflecting the equity optimism. The U.S. dollar is mixed to slightly higher today after a volatile session yesterday.
Markets continue to be hopeful overall of a compromise down the road, but there is a finite amount of patience for investors. The further escalation of the trade war and the tit for tat responses with the potential of all Chinese exports to the U.S. having tariffs and China retaliating will have downstream effects for all of us. We hope that this small fire will be contained and not spread into a California style wildfire.
  • The U.K. reported a mixed jobs report for the month of March. Employment hiring was a disappointment with 99,000 new hires against expectations of gains near 140,000. The UR did tick lower from 3.9% to 3.8%. Average weekly earnings (a key metric for inflation) moved lower than expectations from 3.5% to 3.2%. U.K. interest rates are unchanged; the British pound is weaker and is down in six of the past seven sessions.
  • The German ZEW (business survey) was mixed with the current situation showing some improvement, but the key expectations component weakened below expectations to fall into negative territory at 2.1 from 3.1 in May.
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