US President Donald Trump's surprise firing of FBI director James Comey and news that North Korea will carry out its sixth nuclear test in defiance of the US have rattled financial markets and clipped the wings of recently found risk-on sentiment, lending support to gold and safe-haven government bonds.
Risk appetite had increased this week, especially after last weekend’s victory for the centrist candidate Emmanuel Macron in France, leading to a plunge in volatilities and pressure on the Japanese yen, but that mood has now paused.
“The news overnight went counter to this theme – a bit of risk-off, a bit of a flurry of typical treasury buying and risk selling as Trump moved to fire FBI director Comey,” says Saxo Bank's FX strategy chief John J Hardy.
Saxo Bank's fixed-income trader Michael Boye says: "Government bonds are catching a small bid here as risk sentiment is fading."
“But I think the market is going to have a difficult time following through on anything. These things move very slowly, and the backdrop is supportive for risk appetite if volatilities continue to drop,” Hardy says.
The key 1.0850 level in EURUSD is underpinning the pair near the 200-day moving average. “It was such a pivotal level before, so let’s keep an eye on that if EURUSD does continue lower, as I expect,” says Hardy.
“So I think the risk is that, if we do not see any new themes develop, we could continue to see volatilities drop and complacency rise even as we’ve gone below the 10 handle on the VIX [volatility index],” Hardy says.
Prices of gold, the conventional safe haven, benefited from the new political worries.
“We’ve seen gold stabilising after continued selling now for the past week,” says Saxo Bank’s head of commodities strategy Ole Hansen.
Gold had been sliding towards support at $1,200/oz, and that has gone hand-in-hand with weakness in the Japanese yen.
“The removal of safe-haven demand has been a key driver of gold’s weakness, but the events over the past 12 hours indicate that geopolitical risks and concerns are never far away,” says Hansen.
A drop in gold to $1,200/oz would create “a decent opportunity” to look at gold again, says Hansen. “Say almost anywhere between $1,215 and down to $1,200, potentially with a stop below $1,190.”
But rising yields and equity prices remain the key drivers of weaker safe-haven demand, so any change in the outlook for those factors would also have an impact on gold prices, Hansen says.
Oil clings below key levels
Oil prices are hovering below key resistance levels at $47/barrel for WTI and $50/b for Brent crude, with verbal intervention being offset by rising production in Libya and the US, but also new worries about slowing demand.
Oil prices came under some additional pressure as Libya has cranked up production, but a nearly 6-million-barrel drop crude oil stocks in the American Petroleum Institute’s weekly report on Tuesday lent some support.
“That has raised the bar for this afternoon’s report from the EIA – surveys are pointing to just 2-million-barrel decline,” Hansen says. “If they can replicate the API, that could help sooth some of the nervousness in the market at this stage.”
Draghi on deck
European Central Bank president Mario Draghi is scheduled to speak at noon on Wednesday in the Dutch parliament.
“He is going to want to do very little to support the euro. The ECB’s mandate is inflation. It’s there only mandate,” Hardy says. “We saw that spike [in inflation] early this year, but let’s have some perspective here, that was after a 70-80% year-on-year rise in oil prices, which has now yielded to a nearly 20% fall in oil prices in euro terms since the beginning of the year, and we have seen the euro trade-weighted trading nearly the highs for multiple months as well.”
“So I think he will do whatever he can to keep a lid on any excitement about the prospects for ECB tightening, tapering, whatever you want to call it,” says Hardy.
But other voices, including the German finance minister Wolfgang Schaeuble and former Bundesbank president Alex Weber, have indicated that the ECB could start normalising interest rates before long.
"Interest rates will begin to normalise soon. You can assume that based on the recent remarks of the ECB," Schaeuble told a meeting of his conservative Christian Democratic Union on Tuesday, according to Reuters
Saxo Bank’s equities strategy chief Peter Garnry says, “Obviously that could boost banking stocks.”
“I am not as convinced as these two gentlemen about whether the ECB will actually start normalising,” Garnry says. “I think there are still too many negative effects and events in the economy, though broadly we are still in a positive environment.”
“I am not so sure, but at least it gives you an idea that strong voices are beginning to signal that the ECB could start normalising,” Garnry says.
The new lows in volatility are positive for stocks.
“Studies show that is normally supportive of equities, so that is just another data point supporting our bullish outlook for equities, and that remains our current stance,” Garnry says.
US media group Walt Disney’s second-quarter per share of $1.50 solidly beat the market’s estimate of $1.41 on Tuesday, but revenue missed expectations due particularly to weakness was in cable networks, and the stock fell 2% in after-market trading.
“That is probably the Achilles heel of Disney, which has been a pretty strong performer over the past many years” says Garnry.
But the rise of Netflix, Amazon Prime and other rivals could begin to hurt the profitability of Disney’s cable networks business. “That might be an angle for some downside opportunities in Disney shares,” Garnry says.
Shares in Danish jewellery maker Pandora slid 11% on Tuesday despite first-quarter earnings in line with estimates, as investors grew worried about the growth outlook. “The jury is out. Unless we get stopped out – we have a stop at DKK 660 – then the Q2 will be probably the most important earnings release when we get there in a few months’ time,” Garnry says.
A few Fed speakers – Rosengren and Kaskhari – are also on the calendar for today. And the Reserve Bank of New Zealand meets later on Wednesday (early Thursday in Asia).
“The market, I think, is looking a bit too aggressively for something that sounds hawkish," Hardy says. "I think the RBNZ is going to bend over backwards to try to continue to sound as dovish as possible given the admittedly strong economy and the supportive fact that the kiwi has the highest interest rate among the G10 currencies."
Saxo Bank technical analyst Kim Cramer Larsson will hold a webinar on technical analysis today at 1130 GMT, and Saxo's Georgio Stoev will hold his weekly OptionsLab webinar at 1400 GMT. (Sign up here for those webinars
Trump's firing of FBI chief James Comey has cast a Watergate
cloud over the White House. Photo: Shutterstock
John Acher is a consulting editor at TradingFloor.