Daily Fix: Impeachment risks rising, but does it matter?
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 repo market to a UK Supreme Court expert and to an impeachment expert. Such is life as a markets participant who cuts their craft analysing news flow and what this means for economics, asset markets and adopting a technical overlay.
Boris offers unlawful advice
Take a step back, however, and look at what we’ve seen in the 12 hours or so. Firstly, consider a ruling that the UK Prime Minister 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. These are bizarre times. The irony is Opposition leader Jeremy 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. That 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 (post the European Union 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 not long after, and after much speculation through US trade, we saw US House of Representatives Speaker Nancy Pelosi launch a formal inquiry into the possible — and if we look at the betting markets, probable — impeachment of US President Donald Trump.
So on any other point in history, these would be two impactful pieces of news and high drama indeed. However, in the scheme of things, neither really alters the script too greatly.
Certainly, while impeachment may well happen, it’d need to be passed on to the Senate, where, given the Republicans hold 53 seats (of 100), we’d need to see at least 20 Republican senators vote against the President. What are the chances of that happening? Very low, I’d say, although I’m not a political expert. But I listen to the markets. The fact that S&P 500 futures and USDJPY are modestly higher from the time Pelosi formally announced the inquiry details the markets aren’t overly concerned.
If they genuinely felt Trump would be stood down by the Senate, we’d not see the S&P500 at 2966, the VIX index at 17.05%, US twos at 1.62%, while I hazard a guess that USDJPY would be closer to 105.00. Asian markets are down today, but there’s absolutely no panic.
Trump vs Warren showdown in the making
In fact, we could see a situation where Joe Biden faces greater headwinds as a result. We could also be staring at an increased 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’s 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 and the US consumer confidence report’s falling 9.1 points to 125, not just on Trump’s hawkish speech at the United Nations. I talk about this data point in my webinar “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’re due to see a US recession.
We heard from Reserve Bank of Australia Governor Philip 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 force their hand. If they don’t go in October, they’ll go in November. But it begs the question: why wait? Granted, there are a few things on the domestic front they’re pleased with; however, 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 Reserve Bank of New Zealand meeting seeing the bank on hold. While the RBNZ has said they’ll 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 five-day EMA.
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