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From the Floor: Trump turmoil sparks broad risk-aversion — #SaxoStrats

  • Significant risk-off mode sweeps across markets due to turmoil surrounding Trump
  • Global equities sharply lower in high turnover; volatility spikes
  • USD under pressure; JPY soars
  • Government bonds rally in response across the board
  • 'Too early to be circulating the impeachment word': Hardy
  • Market re-pricing chance of June Fed hike, now down to 64.6%: Moltke-Leth
  • US tension eases slightly as DOJ appoints special council to run FBI probe: Hansen
  • Gold pares gains as DOJ’s appointment could ease sense of Washington paralysis
  • Oil looks vulnerable as it fails to capitalise on bullish EIA report and weaker dollar
  • Oil market pricing in 9-month output cut extension; unsure if Opec can implement
  • Several ECB speakers slated for today 
Saxo Strats banner
 By John Acher

The political turmoil engulfing Donald Trump’s four-month-old presidency, including calls for his impeachment, has sent investors scurrying for cover, knocking global equity prices sharply lower and driving safe-haven government bonds higher.

“Really we are sitting here watching the political developments in the US more than anything else,” says Saxo Bank’s FX strategy chief John J Hardy.

The Japanese yen, often perceived as a safe-haven currency, has soared against the embattled dollar, and markets have begun ratcheting down their expectations of a June US interest-rate hike. Volatility spiked.

Christoffer Moltke-Leth at Saxo Bank’s hub in Singapore says, “There have been some very significant moves over the last 24 hours. Investors are, of course, reacting to the ongoing political turmoil in Washington – some news out that Texas representative Al Green will call on Congress to start impeachment proceedings against Trump, but the bar is very high, given that Republicans have control.”

“Global equities are sharply lower, and this is reinforced by very high turnover today,” says Moltke-Leth. “We also see a very notable move in the VIX [volatility index], which jumped to 15-and-a-half from just 10.7 the day before.”

Sea of red across global equity markets
Sea of red
 Source: Bloomberg

The S&P500 slid 1.8% on Wednesday, its steepest drop in eight months, as Wall Street grew increasingly worried about the shrinking odds of the Trump administration implementing its policies, including tax reform, as the scandals surrounding the White House show no sign of abating.

“Government bonds are rallying in response across the board,” says Saxo Bank fixed-income trader Michael Boye. (Boye's new bonds update webinar is available here on TradingFloor and his latest weekly bonds update is here.)

Treasuries rally on flight to safety, break resistance levels
Source: Bloomberg/Saxo Bank

The whiff of impeachment is in the air in Washington after news this week that Trump asked former FBI director James Comey to halt an investigation of former National Security Adviser Michael Flynn, prompting parallels with the Watergate scandal and increased calls for a special investigation.

But a word of caution here: impeachment by the US House of Representatives does not amount to removal of the president, which would require a two-thirds majority vote in the Senate, which still looks like a distant prospect and which has never happened in US history.

“I think it is too early to be circulating the impeachment word,” says Hardy, noting that President Bill Clinton was impeached by the House, but not removed from office. “The formal process will not start moving forward unless a sufficiently large number of Republicans are willing to abandon Trump on Donald Trump.”

Yen soars

“The yen sees high demand,” says Moltke-Leth. “We see a sharp drop in USDJPY that took it below its Ichimoku cloud, and we have the next support coming in at 109.75.”

The moves in the FX markets, particularly USDJPY, are extraordinary.

“We have a dollar-yen move, which, if we look top to bottom of the recent move, is well over 2%, even just for the last couple of days – the highs from the beginning of the week to the lows yesterday,” says Hardy. (Read also Hardy's latest FX Update here on TradingFloor.)

“Those lows are right at the 61.8% Fibo, and we see it toying with the bottom or the Ichimoku cloud that Christoffer mentioned, and that is probably a tactical level of importance today,” Hardy says.

Next stop for USDJPY 200-day moving average at 109.73?

 Source: Saxo Bank

USDJPY in fact is now more volatile than the S&P, “which is a bit surprising,” says Hardy. “What are we supposed to expect if we see a 10% correction in the S&P over the next couple of months? 12-13% in USDJPY? It’s hard to believe.”

The suddenly heightened nervousness in the financial markets includes a repricing of the likelihood of a June US interest-rate hike, which, according to Moltke-Leth, the Fed funds futures show has fallen to 64.6% from more than 90% just a few days ago.

Gold pares gains

A slight easing of tension came with news overnight that the Justice Department appointed former FBI director Robert Mueller as special counsel to run the bureau’s investigation of Russia’s efforts to influence the 2016 presidential election, as well as possible collusion by Trump campaign associates.

Gold prices pared gains on that easing of tension, says Saxo Bank’s commodities strategy chief Ole Hansen. (See also Hansen's latest comments on gold and silver prices here on TradingFloor.)

“We may potentially have seen some short-term peaks across some of these major commodities, both precious metals and crude oil,” Hansen says.

“Tension has eased somewhat overnight,” Hansen says, pointing to Mueller’s appointment to run the FBI probe. “That seems to just ease the tension somewhat, and potentially also ease the sense that Washington is being paralysed.”

“We did see gold jump yesterday, and silver broke some key levels of resistance, and rose higher, but overnight the market has been drifting lower, especially silver,” Hansen says.

Crude oil looks vulnerable and is struggling ahead of $50/barrel before a May 25 Opec meeting, where the markets expect the cartel to agree on a nine-month extension to production cuts.
“There are concerns that it is going to be very difficult for Opec to implement it,” says Hansen.

Several European Central Bank officials, including ECB president Mario Draghi, were slated to speak on Thursday.

"I have never seen so many ECB speakers in one day," says Hardy. "I don’t know if there is some planned, coordinated message out there, but [I would] expect them – at least in Draghi’s case – to try to talk down this strong euro.”

Saxo Bank's equities strategy chief Peter Garnry will hold an equities webinar at 1330 CET (1130 GMT). Join here.

White House under cloudy skies
 There's a whiff of Watergate in the air in Washington. Photo: Shutterstock

John Acher is a consulting editor at TradingFloor


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