Some Respite From US Politics As Sterling Surges Through $1.30

Yesterday’s dramatic response to the political maelstrom in Washington is over. The appointment of a special counsel to head up the FBI’s investigation into Russia’s attempt to influence the US election appears to have acted a circuit breaker of sorts. It is not sufficient to boost confidence that the Trump Administrations economic program is back the front burners, but it is sufficient to stem the time for the moment.  

Of course, Asian markets had to still respond to US developments. The MSCI Asia Pacific Index fell 0.7%, snapping a three-day advance. Japanese markets paced the losses, with a gap lower openings and nursed losses into the close of 1.3%. European shares are under pressure today after yesterday’s sharp drop, but the Dow Jones Stoxx 600 is off half of yesterday’s 1.2% slide. All sectors are lower, with energy and financials, the weakest sectors, while utilities and the consumer-oriented companies faring the best.  

Yesterday, the S&P 500 gapped lower, and in the ensuing sell-off, it nearly filled the gap created by the sharply higher opening on April 24 in response to Macron’s victory in the first round of the French presidential election. The bottom of that gap is found at 2356.18 and yesterday’s drop stopped three cents shy of filling that gap. Yesterday’s price action also closed the smaller gap created on April 25. US shares are trading lower in Europe. The March-April lows were in the 2322-2328 area, and a loss of that would be significant. The price action in the coming sessions will help determine the significance of yesterday’s high (~2385) and the gap that extends to Tuesday’s low (~2396).  

There is another political storm that is taking a toll. Brazil’s media is reporting that a tape shows President Temer approving a payment to former Speaker of the lower house Cunha who is in jail after masterminding the impeachment of former President Dilma Rousseff. The accusations call into question Temer’s economic program and the political stability that had emerged in recent months. Brazil’s equity ETF that trades in Japan lost nearly 10%. Sharp losses for the Brazilian real are expected when the local markets open.