At Best, Second Rate

The firm that defined what was great
Has run into trouble of late
GE used to be
A great company
But now it’s, at best, second rate

Maybe the biggest headline overnight was the fact that GE, an original member of the Dow Jones Industrial Average in 1907, is being dropped in favor of Walgreens at the end of the quarter. Oh how the might have fallen! This is stunning in that in 2000, it was the most valuable company in the world with a market cap of $548 billion. And while this is not likely to have a broader impact on anything, I think it is indicative of the changes that the global economy has undergone, especially recently.

The other story that really jumped out was the agreement between German Chancellor Merkel and French President Macron that the EU ought to have a common budget, a huge change for Merkel, as the two of them seek ways to prevent the entire bloc from falling apart. This has been a key sticking point for the Germans as they are concerned that they will be forced to fund the profligate habits of Italy, Greece, Spain, Portugal and even France. However, given the unraveling of the post WWII order that seems to be under way, and Merkel’s intense desire to maintain that order given how much it has benefitted Germany, I guess the time was right to concede a major point. If the entire EU ratifies this, then I see it as a significant long-term positive for the single currency. And while there is a long way to go before that happens, it is at least a first step.

Given the dearth of news, it ought not be surprising that markets overnight have been quiet. The dollar is little changed overall with gainers and losers about equally split. Treasury yields are higher by a single basis point and equity markets have rebounded very modestly from a run of negative days.

Looking at specific news, the UK leads with a better than expected CBI Industrial Trends report printing at 13, well above expectations of just 1 and a large jump from last month’s -1. It seems that the recent weakness in the pound has once again encouraged UK manufacturing. Speaking of the pound, it continues to be undermined by the declining probability of a rate hike in August, now estimated at just 43%, and by the ongoing Brexit bill debate in the House of Commons, where a loss for PM May might well bring down her government.

The euro has not had any data released of note, but ECB President Draghi, speaking at the Sintra conference, made a surprising statement indicating that the ECB could restart QE if the economy reversed course and weakened again. This is a far cry from last week’s discussion of the end of QE by December, and speaks to the fact that the doves on the ECB are still a voice to be reckoned with. The euro dipped when the statement hit the tape, but given how much it has fallen lately, and the positive possibilities from the Merkel-Macron announcement, it is only down 0.15% this morning.

However, beyond that, there is precious little to discuss today. Existing Home Sales from the US (exp 5.52M) is the only data point and rarely a market mover. Chairman Powell will be speaking in Sintra in a few hours, so the market will be very focused on his speech. However, there has been no data to suggest that he is going to change his view on the US economy nor his attitude about normalizing monetary policy. It appears that policy divergence will remain the driving force in currency markets for a little while yet.

Taking everything into account, while today doesn’t augur any significant movement, continued gradual strengthening of the dollar seems to still be the best bet. Manage your risks accordingly.

Good luck