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 on 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.
It appears that the Mexican peso, which is the second most actively traded emerging market currency after the Chinese yuan, is being used as a proxy for the less accessible Brazilian real. The peso is off 1.8% as the dollar pushes above MXN19.10, to reach a six-day high. The greenback had been finding support near MXN18.50 over the past month. Speculators in the futures market are net long peso by the most in three years. The central bank meets later today, and although the majority do not envision a rate hike, the peso's weakness injects a new note of risk.
Among the major currencies, sterling is stealing the show today. It has been bid through $1.30 after being stymied there for the past few weeks. The trigger was retail sales twice as strong as the median expected. April retail sales rose 2.3% after falling 1.4% in March. Easter and weather have distorted the data, but there is an underlying concern that rising price pressures are sapping the purchasing power of households. Retail sales fell in Q1 for the first time in several years. Today's gain was widespread and helps ease concerns.
However, the market is not seeing the strong retail sales as a sign that the BOE will raise rates. In fact, the December short-sterling futures contract has seen the implied yield edge lower not higher. The implied rate fell to its lowest level sine last October (~36 bp).
Although we had recognized the $1.30 level as psychologically important, we drew your attention to the 38.2% retracement of the slide since Brexit, which is found near $1.3055. Today's high has been near $1.3045. The 50% retracement is near $1.3430.
The euro's gains were initially extended to a little through $1.1170, but some profit-taking pressures, perhaps through the cross against sterling, has seen the momentum fade in the European morning. Support is seen in the $1.1080-$1.1100 area. The dollar's losses against the yen are extending, as the US 10-year yield takes another leg lower as well. The 10-year yield is below 2.20% and is nearing the mid-April low watermark near 2.16%. The dollar is approaching JPY110. The JPY110.50 area was the 61.8% retracement objective of the greenback's rally from almost JPY108 on April 17.
Lastly, we note that Australia reported a 37.4k increase in employment and a drop in the unemployment rate to 5.7% from 5.9%. The participation rate was unchanged at 64.8%. The Reserve Bank of Australia is likely to look favorably at the report, especially given that it flagged the importance of the labor market in its deliberations. The Australian dollar has not been rewarded. This may be partly due to the risk-off psyche today and partly due to the fact job creation was all part-time (49k), with full-time positions shrinking by 11.6k. We are less concerned. First, the RBA had played down the significance of the full-time/part-time distinction, which says something about its reaction function. Second, Australia grew a revised 73.9k full-time positions in March.
The US session features weekly jobless claims for the same week as the NFP survey. The Philly Fed survey for May will be reported. Separately, Leading Economic Indicators will be reported, and it is expected to have risen by 0.4% for the second month. LEI is not signaling an economic contraction, which some have begun discussing. Note that last year LEI averaged 0.2% a month. Through Q1, it is averaging 0.5% this year.