Morning Commentary: Détente?

Foreign Exchange - Morning Commentary
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Alan Rose
Alan Rose
Foreign Exchange Senior Trader
We have pointed out on numerous occasions that market sentiment can shift very quickly from positive to negative and vice versa. In the past 10 days or so, the markets have gone from an uber-negative outlook, with the prospect that U.S. zero interest rates are just around the corner, to a much more upbeat and positive outlook for the global economy and interest rates.

The fuel for this shift in sentiment has primarily centered on the thawing of the trade war between the U.S. and China as both sides continue to make concessions approaching the key October meeting. The shift between the two superpowers must be contagious because there are reports in the London Times that the DUP party of Northern Ireland is shifting its red line positions regarding Brexit and fueling a British pound surge today. In the background, central banks continue to cut interest rates adding to the upbeat sentiment.

While global equities have responded to the détente between the U.S and China, G7 interest rates, and in particular U.S. interest rates, have seen a sharp reversal of fortune. U.S. 10-year yields are up an amazing 39 bps in a little over one week. Yield curve inversion continues to reflect the renewed positive outlook on trade as this removes further pressure on the Fed to have to act. While the FOMC is still expected to cut interest rates next week, the probability of further rate cuts has declined sharply in the months ahead.

For the short term, markets and market positioning will adjust to the fact that compromise is in the air. The U.S. dollar (DXY) has been seen as a safe haven currency as the trade war has strongly impacted the global economy but has left the U.S. economy still growing at 2.00%+. Even the DXY is giving ground and shedding some of its safe haven status. Détente and compromise are fueling this change in sentiment, but we still have a long way to go to cross the finish line.
  • U.S. interest rates are up sharply again today further fueled by better-than-expected U.S. retail sales for August. Market expectations were centered on a small gain of 0.2% after partial payback for the blockbuster gain of 0.8% in July. Retail sales instead rose by 0.4% fueled by gains in automobile sales and online shopping.
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