Morning Commentary: No-Holds-Barred

Foreign Exchange - Morning Commentary
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Alan Rose
Alan Rose
Foreign Exchange Senior Trader
The economic psyche of investors and traders is going from bad to worse as market uncertainty and volatility rise simultaneously. The trade war between the U.S. and China and the use of punitive tariffs is taking its toll on almost every country exposed to trade as global growth continues to falter. This geopolitical stand-off, with no end in sight, has the markets pricing in further economic weakness.  U.S. yield curve inversion (long term rates below short term rates) is a warning sign of an impending recession; all the major U.S. yield curves are now firmly inverted with the 3-month vs 30-year Treasury debt the latest to join the fray.

Adding to all this turmoil, anxiety, and uncertainty for the markets, is the erratic and inconsistent messaging from the White House. The Federal Reserve has its own share of blame as Fed Chairman Powell has also miscommunicated on numerous occasions. New lows for our ever-evolving tribal warfare between Red versus Blue only make a bad situation worse.

Last week President Trump posed the question “who is our biggest enemy Jay Powell or Chairman Xi”…an almost incomprehensible personal attack on Chairman Powell and the Federal Reserve. Yesterday, former head of the NY Fed, William Dudley, felt compelled to come to the defense of his former colleagues and institution. He suggested in an editorial that the Fed not cut interest rates further in an attempt to sway the 2020 election. “After all, Trump’s reelection arguably presents a threat to the U.S. and global economy, to the Fed’s independence and its ability to achieve its employment and inflation objectives.” It is another example of no-holds-barred political expediency as William Dudley also crossed the line and went too far in his comments.

In my 46 years in the markets, I have never seen anything like this before where the Fed Chairman has been referred to as an enemy of the state nor have I seen a Fed official call for the removal of a sitting President as a threat to our economy. These comments are potentially dangerous and ominous signs for further market angst and volatility ahead.
  • U.K. Prime Minister Boris Johnson is reportedly going to ask Queen Elizabeth to take the highly controversial step of suspending Parliament without dissolving      it (proroguing option) from mid-September to mid-October.  This action, if taken, would be a clear sign that Boris Johnson is acting to remove Parliament as a potential obstacle to a hard Brexit and is likely to cause a political uproar with the Brexit deadline on October 31st . This action increases the odds of no-deal Brexit. U.K. rates have fallen sharply and the British pound fell over 1% before recovering.
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