After the events of the last week in global politics, it seems that risk aversion is back in vogue. Interest rates in both the US and Europe trended higher overnight, a suggestion that investors are starting to worry about uncertainty in the two largest economies. And with the UK heading to the polls, France up for a second round of parliamentary elections, and the countdown to the US elections, politics will likely weigh a bit on the markets.
But, what markets are essentially worried about is lack of growth. The political changes in Europe are seen as creating disruptions that might affect the fragile economic recovery. The electoral results in the UK might leave the BOE keeping rates higher to counteract increased government spending. That might be positive for certain currencies, but generate a drag on others.
Growth Is Still Not Solid
Through the first half of the year, the narrative was that the US had avoided a recession, and China was on the mend from its housing market crisis. Europe was having a tepid rebound and the UK was coming back from a technical recession. All of that would be expected to push commodity prices at the expense of safe havens.
But, as summer wore on, the data hasn’t been all that auspicious. European PMIs are stuck in contraction. US economic growth projections keep getting slashed. And China’s official manufacturing PMI figure is back into contraction as well. All of this leads to worries about the health of the global economy, and whether forex traders should bet on emerging or safe haven currencies.
Trade’s Impact on the Markets
The Global trade is one of the pre-eminent signs of global economic health, and can forecast an impending recession. Typically, trade slows down before other major economic indicators react. That’s because businesses will slow down purchases as they see demand from consumers slacking off. But this drop in buying means the company can keep up its profit margins, and prevent its share price from dropping.
Though international trade tends to ebb and flow depending on shifting demand patterns. There have been years now of Europe and the US trying to diversify imports from China, which would naturally slow down trade across the Pacific. But a general trend towards both lower imports and exports in multiple countries could be concerning. And that could contribute to further market risk-off sentiment. On the other hand, an unexpected resurgence in trade figures could help reassure the market and bring back demand for commodity and emerging currencies.
What to Look Out For
Markets will likely be interested in the US trade balance coming out tomorrow, which is expected to see its deficit rise to -$76.0B from -$74.6B in the prior month, thanks to imports increasing faster than exports. Despite the negative number, the growthing in imports could be a sign the US consumer is still healthy.
Canada’s trade deficit is expected to expand, which would weigh on its GDP growth outlook, and potentially make the BOC more likely to cut rates when it meets next time. Australia’s trade surplus is expected to expand, as Australians buy less but its exports to China aren’t falling as fast.
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