Five on Friday: What Happened in Markets This Week

Lizzy Birmingham provides a brief roundup of the major FX moves this week, and the drivers behind each.

1) US Economy on “Recession Watch” says Morgan Stanley

This Tuesday, chief US equity strategist at Morgan Stanley, Michael Wilson, warned investors of a possible upcoming US recession. In a note to clients, using recent data highlighting underperformance in crucial indicators, Wilson stated that “US earnings and economic risk is greater than most investors may think.”

Wilson pointed to a recent report from financial data firm IHS Markit which found that manufacturing activity in May fell to a 116-month low, and service sector activity fell to a 39-month low.

Furthermore, Wilson and Morgan Stanley analysts point to an adjusted yield curve to serve as a recessionary warning, which they state first inverted in November and has stayed in negative territory ever since.

“The adjusted yield curve inverted last November and has remained in negative territory ever since, surpassing the minimum time required for a valid meaningful economic slowdown signal,” Wilson stated in his note to clients. “It also suggests the ‘shot clock’ started 6 months ago, putting us ‘in the zone’ for a recession watch.”

Morgan Stanley Cross Asset Research

Along with recession warnings, Wilson defended his gloomy outlook for 2019, stating that the “second-half recovery,” which is highly anticipated by investors, will likely never materialise. In fact, Wilson expects conditions to worsen, as a recent decrease in overall capital spending caused Morgan Stanley economists to lower the bank’s second-quarter US GDP forecast from 1.0% to to 0.6%, the weakest growth since the earnings recession in 2015.

Wilson’s grim outlook for the US economy seemed to be supported by stock market troubles on Tuesday, which saw the Dow Jones Industrial Average fall 237 points, down 4.6% for the month of May, and the S&P drop 0.8%, down 4.8% this month.

2) Pound Falls as Question of New PM Arises

Following a slight bounce in value following Theresa May’s resignation announcement, the pound fell once more this week as investors speculate as to who will take the May’s position.

With almost a dozen candidates candidates vying to be Prime Minister, with varied positions on Brexit, Boris Johnson seems to be the frontrunner in the eyes of many political analysts. The conservative candidate’s hard line views on Brexit and his promise to leave the European Union on October 31st, with or without a Brexit deal, have alarmed investors and aided in the drop of the pound.

On Friday, the pound traded as low as 0.88 against the euro. This marks a nearly 3% monthly loss against the euro, the biggest drop in value since May 2017.

Reuters quotes Petr Krpata, a London based currency strategist at ING, as saying: “We remain worried on sterling and look for the pound to fall to 0.90 versus the euro, as the prospect of a new eurosceptic prime minister won’t bode well for the markets and represents a clear negative.”

3) Peso Plummets After Tariff Announcement

This Thursday, US president Donald Trump announced a 5% tariff on on all Mexican goods coming into the US.

In a statement released from the White House, Trump promised to impose the new tariff on June 10th, and keep tariffs in place until his administration is satisfied with the work Mexico is doing to reduce the number of migrants crossing over the southern border.

Donald Trump, Twitter

Following Trump’s announcement, the Mexican peso dropped more than 3% on Friday, coming in at 0.051 against the USD. This marks the peso’s greatest loss in seven months.

4) USD Creeps Up Amidst Trade War

The US dollar continued rising in value this week, putting it on track for a fourth straight month of gains.

The dollar’s gains this week come as escalating trade tensions between the US and China have caused traders and investors to put their money into perceived safe currencies, such as the USD, as the market becomes more volatile.

As of Thursday, the dollar traded at 0.90 against the euro.

That being said, Thursday saw very slow growth for the dollar, and Friday has seen losses, erasing many of the gains the dollar has made this week. Friday’s poor performance could be due to steep losses on Wall Street due to new trade worries with Mexico and rising US bond prices.

When discussing the dollar’s slow growth as of late, Reuters quotes Joseph Trevisani, senior analyst at FX Street, as saying: “With the US-China trade situation, people don’t want to do anything until there’s a resolution.”

5) Euro dragged down by Italian Threats

The Euro dropped slightly on Monday after Italian deputy Prime Minister Matteo Salvini warned citizens that the European Commission could impose €3 billion in fines on Italy for breaking EU debt and deficit rules.

Salvini’s comments come after his far-right political party, the League, secured 34.3% of the vote in Sunday’s European parliamentary elections.

Reuters quotes Salvini as saying that he would use “all [his] energies” to fight what he said were outdated and unfair European fiscal rules.

With these new threats, the euro dropped to a new six-and-a-half month low against the dollar on Wednesday, reaching $1.1510.

Furthermore, Tuesday saw losses in Europe’s stock indexes. The pan-European Stoxx 600 dropped 1.37%, and Italy itself saw the FTSE MIB fall 2.65% on Tuesday alone.

Lizzy Birmingham

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