Morning Commentary: This is a Time to Hunker Down!

Foreign Exchange - Morning Commentary

This is a Time to Hunker Down!

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Alan Rose
Alan Rose
Foreign Exchange Senior Trader
This is not a time to be a hero.  Market volatility and the news cycle is playing havoc with investors as the sheer amount of whipsaws is hard to fathom, and it is not a time for those who are faint of heart. Equity markets rejoiced yesterday on the back of Fed Chairman Powell’s comments that they are watching closely for signs that heightened trade friction is denting the economic outlook which could lead to a Fed rate cut. Today’s U.S. economic data adds to the concerns that the U.S. is not an island and is not immune from a global economic slowdown.
 
Today’s May U.S. ADP Employment report (private sector report and a precursor to Friday’s labor department report) shocked the market as the report badly missed the consensus forecasts. Market expectations were for gains of 185,000, but the actual number showed only gains of 27,000 with a downward revision to April; this is the fewest amount of workers added in any month since 2010.
 
While U.S. equity futures look to open higher, U.S. interest rates have collapsed again today sending the U.S. dollar lower for the fourth day in a row. U.S. 2-year interest rates fell by a whopping 11 bps before stabilizing and have made a new low for the year. The probability of a Fed rate cut for the upcoming June meeting has jumped from a 6% probability yesterday to 28% today. Continue to expect divergence between equities and interest rates; equities like the idea of a Fed rate cut and lower interest rates, and the interest rate market is hypersensitive to weak economic data in the short term. The U.S. dollar (DXY) has been consolidating during all the extreme volatility in May and June but is beginning to look toppish. 
HERE ARE THE KEY NEWS STORIES FROM OVERNIGHT:
  • Earlier today, the European Commission indicated that the Italian budget excess warrants disciplinary action and a possible fine of €3.5 billion for violating European budgetary guidelines. Italy has made insufficient progress in reducing its mountain of debt. This a complicated and convoluted process as the EC has never levied a fine against a country for excessive debt and will be an ongoing theme in the fx markets hindering euro appreciation.  This news story caused the euro to weaken prior to the release of the ADP report.
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