Politics continues to be the dominant driver of financial markets, although some traders were caught in a mini flash crash overnight in GBP/USD, which fell 90-odds points in a minute. For institutional investors though, the focus has shifted somewhat away from Donald Trump to Brazil, where President Temer refuses to step down despite allegations of bribery.
This focus will revert back next week, notably with former FBI director James Comey set to testify to the Senate mid-week and that promises to be an absolute must-watch event.
The massive inflows into emerging market funds this year have been partially driven by a goodwill towards reform in Brazil, resulting in the Brazilian stock market gaining close to 90% from January 2016 to February 2017. The BRL (Brazilian real) has performed admirably during that time, and traders who largely bought into the idea of reform have had to do a rethink here. Where else have we felt that? Either way, Brazilian assets have rightful been whacked overnight (USD/BRL gained 7.3%), taking the iShares MSCI Emerging Markets (NYSE:EEM) ETF down 1.6% with it.
The political angst in the US is still very much in play, but most of the focus has turned to Trump’s defense of the various news flow, where predictably the controversies have absolutely nothing to do with his actions and he is the victim of a “witch-hunt”. Some have attributed a slight bid in the USD, with the USD index breaking a five-day losing streak, to a video from 3 May of fairly vague James Comey, who said Trump was not seemingly leaning on Comey to stop the investigation into Michael Flynn’s collusion with the Russians. This is a theme Trump was running with overnight too, suggesting the decision to fire Michael Flynn was a bipartisan one. As I say, this all seems vague, but it was one of the inputs that seem to have stabilized the USD, helped by a modest sell-off in the two- to ten-year part of the fixed income curve.
Interestingly, ‘real’ (or inflation-adjusted) yields actually fell a touch showing some stability in inflation expectations and we can see gold falling 1% as a result. Keep an eye on the gold market today, as the sellers hit the yellow metal as soon as price hit the 61.8% retracement of the April to May sell-off at $1264. This was the line in the sand I was mentioning yesterday, but we now find price is testing the April downtrend, so let’s see if the buyers support here.
We have seen some selling in the interest-rate markets too, with July fed fund futures contract pushing up 2.5 basis points to 1.085%. This details 17.5bp of hikes priced in for the June FOMC meeting and therefore a 70% probability of action and again it really does highlight that the markets view on Fed tightening is being driven by US equities and credit markets and the impact this has on financial conditions. With that in mind, we can see calmer conditions in US equities, with the US volatility index (VIX) falling 6% to 14.66%. The Nasdaq 100 has gained 0.8%, on volumes some 11% above the 30-day average and the S&P 500 tech sub-sector has performed well. In fact, on a sector basis, it was really only energy that has fallen on the session and this gives the ASX 200 and the broader Asia region some signs of inspiration that perhaps Trump is not about to bring the US economy tumbling down.
Our opening call then for the ASX 200 sits a 5722, so a somewhat softer open and it seems a tall order to close above 5836 and stop what is looking like the first back-to-back loss in the Aussie equity index since January. It’s all eyes on banks again and after an 8% pullback (in the financial sector) one questions if we do start seeing some brave soul starting to wade back in. The shorts will certainly be watching price action and any signs of buying will likely cause a few to cover.
Energy underperformed in the US, despite the crude price moving 0.6% higher on the day. Elsewhere, BHP (NYSE:BHP) looks like it will open around 1% higher, based on the moves in the American Depository Receipt, while Vale’s US-listing closed down over 6%, although this is a reflection of its exposure to Brazil and not indicative to how the Aussie mining sector may trade. Spot Iron ore did fall 1%, but Dalian futures are a touch stronger and steel futures have pushed up 2.2% - all a bit messy really.
There seems little to drive in terms of data and other event risks for the session, so perhaps we may see lighter volumes and markets drifting into the afternoon. AUD/USD moves should be capped into $0.7450 to $0.7390 and it’s interesting that despite having both wage and jobs data that the swaps market has altered the degree of implied tightening all week from the Reserve Bank have not moved and continue to remain at three basis points. So a big week of Aussie data, but it simply hasn’t altered the view on RBA policy one bit.