The market was starting to get hysterical over political risk in the US. The chart of the USD/CHF shows that (and the SNB chief was muttering again about being able to intervene if he chooses).
But the appointment of special counsel Mueller should halt hysteria in one blow. Mueller is a heavy-hitter and will do the job right. The threat to the republic has been fended off. Trump can, technically, fire the special counsel but he is cowed and probably won't dare. A few things: the press will still work the story but the days of leaks are over. We may not get any juicy stories for many months. The public is not owed a final report, just whatever indictments may come.
Here's our guess: the slimy Manafort and the half-nuts Flynn may well get caught for misdeeds and indictable crimes, but that's it. Trump himself will not be implicated. This is not to say Trump is a pa-triot, just that he is focused entirely on acquiring wealth, and treason doesn't pay. Trump's self-absorption breeds arrogance and foolishness, but not genuine trickery. Trump does not play chess.
Reuters reports today that Flynn and other were in contact with Russian officials at least 18 times dur-ing the last 7 months of the campaign—not disclosed until now. A leak indicates Flynn was trying to establish a "back channel" between Trump and Putin to "bypass the U.S. national security bureaucracy, which both sides considered hostile to improved relations, four current U.S. officials said." But Trump himself and the White House have denied at least some of these contacts. It is improper but probably not illegal to bypass the established security agencies.
Assuming Trump personally is found blameless, the impeachment betting is wrong. Wishful thinking, maybe. The FT headline on the impeachment betting suggests this is the FT's view, too— "It's the hope of a Trump impeachment that kills you." Trump may be censured for bad judgment, but not charged. See the chart. The FT has a similar chart showing PredictIt has a 26% chance Trump gets im-peached this year, up from 16% on Monday. And the odds of Trump staying in office until the end of 2018 have dropped to 55%.
Or maybe the chart is right, after all. While Trump will escape charges of collusion with the Russians, he won't escape charges of self-enrichment under the emoluments clause. But the special prosecutor is not charged with investigating that. With any luck, Mueller's "following the money" will lead to evi-dence of self-enrichment, however inadvertent and indirect. The odds of Trump remaining in office by 2018 has fallen below 60%. See the next page.
As for the Trump agenda of setting a fire under the economy, pushing the investigation off the front page should make room for a reboot, including a renewed Congressional effort. The Trump trade can return. But will it?
Next up is a foreign trip, starting in Saudi Arabia. Bloomberg makes the interesting point that relations are good and about to get better, assuming Trump makes a deal to boost US non-oil investment. "Bilateral trade between the two nations is strong, amounting to almost $40 billion in 2016, according to the U.S. Census Bureau. In fact, last year was the first time in 21 years the U.S. sustained a trade surplus with Saudi Arabia, mainly due to lower oil prices. Oil plays just one part in the relationship. Saudi Arabia was supplanted by Canada in 2006 as the largest supplier of crude to the U.S., and provid-ed 1.1 million barrels per day in 2016, according to the Energy Information Administration.
"For Trump, Saudi Arabia is a long-term business partner offering enormous potential for U.S. compa-nies as the Middle East nation prepares for its post-oil future. Attracting U.S. investment is vital for its foreign-direct investment programs and successful implementation of Saudi Vision 2030." A good deal with the Saudis could go some way to restoring confidence in whatever shreds of credibility Trump has left.
However, the Trump trade depends more on domestic initiatives than foreign adventures. Alas, Trump has never been one to set forth anything resembling an actual plan. That is the crux of the matter. Fi-nancial market players desperately want to believe in the Trump reflation trade. They believed in it when there was no evidence it existed in the first place, based solely on bluster. What would it take to restore confidence? An actual bill passed by Congress and signed by the president. It doesn't have to be a big bill, just something big enough to prove the intent to disrupt in a constructive way. Passing a tax cut for the rich usually does the trick. And meanwhile, diehard Trump voters are not even remotely im-pressed by these woes. They continue to support him.
Forecasting the sequence of financial market responses to these developments is tough. We say the first response, today and over the next few weeks, could well be a relief rally. That would make the equity gang and dollar bulls happy. We are expecting a tax bill in June.
Then we should expect risk appetite to melt as incompetence in the White House does not actually go away and Congress continues to be spineless and ineffectual. Market prices get rangey and move side-ways—a summer lull. But third, something remotely resembling the Trump imaginary plan does get done. Passing a tax cut for the rich usually does the trick. Then optimism can rise up again, like the tide.
By now it will be late August or September—past the Fed hike in June and with the September hike looming. The dollar "should" recover, although not as much as we may think because by then we will have the ECB taper idea firmly planted (in July) and starting to send up green shoots (in September).
One caveat: the recovery trade is not developing much so far this morning. Maybe the markets are not so quick to forgive and forget. Equity futures are still negative, albeit less than early this mroning. Maybe the weight of all the Trump lies and growing anti-Trump sentiment is too high for a single spe-cial counsel to overcome. And in a somewhat scary development, the CME Fed Watch tool has the probability of the June hike down to 60% this morning, from 88% a few weeks ago. We don't believe it—the Fed is not going to get the shakes at this point—but market sentiment must be respected.
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Note to Readers 2: We will not publish any reports during the week of May 22-26. We will be travel-ling. Note that the following Monday, May 29, is Memorial Day and markets are closed, so no reports that day, either.
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This morning FX briefing is an information service, not a trading system. All trade recommendations are included in the afternoon report.