Morning Commentary: Too Much Pessimism?

Foreign Exchange - Morning Commentary
Too Much Pessimism?
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Alan Rose
Alan Rose
Foreign Exchange Senior Trader
Markets, and in particular equity markets, have reacted harshly and emotionally over the past two days pricing in another bout of global economic weakness. U.S. equities have fallen in four of the past five sessions. It has been the worst bout of equity selling over the past two days since December of last year. Since Monday, the probability of the Fed cutting interest rates for the third time has jumped from 53% to 77%.

Spurred on by a very weak U.S. ISM report on Tuesday (details below) and followed up by a WTO ruling in favor of the U.S. against Airbus, more fear about a global slowdown has been unleashed as the U.S. announced that it is raising tariffs on $7.5 billion of European exports including a 25% tariff on French wine, cheese, olives, etc. A 10% tariff will be applied to imported European aircrafts.  More global tariffs and reduced trade volumes equals weaker growth down the road. An ISM print showing a deeper decline implies that it is not just manufacturing that is suffering and the economic slowdown is spreading to other sectors.

What makes this market capitulation slightly different is that equities are leading the bond market this time. Going back to Q4 last year and through most of this year, the bond market reacted first to negative economic news and indicators, and equities followed suit. While the DJI fell almost 500 points yesterday, the U.S. 10-year yield fell only by 5 bps.

Tomorrow is the key U.S. Jobs Report for September where expectations are centered on job gains of 148,000 following August’s gain of 130,000.
  • The ISM Non-Manufacturing report printed at 52.6 against expectations of 55.0 following August’s print of 56.4. This is another economic disappointment and a three-year low for this series. U.S. equities are much lower as are U.S. interest rates, and the DXY is much weaker.
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