I think this week has been one of education, where it feels like many, including yours truly, have gone from being an ‘expert’ on the US repo market, to a UK Supreme Court ‘expert’, to an impeachment ‘expert’. Such is life as a market participant who cuts their craft analysing news flow and what this means for economics, asset markets before adopting a technical overlay.
Boris offers unlawful advice
But, take a step back and look at what we have seen in the 12 hours or so, and firstly consider a ruling that the UK PM offered the Queen unlawful advice. In any other situation, this would almost certainly have seen a vote of no-confidence pulled on Boris Johnson and a likely dismissal of the top job – The fact we haven’t highlights that these truly are bizarre times. The irony is that Corbyn has no-confidence in a Johnson-led government but is unlikely to call a vote as a caretaker government would need to be formed which makes life somewhat problematic when the UK hasn’t yet formally requested an extension to Article 50 (A50).
A general election has been my base case for a while, and I see no reason to alter the probability of this call, although, we may have to wait until as far out as 19 October (that being, post the EU Summit) to hear of a formal request to extend A50, before we plunge into the fiery pits of hell and another general election. From a tactical perspective, it feels as though traders will be buyers of GBP on selloffs here, although GBP implied volatility is moving higher and portrays for those holding GBP exposures to keep them to a minimum.
Trump could be impeached, but does it matter?
Then consider later in the session, and after much speculation through US trade, we saw Nancy Pelosi launch a formal inquiry into the possible, and if we look at the betting markets (https://www.predictit.org/markets/detail/3537/Will-Donald-Trump-be-impeached-in-his-first-term) probable, impeachment of Trump.
So, in any other point in history, these would be two incredibly impactful pieces of news and high drama indeed. However, in the scheme of things, neither really alter the script too greatly.
Certainly, while impeachment may well happen, it would need to be passed on to the Senate, where, given the Republicans hold 53 seats (of 100), we would need to see at least 20 Republican senators vote against the president and what are the chances of that happening? Very low I’d say, although I am not a political ‘expert’, but I listen to the markets. So, the fact that S&P 500 futures and USDJPY are modestly higher from the time Pelosi formally announced the inquiry details the markets are not overly concerned.
If they genuinely felt Trump would be stood down by the Senate, we would not see the S&P500 at 2966, the VIX index at 17.05%, US 2s at 1.60%, while I hazard a guess that USDJPY would be closer to 105.00. Asian markets are down today, but there is absolutely no panic.
A Trump vs Warren showdown in the making
In fact, we could see a situation where Joe Biden faces greater headwinds as a result, and we could be staring at an increased chance of a showdown, where Trump squares off against Elizabeth Warren for the 2020 Presidential elections and the prospect of vast spending promises. I guess we still need to see how impeachment plays out, but one questions when the election becomes a market event. There is going to be increased volatility within the S&P 500 sectors, while the direction of the USD will be fascinating. Promises of fiscal support is clearly a USD positive, and we’ve seen worrying government debt dynamics for some time, and the USD has been a rock.
Let’s also face the issue that risk was coming off through US trade, not just on Trump’s hawkish speech at the UN, but also the US consumer confidence report fell 9.1points to 125. I talk about this data point in my webinar held yesterday, titled “A world looking over the edge”. In which I focus on the key charts and signals that should offer insights for those wanting conviction that we are due to see a US recession.
We heard from RBA governor Lowe overnight who pretty much told us what we already knew and that the cash rate is coming down. The market ascribes a 71.3% probability of a cut in October, as external concerns and slack in the labour force their hand. If they don’t go in October, they will go in November, so it begs the question, why wait? Granted, there are a few things on the domestic front they are pleased with, but rates are coming down, and the market sees the cash rate at 0.5% in 12 months’ time. The exchange rate is key and the importance of keeping the AUD from rallying means keeping policy in line with other central banks. This should keep vols in check, as the idea of central bank divergence is one hedge funds love to exploit and suggests selling rallies in the AUD, certainly against the USD and CAD.
AUDNZD is on the radar here, with the RBNZ meeting seeing the bank on hold. While the RBNZ has said they will ease again if necessary, we’ve seen strength in the NZD as the outlook is largely in the price and traders have already gone some way to pricing in a cut in November. I see scope for the pair to trade lower here, so would be short, closing the trade on a daily session close above the 5-day EMA.
Published by Chris Weston, Head of Research, Pepperstone