FTSE -28 points at 7475
DAX -11 points at 12620
CAC -7 points at 5310
Euro Stoxx -8 points at 3576
Political tensions in the US are escalating as the FBI persists on deepening the Russian probe investigation. The US Justice Department has named the former FBI chief Robert Muller as the special counsel to investigate an eventual Russian influence on the US’ 2016 election campaign and the outcome. Muller is well respected by both Democrats and Republicans and has been described as an excellent choice for the matter.
There are rising voices that President Donald Trump could be impeached. At this point, one could hardly imagine a worse scenario than an eventual Trump impeachment for the markets. Even it is too early to point the latter as the base-case scenario, if Donald Trump is impeached, his massive infrastructure spending plans and the colossal tax reforms would never see the daylight. Hence, the past six-month’s reflation rally would face severe reversal risks. If the markets were to retrace the Trump-reflation gains, this would trigger a decent ‘deflation’ squeeze.
A quick glance to recent stock price history could give an indication of the risks. The Dow Jones rallied from $17,480 to above $21,100 following Donald Trump’s victory on November 9 election; this is roughly a 21% rise. Likewise, the SPX surged from $2,030 to above $2,400, which is more than 15% increase.
The VIX index, which has hit the lowest level since 1993 a week earlier, surged by 35% to 15.69% on Wednesday. Investors are now rushing into alternative markets, such as option and futures markets, to hedge their long positions in the US stocks.
The Dow Jones dropped 372.82 points yesterday. Bank and mining stocks were among the most sensitive sectors to the deflation risks. Financials erased 3.26%, as mining stocks tumbled by 3.21% on rising fears that the Trumpflation trade could eventually dis-inflate.
Unfortunately, the US stocks are not the only ones concerned. The global Trumpflation virus contaminated the major stock markets across the globe. Since November 9, the German DAX rallied more than 26%, Europe’s Stoxx 600 gained past 12%, the Japanese Nikkei stepped up to 24%, the Australian ASX 200 soared nearly 18% before the sell-off started at the beginning of May and the UK’s FTSE rose by more than 12%.
Even the Brazilian stocks believed in the reflation story for a moment and added 22% between December and February. Of course, Brazil has got its own problems. Brazil is plunging back to a bribery crisis concerning its newly elected President Michel Temer, following the former President Dilma Rousseff’s impeachment last year.
As a result, the money flows from the reflation assets into the safe haven markets. The yen, the Swiss franc, gold, the US and German treasuries are the principal destinations.
Gold tests $1,264 (major 61.8% retrace on April – May decline). Surpassing this level is expected to strengthen the bullish trend, along with the golden cross formation on the daily chart (50-day moving average crossed above the 200-day moving average). The next positive targets stand at $1,276 (minor 76.4%) and $1,295 (April peak).
The USD/JPY slipped below its 200-day moving average (111.00) and is testing the minor support at 110.60 (23.6% retrace on January – April decline). The 110.00 mark is back on the radar. Offers eyed at 112.00/112.15 (major 38.2% retrace). Japan’s first quarter GDP growth accelerated to 2.2% year-on-year annualized from 1.2% printed a month earlier, beating the analysts’ expectations of 1.7%. The Bank of Japan (BoJ) Governor Kuroda gave no time to the BoJ-hawks to resurge. The JPY-bears remained on the sidelines as he told PM Abe that the bank will continue with the ultra-expansive monetary policy.
The Swiss franc surged to the highest levels since November against the greenback. The EUR/USD advanced to 1.1172 in the continuation of the positive mid-term breakout. The next eye-catching upside target stands at 1.1300 (November 9 high).
The DAX and the CAC closed the Wednesday’s session 1.35% and 1.63% lower and the sell-off is expected to deepen at the European open. The FTSE erased 0.25% off the historical high levels, as Cable traded below the 1.30 resistance despite rising the inflationary fears in the UK. The Nikkei and Topix sold off by 1.48% and 1.43% on stronger yen.
Cable surged to 1.2991 as a result of higher British inflation and improved wages data released on Tuesday and Wednesday respectively. The UK retail sales data is due today and is expected to print 1.0% month-on-month increase excluding auto fuel versus the 1.5% contraction a month earlier. In theory, the combination of solid UK data and the broad-based sell-off in the US dollar could finally defeat the $1.30 resistance. Offers are eyed above. The key mid-term resistance stands at 1.3040, the major 38.2% retracement on post-Brexit sell-off, if taken out would mark the end of the mid-term bearish trend in GBP/USD.
The AUD/USD is the only G10 currency that has not been subject to the USD correction in Asia. The Aussie extended gains to 0.7467, as the unemployment unexpectedly dropped from 5.9% to 5.7% in April. Though, job losses came from full-time jobs (-11.6K). The deterioration in the global risk appetite and soft iron ore prices could cap gains pre-0.75 level.
Quick glance at technicals on LCG Trader:
GBP/USD intraday: further advance. Long positions above 1.2930 (pivot) with targets at 1.3005 & 1.3035 in extension. Below 1.2930, downside potential to 1.2905 & 1.2880.
USD/JPY intraday: downside prevails. Short positions below 111.75 (pivot) with targets at 110.30 & 109.90 in extension. Above 111.75, upside potential to 112.20 & 112.55.
Crude oil intraday: rebound expected. Long positions above 48.75 (pivot) with targets at 49.50 & 50.00 in extension. Below 48.75, downside potential to 48.47 & 48.05.