Morning Commentary: June Gloom

Foreign Exchange - Morning Commentary

June Gloom

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Alan Rose
Alan Rose
Foreign Exchange Senior Trader
You would think after decades in southern California that I would know better.  Summer seems to be coming.  Kids are almost out of school. Days are getting longer.  We are thawing out from another L.A. winter that saw temperatures plunge into the 50s.  Yet, as inevitable as another NBA title for the Golden State Warriors, clouds gather in the skies and we are left wondering when we can reliably fire up the grill any time we want.  Yes, June Gloom has returned.
It is not too different with markets.  The weekend has provided no reprieve as global equities remain under pressure and global interest rates continue to march lower. Germany’s 10-year bonds are at -0.21% this morning.  Deepening fears of an escalating and spreading trade war with no apparent end in sight are setting off a full “risk-off” trading environment with many investors moving to cash or other safe haven assets like U.S. bonds and traditional safe haven currencies like the Japanese yen and Swiss franc.
Friday’s downward spiraling price action (U.S. equities and U.S. interest rate yields) sparked by the threat of more U.S. tariffs against Mexico capped off a tumultuous month of May for equities and interest rates. U.S. equities fell more than 6.5% in May (worst performance since December} and sent U.S. bond yields to their largest one-month decline since 2015. At 2.11%, the 10-year is at its lowest level since September 2017.
This July will mark the longest economic expansion in U.S. history. But markets are always looking forward and investors are fearful that a potential economic recession is on the horizon. To put a point on it, Fed Funds Futures this morning are pricing in a better than 50/50 chance of a Fed rate cut at the end of July.  Several key U.S. money center banks have recalibrated their call on future interest rate policy, and many are now expecting the Fed to cut interest rates two or three times before the end of 2019
The ECB meeting on Thursday and the U.S. jobs report on Friday will be important markers for the week ahead.  And for what it is worth, my weather app is forecasting clearing skies and warmer temperatures this week.  We will see.
  • U.K. Manufacturing PMI came in at 49.4 vs. 52.2 expected today.  This is the first sub-50 reading since July 2016 and is a warning of further economic weakness ahead.
  • Korea reported May exports at -9.4% y/y.  This was worse than expected and the sixth straight month of contraction.  Semiconductor exports fell sharply by 30.5% y/y.  Korea is just one of many nations to feel the negative spillover from US-China trade tensions.
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