Markets may recover, but Trump still a red flag for risk
|European markets have opened lower once again as they digest the latest news that Congress is officially investigating the Trump/Comey claims and demanding that the FBI hand over the Comey memo that states President Trump put pressure on the FBI chief to drop an investigation into his National Security Advisor. But, the selloff may not last as US futures are actually predicting a positive open for US stocks later today.
Has the political genie escaped from the bottle?
We will be watching the futures markets to see if sentiment towards US markets change, but after Wednesday’s steep sell off, a bit of profit-taking is to be expected. However, this does not mean that the political risks are put to bed, if this crisis continues to escalate then we would expect a further sharp reaction in the markets. Ben Bernanke said on Wednesday that he was amazed that investors had become so blasé about political risk, until it was staring them in the face. If the political genie has escaped from the bottle, then it could be an edgy summer for investors as they remain cautious about the political outlook for the US.
We continue to think that the bar to impeachment is high, after all, there are some questionable aspects to Comey’s character (remember the reopening of the Hillary emailgate a few weeks before last year’s election?), and the Republican Congress may be wary of starting proceedings that could impeach their own President. However, if it does come to this then we would expect to see both the dollar and US stocks slide sharply and in tandem, which would be a clear sign that the political situation in the US had taken a severe turn for the worse.
Do stocks really reflect the level of risk in markets right now?
Right now, the market has to weigh up whether the slide in stocks, the S&P 500 is down 40 points from this week’s record high, is enough of a reflection of the political risk that has emerged in Washington. 40 points doesn’t seem like much, however, markets move on news, and if we don’t get any fresh developments this week on ‘Trumpgate’ then we could see markets stabilise and volatility start to retreat. This is already being reflected in the gold price today, which has fallen at the open on Thursday after a $20 boost on Wednesday. However, even if stocks do make a recovery on Thursday, the days of record highs for US stock indices and a rock bottom low for volatility could be a thing of the past.
Stocks vs. the USD
If Congress gets side-tracked by this scandal then we could see a prolonged period of stalemate in Congress. Usually political stalemate can benefit financial markets as it can create certainty that nothing will change, but the markets rally since November has been based on Trump’s economic policies getting to see the light of day. If Trump becomes a lame duck President this early on in his tenure, then the prospect of his legislative agenda being made into reality is slim. If this happens then the S&P 500 could be more at risk than the dollar. The dollar has slid since January, whereas the S&P 500 has continued to break fresh record territory. Thus, if the political crisis reaches a plateau, we could see the dollar/ S&P 500 relationship breakdown: the dollar could rally on inflows into US Treasuries and the prospect of Fed rate hikes, even if US stocks remain under pressure.
Looking ahead, UK retail sales and US Philly Fed are worth a look, strong sales could boost the pound later today and finally get GBP/USD above the 1.30 level.
Information on these pages contains forward-looking statements that involve risks and uncertainties. Markets and instruments profiled on this page are for informational purposes only and should not in any way come across as a recommendation to buy or sell in these assets. You should do your own thorough research before making any investment decisions. FXStreet does not in any way guarantee that this information is free from mistakes, errors, or material misstatements. It also does not guarantee that this information is of a timely nature. Investing in Open Markets involves a great deal of risk, including the loss of all or a portion of your investment, as well as emotional distress. All risks, losses and costs associated with investing, including total loss of principal, are your responsibility. The views and opinions expressed in this article are those of the authors and do not necessarily reflect the official policy or position of FXStreet nor its advertisers.