Talking Points:
- The Federal Reserve exactly met expectations for a hike, forecast for another in December and three further moves in 2019
- Despite the contrast the US monetary policy draws to its global counterparts, neither DXY nor EURUSD found a clear break
- Trade wars are starting to turn even more messy with following President Trump's UN speech and the global rebuke
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Trade Wars and Growing Tensions at the UN
The US is currently employing over $250 billion in taxes on Chinese imports and China is reciprocating with over $110 billion of its own tariffs on US imports. That is a massive economic and financial roadblock for the global system to deal with; and yet, speculative markets seem to barely register the threat. History has shown trade wars to be a costly endeavor for those that are both targets of the effort as well as the instigators. Yet, complacency has proven time and again an effective - if temporary - salve for markets. The tension, however, will not stop with 'traditional' trade wars. For the US-China confrontation, the cap on direct taxes for the counterpart's imported goods is near at hand. Seeing US President Trump escalating the range of taxes to include the entirety of the country's shipments is inevitable and China will need to follow an even more unorthodox outlet to keep pace. That said, the next stage of this confrontation and general populism isn't a direct cap on imports. At the UN General Assembly, President Trump directly called out trade counterparts for target. After praising his own administration's efforts at nationalism, the President's fiery remarks earned strong rebuke from the country's largest counterparts. If these afflicted economies were to collaborate on a response, the US stands to lose far more than those it is targeting.
The Fed Offers an Unrivaled Hawkish Path...and Meets Forecasts
Top event risk for this past session was easy to spot. This week's particular Federal Reserve Open Committee (FOMC) rate decision was a high profile event months ago. That speculative appeal can be inordinately attributed to the fact that the market was heavily expecting a rate hike out of this meeting. True to form, the group would meet market expectations with the third quarter percent rate hike to the benchmark range this year. Heading into the policy update, the market was certain of the upgrade to yields to a range of 2.00 to 2.25 percent. To ignore the consensus forecast would be to invite a volatile response from asset prices. Dealing with a policy speculation that stretches well beyond a single move, the group's outlook extended to reinforce the belief of a fourth rate hike come December as well as a forecast for three additional hikes in 2019. There is no other major policy authority anywhere close to this pace. Yet, this fundamental advantage hasn't translated into a tangible price motivation. The S&P 500 managed its most recent climb to record highs and the Dollar slid these past few months with just such an outcome fully priced into the backdrop. Confirmation does little alter the established course.
An RBNZ Decision that Lacks for Drive and a Euro Reverting to Old Habits
Just as the US central bank's rate hike falls exactly in line with expectations, so to does the Reserve Bank of New Zealand's (RBNZ) decision to hold its course. This one-time carry currency could not have drawn any greater a disparity to its previous status given the Fed's hike if it tried. The past months have seen a smart depreciation of the currency owing to its fall from grace as a carry currency in an environment where risk trends have held strong. With the interest rate seemingly on hold through 2020, the RBNZ is looking at doing potential permanent damage to the Kiwi should the rest of the world start in on normalization. One of those very central banks altering the course of the past decade may be the European Central Bank (ECB). Speculation of a forthcoming hike earned the remarkable move from the world's second most liquid currency through 2017. And yet, that commitment has certainly flagged these past months. Further, other fundamental issues have started to cast economic concern into the mix. Italy is still heading for another clash with the European Union to create a systemic threat to the Eurozone rather than just the EU. Ahead, the German, Italian and Euro-rea sentiment surveys are worth keeping tabs on, as is the ECB economic bulletin.
Brexit Uncertainties Throw the Breaks on the Pound, WTI and Brent Spread Widens
Just as the Dollar and New Zealand Dollar grapple with high profile event risk for genuine motivation, the British Pound remains explicitly anchored to its spot. This week, Prime Minster Theresa May's loss of confidence in her directing Brexit translated into struggle for the Sterling. May has pushed the responsibility of next steps to her EU counterparts, the chances of a 'no deal' outcome are raised uncomfortably high by officials warning preparedness and Labour has left open the possibility of a second referendum. If you have Pound exposure, set your expectations accordingly. Meanwhile, where most risk-leaning assets are struggling, commodities continues to outperform most other markets with a risk leaning. Energy prices remain one of the key areas of performance, but the US-based WTI contract flagged this past session while Europe's favored Brent extended its slow crawl above 80. We discuss all of this and more in today's Trading Video.
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