The Trump Trade on the Ropes
The markets were looking rather positive for risk when I clocked out yesterday, as election fears in France subside after a steady performance from Macron. It all went downhill rapidly in the NY session as there are concerns about whether Trump and Ryan have enough votes to pass their new healthcare bill (repealing Obamacare) through Congress on Thursday, which brings into question their ability to pass tax and spending reforms further down the line.
Apparently, investors are extrapolating much from this major setback as the market sours on the Trumpflation trade. It appears his lack of skilled political operators will hurt the enactment of his key initiatives. Needless to say, this also brings into question, whether in the White House, Foggy Bottom or overseas, if Trump’s administration has the politicians at his side to build key political relationships, negotiate huge deals both at home and abroad and more importantly, the backroom movers and shakers, to defuse problems before they become a crisis. But one thing we know for sure now is that there are no rubber stamps for Trump's agenda.
The sharp stink of risk-off has the S&P 500 down 1.2%, US Treasuries rallying, while both crude oil and the US dollar have stumbled. All of which is pointing to a stern near term test for Trumpflation.
Today will be all about healthcare headlines and global equities fallout, which should provide a decent barometer for investor sentiment.
Australian Dollar
After US equities put on their weakest showing of the year, eyes now turn to a likely contagion effect on global equities which could weigh on the AUD/USD today. The markets are very fidgety about this political setback for the Trump administration, which will be the primary driver in today’s session and possibly beyond. No asset class was spared investors' wrath with WTI -1.3% and Industrial Metals lower, led by copper. The Aussie dollar’s resilience will certainly be tested as the Trump re-inflationary narrative comes under scrutiny.
Overnight GBP, EUR and JPY were the best performers. And while the Trump Dump played a part in each, all had a uniquely local story.
British Pound
UK consumer price inflation hurdled the Bank of England’s target of 2% for the first time since 2013, and the pound exploded higher. The rise to 2.3% YY in the CPI was well above expectations, which will undoubtedly pressure the MPC into considering a rate hike. However, the dust is far from settled on the Brexit campaign, and the BOE will likely opt for a uniform policy, as fear of the unknown may be a stronger motivator than the fear of the known (read inflation).
Euro
The EUR and Cross EUR has turned bid in the aftermath to the French elections debate, as the markets jump to conclusion and prices in a Le Pen defeat. But the significance of this shift is that it now provides the market with a singularity of focus on a possible ECB policy pivot. I suspect the EUR momentum was only capped by skittishness over potential global equity market fall about the implementation of Trump’s agenda as part of the bullish Euro storyline, which includes surging demand for EU assets as political risk abates. But clearing the political airwaves has indeed put the euro pointing higher, as dealers are now setting their sights on the lofty 1.1000 target. Keep an eye on the yearly high of 1.0829 as this could be a near-term tipping point for anyone holding short EUR positions. While we should expect heavy selling ahead, the momentum is clearly higher for the EUR.
Japanese Yen
USDJPY is more or less a tale of two sessions. After moving to 112.75 on post-French debate risk euphoria, the USDJPY fell prey to slumping US equity prices and risk aversion on the back of the Trump Obamacare debacle. With little top tier news on the agenda, traders worked themselves into a froth as the US political developments devolved.
Keep in mind that during this recent wave of risk aversion, the Moritomo scandal is simmering on the back burner and because of that, along with repatriation flows from Japanese corporations expected at fiscal year-end, we could see and acceleration on USDJPY, selling on a break of the 111 level. It’s going to be a nervy day on the dollar-yen desk as we open up just on top of significant support at 111.50-30. Let’s see who is first to blink.
BOJ released the January meeting minutes and stated the economy continued moderate recovery trend is encouraging but contained little forward guidance
Predictably Nikkei 225 has opened -1.6 % after the shoddy performance in US markets