Morning Commentary: Politics Roil the Markets

Foreign Exchange - Morning Commentary

Politics Roil the Markets

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Alan Rose
Alan Rose
Foreign Exchange Senior Trader
We spend a lot of time analyzing economic data and central bank monetary policy as they generally provide the backbone to determine the direction of the global economy and exchange rates. But, we also spend a lot of time analyzing geopolitical and political developments in general and the impact that they also have on the global economy. We regularly remind our readers that political developments can impact and overwhelm the markets in the short term. It would appear this week will be one where politics is at the forefront.
As we arrive this morning, there are numerous flashpoints that are negatively impacting the markets and hurting investor confidence and expectations:
  • U.S. – China trade talks are at the top of that list with the threat that the U.S. will impose more tariffs on Friday but with the hope that Chinese Vice Premier Liu will arrive in the U.S. and work to find a compromise.
  • Turkey’s stock market, bond market, and currency are all under severe pressure this morning as Turkey’s President Erdogan is set to rerun the mayoral elections that his party lost to the opposition. Turkey is an economic mess with inflation four times the official target, UR at 14.75%, and the country in a recession.
  • Finally, Brexit is back on the agenda with PM May meeting with the Labor party to try to find a way forward for the stalemate that seems to never end. Both the Tory Party and Labor took heavy elections losses last week as the electorate is dissatisfied with a lack of results after nearly three years. A failure to compromise could result in a snap election, another referendum, or PM May facing another leadership challenge.
While Asian equity markets were mixed overnight after collapsing the day before, European and U.S. equity markets are lower. G7 interest rates, for the most part, are lower and commodity prices are weaker. The U.S. dollar (DXY) is stronger against most of the major and emerging market currencies (Turkey is weaker by nearly 1%).
  • Australia is one of the few currencies in positive territory this morning. The Reserve Bank of Australia (RBA) kept interest rates unchanged at 1.50%...the market was evenly divided between a hold and a cut in interest rates. The RBA’s statement focused on an improving labor market and implied that low inflation readings were transitory. Aussie interest rates are up sharply on the day and have helped to pull the Aussie higher.
  • Malaysia cut interest rates by 25 bps to 3.00%. The market was again evenly divided between a hold and a cut.
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