In early September, investors and traders from all over the world return to their desks from summer vacation. After much deep thinking and several cups of coffee, they begin to make big trading decisions they hope will carry them to a successful year-end.
More often than not, a herd-mentality among investors comes into play, leading to big directional moves in markets. Here are five recent important economic and market LOWS indicating what those next big moves might be, and what impact they may have on the foreign exchange (FX) markets.
- US TREASURY YIELDS PLUMMET. On September 3, yields for US 10-year Treasuries (UST) dropped to 1.44%, matching the August 26th low, and well within reach of the July 2016 all-time low of 1.34%.1
- The rush into US Treasuries can be attributed to a combination of 1) safe haven buying; 2) a rotation out of risky equities into bonds; 3) a very attractive yield compared to negative-yielding notes and bonds in other G10 countries (totaling $17 trillion); 4) a dovish Fed with several more rates cuts expected; and 5) several signals that the US economy may be heading for a downturn (see #2 below).
- FX impact: the global demand for UST’s has led to demand for the US dollar. We expect that to continue until yields bottom out and move back higher, which will then become a head-wind for further dollar strength.
- US ECONOMY SUFFERS A ONE-TWO PUNCH. Two surprisingly weak U.S. economic data releases were a one-two punch in the economic gut of our country.
- On September 3, the Institute for Supply Management (ISM) released their monthly PMIs for Manufacturing, Employment and New Orders. All came in below the 50 breakeven mark, implying an outright contraction in activity.
- On September 4, the widely-followed University of Michigan’s Consumer Sentiment Index saw its biggest drop in six years. Consumers account for two-thirds of U.S. economic activity.
- FX impact: a slowing economy is seldom good for a country’s currency. Our economy has been performing well, but this data should be considered as early indication of a slowing economy.
- THE GERMAN ECONOMY TEETERS ON RECESSION. German GDP growth in Q2 QoQ fell by 0.1%.2 Exports dropped faster than imports, while investment in construction declined significantly.
- Forecasters expect a further contraction in the third quarter, putting the German economy into a technical recession (defined as two consecutive declines in GDP).
- FX impact: once again, a slowing economy is seldom good for a country’s currency. And, here is one more reason for global investors to shy away from the EU and the euro.
- FALLING COPPER PRICES PRESAGE A GLOBAL SLOWDOWN. Since April, copper has dropped 16%, to its lowest level since mid-2017.3
- Copper prices are viewed by analysts as a reliable leading indicator of global economic health, since it has widespread use in most sectors of an economy. Declining copper prices reflect reduced demand and suggest an impending economic slowdown.
- FX impact: the correlation between copper prices and the US dollar is slightly negative, so declining copper prices may provide a modest tailwind for the dollar.
- ITALIAN GOVERNMENT BOND YIELDS DROP TO ALL-TIME LOWS. Yesterday, 10-year Italian bond yields hit an all-time low of 0.805%, plummeting nearly 50% from their early-August level of 1.55%.4
- The political storm triggered by a collapse in the governing coalition of Italy is effectively over. The 5-Star Movement party approved a coalition with the center-left Democratic Party yesterday, removing the final hurdle to the formation of a new, more business-friendly government.
- After Greece (10-year bonds at 1.54%), global bond investors are looking to Italy for the highest and most attractive yields in Europe.5
- FX impact: replacing an ineffective coalition government with one that has the potential to be effective makes global investors feel better about Italy and the eurozone, so this is good news for the euro.
1,2,3,4,5 Bloomberg, September 2019