A risk-off mood dominated the overnight session amid growing concern over the turmoil engulfing the Trump administration, as fresh allegations add to deepening political scandals in Washington, the latest coming from Tuesday’s NYT report citing former FBI director Comey’s memo which raises possibility of obstruction of justice, an impeachable offense. The dollar, already in retreat after a report that the U.S. president shared terrorism intelligence with Russian officials, decline again and the Bloomberg Dollar Spot Index dropped for a sixth day, while the VIX index surged over 10% in early trading.
Still, we can’t help but wonder how long until the BTFD algos emerge from their overnight stupor and send futs back to the green. The reason is that while the move lower in S&P futures does not appear overly dramatic, the 12 point drop has wiped out the past month’s market gains and more importantly, for the first time since his inauguration, a scandal impacting Trump has spilled over into the broader market as the probability of Trump passing virtually any legislation in the foreseeable future now appears virtually non-existent.
The political chaos is finally shifting to markets
— zerohedge (@zerohedge) May 17, 2017
This morning Bloomberg agreed with our Twitter-take from last night, writing that “after a protracted period of dormancy, financial markets are beginning to react to developments in Washington in a more unified manner. With stock and bond volatility muted, investors have looked for a clearer reaction to the political din in currency markets. The U.S. currency now sits at its lowest level since the day of Trump’s shock win, a retracement some blame on perceptions his legislative agenda faces deeper challenges.”
And after recently crashing to record lows, and staying below 11 for the longest stretch on record, global volatility appears to be stirring.
The US futures selloff has been broadly in line with major index movements in Europe and Asia. In other assets, T-note futures rally while the Bloomberg Dollar Index slumped for a sixth consecutive day, falling to lowest since November. Meanwhile, over in China the PBOC continues to add liquidity injecting 140 billion yuan with reverse repos, setting the CNY fixing at the strongest level since February. WTI crude drops one percent; iron ore futures gain on hope for an imminent Chinese rebound.
“If he’s preoccupied defending himself and if it goes a lot further, then any hope of his legislative agenda coming to the fore is going to be reduced,†John Stopford, the London-based head of fixed-income at Investec Asset Management Ltd., said in an interview with Bloomberg TV. “Clearly at the margin it’s a negative. At the moment there’s a classic environment for yields to rally a bit further and for the dollar to sell off.â€
So far, broadly upbeat global growth has underpinned risky assets and supported the multi-year lows in measures of market volatility. But the retreat in the dollar which has now given up all the gains it made since Trump’s election and a pull-back from record highs for world stocks points to investor unease about this week’s headlines, Reuters writes.
“The Trump issue seems to come in waves, and now we have another wave,” said Hans Peterson, global head of asset allocation, at SEB Investments.
“I have been asked if he is going to be impeached. I think that is the type of discussion some (investors) are having,” Peterson said, pointing out that institutional clients are turning cautious.
Meanwhile, the euro zone economy started the year with robust growth that outstripped that of the United States and set the stage for a strong 2017. “At the moment everyone is focusing on the political relief in Europe and the political unrest in the U.S.,” ING’s senior rates strategist Martin van Vliet said.
This is how SocGen’s Kit Juckes summarizes today’s action”
In ‘market Top Trumps’ the US President trumps just about everything else, at least in the very short term. “Comey memo says Trump asked FBI Chief to drop Flynn probe†is the FT headline on the story doing the damage overnight, though we do also have softer oil prices after the release of strong US inventory data. 10-year Treasury yields are 4bp lower than when markets closed yesterday evening, 10bp lower than they were on Thursday before the US CPI and retail sales data releases. European yields are opening lower too, but the 10year has narrowed to 189bp, and the Treasury/JGB spread to 226bp.
Then there is the Fed: while traders continue to price in two interest rate increases by the Federal Reserve this year, speculation is rising that European counterparts are preparing to withdraw their own stimulus measures. “The only political calibration the Fed has is how much Trumponomics we were going to get that they can’t see yet,†Neil Dwane, global strategist at Allianz Global Investors, said in an interview with Bloomberg TV. Even so, U.S. policymakers “are in the mindset to raise as long as the markets are prepared for it.”
To be sure, pressure on the ECB rose as Eurozone Core CPI jumped to a 3 year high of 1.2%. Inflation ex energy andfood showed notable rise across countries, adding to Draghi’s list of reasons why a taper, and eventual rate hike, appear inevitable.
Looking at global stocks, the Stoxx Europe 600 Index fell 0.3 percent, after ending little changed in the previous session. Futures on the S&P 500 Index fell 0.5 percent, after the underlying gauge on Tuesday touched an all-time high of 2,405.77. The MSCI All-Country World Index fell 0.1 percent from a record, with banks having the biggest impact across all regions.
