Morning Commentary: Animal Spirits on the Mend

Foreign Exchange - Morning Commentary
Animal Spirits on the Mend
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Alan Rose
Alan Rose
Foreign Exchange Senior Trader
Despite no final conclusion to Brexit or the U.S.-China trade talks, markets remain optimistic and confident that a positive outcome will result from these twin storylines. Over the past weeks, significant progress has been made regarding both endeavors. Markets are always looking forward, and improvement in animal spirits and a return to a “risk-on” market psychology have been evident over the past two months. Both Brexit and the trade talks will continue to provide near term volatility and ping-pong headlines that will create anxiety in the markets, but the markets continue to see a silver lining regarding both of these key market-moving events reaching a successful conclusion for now.

Regarding the U.S. and China talks, ever since both parties agreed in early September to restart the trade talks, market optimism has been on the mend. Recent headlines from both China and the U.S. are hopeful for a mini-breakthrough next month. We have discussed the warning signal of an inverted yield curve (long interest rates below short term interest rates) as a metric for a warning sign of a potential recession. On September 3, U.S. 3-month against 10-year yields was inverted by -55 bps. Today, it resides at +11 bps which is the highest level since April of this year.

Regarding Brexit, markets and investors are removing the possibility of a hard Brexit as PM Boris Johnson has exceeded expectations and done what many saw as impossible. While there will continue to be short term snafus within the U.K. Parliament, markets remain optimistic and hopeful for a successful conclusion to Brexit. Coinciding with the September 3 announcement regarding the U.S.-China trade talks, the British pound is up by nearly 7% against the U.S. dollar and nearly 10% against the euro as uncertainty has been replaced with near term optimism.
  • Canadian PM Trudeau won a second term in the Federal election yesterday but will lead a minority government. PM Trudeau’s Liberal Party lost the popular vote and its 33% share of the popular vote was the lowest for any governing party in Canada’s history. Canada, like the U.S., is a divided country in terms of how the provinces are aligned. Of the 157 seats that Liberals won, they were highly concentrated in the Eastern part of Canada with a strong showing in Toronto and Montreal; they won only 17 seats west of Ontario. However, with political uncertainty removed, the Canadian dollar remains poised to continue to be a favored currency among investors as the economy has remained resilient and the Bank of Canada has been on hold.
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