Morning Commentary: Signal in the Noise

A daily summary and commentary of events and factors that affect the global markets, with a particular emphasis on the foreign exchange markets.

Signal in the Noise Share this story: Andrew Kositkun Foreign Exchange Head Trader

Politics surrounding the Democratic presidential nominee have generated a massive amount of headlines leading up to the primaries.  For the most part, markets have looked through these headlines as they were more focused on other geopolitical events.  This is set to change.     The formal Democratic nomination selection process kicked off last night with the Iowa primary.  While an unexpected technological glitch has delayed the Iowa results, they should be announced later today.  In total, 39% of delegates should be chosen by Super Tuesday (March 3).  Clearly the proximity of actual voting raises the importance of the Democratic race.  This focus has only been amplified by Bernie Sanders’ recent surge in the polls covering early primary states given the fiscal deficit impact of Sanders’ signature proposals.  On a broader level, elections matter as the Democratic nomination and the US presidential election will shape future US policy toward China, global trade, and US’ stance on multilateral institutions such as NATO, WTO, etc. Ultimately, it is important to remember a couple of points.  The first is that Senate and House races, while less covered, are also important as legislative approval is needed for the signature proposals to become law.  The second point is that support remains fragmented overall, both between frontrunners and between moderates and progressive camps.  From an FX perspective, the race between the moderate and progressive camps will be the most important factor in determining the USD impact.  HERE ARE THE KEY NEWS STORIES FROM OVERNIGHT: President Trump will deliver his State of the Union address tonight at 6 pm PST.  It is expected that the president will address less contentious topics such as tax cuts and infrastructure spending.  Coronavirus headlines continue to hit the newswires with the infection rate and death toll continuing to rise.  However, market indicators show that concern has started to recede with China adding liquidity to the markets for the second straight day.  For the day, equity markets are higher around the world and some companies have announced that they are resuming business operations in China.  Given this, risks to the global economy remain with the list of companies warning of the outbreak’s negative economic impact growing.      The Reserve Bank of Australia kept its cash rate unchanged with the tone of the statement less dovish than in December as it represented a relatively optimistic view of the domestic and global economy.  While the bank noted that interest rates have “already been reduced to a very low level,” the door to easing remains open.    Technical experts from OPEC are scheduled to meet in Vienna today in order to evaluate the impact from the coronavirus on oil demand.  Saudi Arabia has been pushing for a cut as oil demand in China has dropped 20%.  UK construction PMI beat estimates at 48.4 versus expectations for a 47.1 print.  While the data did bounce today, there remains softness in the economy and markets continue to expect a BoE cut this year.

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