Silver as an investment

Selloff Accelerates As Trump Fears Mount: “The Market Will Revert To Much Higher Volatility”

European and Asian stocks slumped on Thursday following the worst one-day drop in US stocks in 8 months, while S&P futures tumbled to session lows, down 0.3% to 2,350 after initially posting a modest rebound, following a new Reuters report alleging that Trump campaign members communication with Russians on at least 18 occasions, and which prompted today’s risk off mood sending the USDJPY crashing by 100 pips from overnight highs of 111.40.

As stocks fells, yields dropped to the lowest in a month, while volatility, artificially subdued for the past month, exploded higher. Should vol continue to rise rapidly, there is a threat that vol-neutral and directional systematic funds such as CTAs and risk-parity will be forced to liquidate positions, as explained yesterday.

“The market will revert to much higher volatility and this could be the start of it,” said Richard Haworth, chief investment officer of 36 South Capital Advisors, a London-based hedge fund which bets on rising price swings. “The sharp move this week reflects how short volatility the market was – how complacent.”

Asian stocks fell sharply after Wall Street suffered its worst day in over eight months overnight and Europe’s main bourses dropped between 0.8 and 1.3 percent as the selling momentum built again. The MSCI Asia Pacific Index slid 0.8 percent, the most since April 6. Japan’s Topix slumped 1.3 percent while a volatility measure on the Nikkei 225 Stock Average jumped to the highest this month.  The Hang Seng China Enterprises Index of mainland shares traded in Hong Kong retreated 1.1 percent.

Rabobank strategist Michael Every said the key question was whether markets would “calm down, or panic more.”

“The obvious point we’ve made before repeatedly is that Trump now has much less political capital to spend in the Capitol, and that makes Trumpflation far less likely. Yet things seem to be rapidly moving beyond that point, opening up other scenarios,” he said. He was referring to the threat of impeachment.  A mini-recovery in Asia as Japan posted its best economic performance in a year also ran out of steam however.

And while stocks flashed warning lights again, the dollar seemed to be going for the ‘calm down’ option, pulling out of a six-day dive that had taken it to its lowest level in six months against other top currencies including the euro and the yen.

Even as the euro fell, there was more support for the common currency as one of the European Central Bank’s most influential policymakers, Executive Board member Benoit Coeure, said it should not delay paring back its stimulus once it was convinced inflation has recovered. “Too much gradualism in monetary policy bears the risk of larger market adjustments when the decision is eventually taken,” Coeure told Reuters in an interview in which he also said the bank’s bond-buying program was “not set in stone”.

For now, however, the political jitters coming out of the United States remained the dominant factor for traders.

In Europe, UK retail sales were the major economic release, and they beat expectations decisively with headline retail sales rising 4.0% in April vs. Exp. 2.1% (Rev. 2.0%), while retail sales ex fuel (Apr) rose 4.5% Y/Y vs. Exp. 2.5% (Prey. 2.6%, Rev. 2.8%). This sent the Sterling surging above 1.30 for the first time since October.

It’s not just US political woes that are in focus: trouble mounted for Brazilian President Michel Temer, who was recorded discussing payments to silence testimony by a potential witness in the country’s biggest-ever graft probe, sources told media including Reuters. An exchange-traded fund of Brazilian equities fell more about 8 percent in Tokyo after the Brazilian real had dropped more than 1.2 percent in local markets.

In commodity markets, which have also been highly volatile in recent weeks but due mainly to supply and demand issues, there were steadier signals. Brent oil futures dipped back to $52.05 a barrel after hitting a two-week high overnight on the back of an ongoing effort by OPEC to cut production.

In rates, the yield on 10-year Treasuries dropped four basis points to 2.19 percent, heading for the lowest since April 18. Yields in France fell three basis points, while German yields lost five basis points. Bonds of state-controlled energy company Petroleo Brasileiro SA dropped by the most in six months amid the previously discussed political crisis in Brazil. The company’s 800 million euros of notes due in January 2025 led the slump, falling 4.5 cents on the euro to 102 cents, the biggest decline since November.

Today we get jobless claims data and the Philadelphia Fed Business Outlook. Earnings expected from Wal-Mart, Gap, Salesforce

Bulletin Headline Summary from RanSquawk

  • Equity markets sour on fresh Trump revelations.
  • GBP reaches highest since Sep’16 following strong retail sales.
  • Looking ahead, highlights include Philadelphia Fed Manufacturing Index, as well as comments from Draghi.

Global Markets Snapshot

  • S&P 500 futures down 0.3% to 2,350
  • STOXX Europe 600 down 0.5% to 389.20
  • MXAP down 0.8% to 150.76
  • MXAPJ down 0.6% to 491.18
  • Nikkei down 1.3% to 19,553.86
  • Topix down 1.3% to 1,555.01
  • Hang Seng Index down 0.6% to 25,136.52
  • Shanghai Composite down 0.5% to 3,090.14
  • Sensex down 0.4% to 30,549.86
  • Australia S&P/ASX 200 down 0.8% to 5,738.31
  • Kospi down 0.3% to 2,286.82
  • German 10Y yield fell 2.3 bps to 0.355%
  • Euro down 0.2% to 1.1135 per US$
  • Italian 10Y yield fell 8.2 bps to 1.861%
  • Spanish 10Y yield unchanged at 1.565%
  • Brent Futures down 0.7% to $51.85/bbl
  • Gold spot up 0.06% to $1,261.85
  • U.S. Dollar Index down 0.02% to 97.56

Top Headline News

  • The U.S. Justice Department has named former FBI Director Robert Mueller as special counsel to oversee the bureau’s investigation of Russia’s efforts to influence the 2016 election, as well as possible collusion by Trump campaign associates, and to prosecute any federal crimes uncovered
  • Brazil was plunged back into a political crisis reminiscent of last year’s impeachment saga following reports that President Michel Temer was embroiled in an alleged cover-up scheme involving the jailed former speaker of the lower house of Congress
  • Carlyle Group LP is seeking to raise about $280 million in debt for its acquisition of more than 1 gigawatt of natural gas-fired power plants in Illinois
  • Noble Group Ltd.’s stock fell while its bonds rose Thursday after people familiar with the matter said the embattled commodity trader has approached lenders to replace a credit facility with a $2 billion borrowing base facility
  • As political turmoil in Washington roils financial markets and throws doubt over prospects for a Trump bump to growth, Japan is enjoying a stability dividend
  • Japan Gets Growth Under Abe’s Stable Hand as Trump Roils U.S.
  • Oil Stuck in Trump Slump as Risk Aversion Damps U.S. Supply Drop
  • Venezuela’s Oil Woes Give OPEC a Hand as Crisis Cuts Supply
  • U.S. Said to Ready Lawsuit Over Fiat Chrysler Diesel Emissions
  • Carlyle Said to Seek $280 Million Debt for Gas-Plant Purchase
  • GM to Cease India Sales, Offload South African Assets to Isuzu
  • Citi Appoints Rajashekaran as Country Officer for Bangladesh
  • National Grid Considers Electric Vehicle Charging in U.K., U.S.
  • Medtronic’s New Stent Succeeds in Coronary Artery Disease Study
  • James Hardie in Final Stages of U.S. Sales Chief Search: CEO
  • Argenx Raises About $100m in Gross Proceeds From Nasdaq IPO
  • CSX Says CEO ‘Actively and Deeply Involved’ in Daily Management
  • Chicken Outlook Positive as B&G Eyes M&A: BMO Conference Wrap
  • L Brands Sees Year Comp. Sales Down in Low-Single Digits
  • Noble Group Said to Seek $2 Billion Loan Amid Turmoil

Asia equity markets maintained the downbeat tone from Wall St, where US stocks posted their worst performance in 8 months and financials slumped as the ongoing Trump-Comey-Flynn situation led to an unwinding of the Trump trade. This pressured ASX 200 (-1.2%) and Nikkei 225 (-1.5%) from the get-go, while the latter also suffered from the ill-effects of a firmer currency. Shanghai Comp. (-0.6%) and Hang Seng (-0.5%) conformed to the downbeat tone, although losses have been stemmed as participants mulled over the latest property price data and government steps to support businesses. 10yr JGBs were initially higher to track the gains in T-notes with demand supported amid a flight to safety. However, prices then failed to sustain the upside and returned flat in the 2nd half of trade, amid a lack of drivers and after a muted 20yr auction where the results were broadly in line with the prior month.

Top Asia News

  • China’s Leverage Campaign Is Turning Bond Market Upside Down
  • Indonesia Keeps Rates Steady as Inflation Pressures Increase
  • Japan Apartment Loans Drop as Regulators Monitor Transactions
  • Cogobuy Slumps; Spokesperson Says Unaware of Reason for Decline
  • AAC Technologies Suspends Trading in Hong Kong
  • Subaru Is Said to Weigh Sweden’s Autoliv as Camera Supplier

European equities continue to take direction from events stateside whereby Trump is coming under increasing pressure given recent revelations surrounding former FBI Director Comey. The latest reports suggest that Trump Adviser Flynn and a Russian ambassador discussed setting up a back channel Between Trump and Putin in 2016 with records of 18 calls between Trump campaign and people linked to Putin currently being reviewed by investigators. Given that a bulk of the focus for the market is on developments in the US, some participants may await the US entrance to market for any further clarity but nonetheless EU investors are unwilling to currently support stocks with the Eurostoxx 50 lower by 0.7%. On a sector breakdown, losses are largely broad-based with the exception of the energy sector which is being hampered by a modest pullback in prices and Shell (-3.0%) who trade ex-div. Given the price action in equities, fixed income markets trade broadly higher in Europe with markets choosing to look through rhetoric from ECB’s Mersch, Coeure, Weidmann, Vasiliauskas and Jazbec. This subsequently saw German paper break through yesterday’s highs with potential upside initially capped by a raft of EU supply. From a core perspective, focus was on French paper given impending supply as the lines on offer were the first 5yrs placed in the market since the Macron victory. While in peripheral markets, Spain came to market with prices modestly lower heading into the bidding deadline. Both auctions were perceived as well received with attention in the fixed income space now turning to the US and the noted flattening of the US curve.

Top European News

  • Prudential Says First-Quarter Profit Jumps 25%, Names New CFO
  • Brazil-Exposed EU Shares Fall After Latest Political Crisis
  • Former FBI Chief Mueller Named Special Counsel on Russia Probe
  • Vitol Has Physical Sales of 4.5m Tons of LNG So Far in 2017
  • Commerzbank Said to Exit Physical Precious Metals Business
  • Achleitner Says Ex-Deutsche Executives to Pay for Past Missteps
  • ECB’s Weidmann Says Political Risks Have Diminished in Euro Area
  • If Germany Wants to Leave Incirlik, Turkey Will Say ‘Bye’: FM
  • Goldman ‘Myths’ Skewered in Danish Probe, CEO of Dong Says

In currencies, USD/JPY saw a move back under 111.00 as late Asia reversed the move down to 110.53. There was no urgency in retesting these levels based on the price action this morning, but with the latest news of communications with Russia during his campaign, risk (off) sentiment takes another battering just after it looked as though the dust was settling. Treasury yields had been stabilising, but are now under pressure again, with the 10yr testing 2.20%. 110.00 next support of note. In Europe, UK retail sales were the major release, and as have noted in the past week or so, the evidence based on the BRC and CBI monitors on consumer spending pointed to a strong number today. Gaining 2.3% over April, we beat consensus expectations by more than double this, so it is no surprise to see Cable taking out 1.3000 on the upside, as has been threatening in recent weeks. EUR/GBP has been knocked back into the lower half of the 0.8500’s, but with the EUR showing strong gains elsewhere, we anticipate limited downside here unless EUR/USD loses its relentless bid tone. Pressure on the commodity currencies continues, and more so on CAD after failing to take advantage of USD weakness yesterday. This looks squarely down to the hesitancy in Oil prices where WTI struggles in the mid USD49.00’s, but reclaiming USD50.00 will go some way in alleviating some of the pressure on CAD.

In commodities, in light of the ongoing Trump saga, which has taken another turn for the worse, all risk assets are and will remain under pressure. Whether this takes its toll on Oil and metals is in the balance, but Gold is certainly looking more attractive by the day, but we are still trading well off the recent highs, with Silver still trading on a USD16.00 handle. For WTI, the resistance ahead of USD50.00 now dictates trade, but consolidation circa USD49.00 suggests we are in for further upside tests, especially with the major producers all agreeing (in principle) on an extension to the output deal. The DoE was also supportive yesterday, so technical factors largely at play, but demand — as ever —contains excessive moves on the upside. Copper is back at USD2.50 this morning — down around 1.5% on the day -losses outpaced by Lead only.

Looking at the day ahead, the data includes initial jobless claims, Philly Fed business outlook for May and conference board’s leading index for April. Away from the data there is a fair amount of central bank speak scheduled. Over at the Fed we’re due to hear from Mester at 6.15pm BST when she is due to speak on the US economy and monetary policy. ECB President Draghi also speaks this evening at 6pm BST while other ECB speakers scattered throughout the day include Weidmann, Mersch, Lautenschlaeger and Nowotny. Away from that, US Treasury Secretary Steven Mnuchin is due to offer his first congressional testimony since taking office when he appears before the Senate this afternoon. A pre-release of the testimony suggests that Mnuchin will say that he wants “free and fair” trade deals for US businesses and workers, make banking rules more  efficient, and also that he wants to make sure there is ample credit available for housing. Finally this evening UK politicians (not including PM May) are due to take part in a live televised debate.

US Event Calendar

  • 8:30am: Initial Jobless Claims, est. 240,000, prior 236,000; Continuing Claims, est. 1.95m, prior 1.92m
  • 8:30am: Philadelphia Fed Business Outlook, est. 18.5, prior 22
  • 9:45am: Bloomberg Consumer Comfort, prior 49.7
  • 10am: Leading Index, est. 0.4%, prior 0.4%
  • 1:15pm: Fed’s Mester Speaks on Economy and Monetary Policy

DB’s Jim Reid concludes the overnight wrap

In a hotel room in Berlin I was glued to the TV watching events unfold with regards to the US ‘MasterChief’ Mr Trump. As we discussed yesterday it all started just after the close on Tuesday with reports that Trump was potentially interfering with an FBI investigation based on a memo written by the recently sacked FBI director James Comey back in February. The White House denied Comey’s version of events in an emailed statement saying that the President “has never asked Mr Comey or anyone else to end any investigations”. House Speaker Paul Ryan backed Trump yesterday and told reporters that “now is time to  gather all the pertinent information” and that “our job is to be responsible, sober and focus only on gathering the facts”. Ryan also questioned why Comey didn’t take action at the time if the allegations are true. He also said that “it is obvious that there are some people out there that want to harm the president”. Trump himself echoed similar comments when he spoke at an event in the afternoon, saying that “no politician in history…has been treated worse or more unfairly”.

The debate in the press and in markets is whether or not there is an obstruction of justice with the ‘impeachment’ word now spreading through various press outlets and through lawmakers. The House oversight committee has requested from the FBI all memoranda, notes and information regarding any communication between Trump and Comey with the Chairman of the committee giving the FBI bureau’s acting director until May 24th to comply. There have also been requests made by the Senate Intelligence Committee and Senate Judiciary Panel for material. Numerous lawmakers have also called for Comey to appear before Congress to resolve the dispute however we are yet to hear of any confirmation from Comey. Remember that all of this is coming as the Trump administration also deals with the issue of revealing potentially sensitive information to Russian ambassadors, and also the alleged interference by Russia into the US election campaign. On that it was noted that Russian President Putin yesterday said that allegations over Trump passing classified information to Russia is intended to incite “anti-Russian sentiment”.

Overnight, the only real significant news concerns the appointment of ex-FBI Director Robert Mueller as the special counsel to oversee the investigation into the allegations of interference by Russia into the 2016 US election. The appointment was made by US deputy attorney-general Rod Rosenstein and who said that the decision to appoint Mueller “is not a finding that crimes have been committed or that any prosecution is warranted” but that “the public interest requires me to place this investigation under the authority of a person who exercise a degree of independence from the normal chain of command”.

Rosenstein is due to brief the Senate behind closed doors today. The appointment of Mueller has brought about bipartisan support, while President Trump also welcomed the appointment. No surprise then that all this culminated in a perfect storm for risk assets and one of their worst days for many months. The S&P 500 was hit to the tune of -1.82% which was the biggest one-day decline since September 9th last year. The Dow (-1.78%) was hit by a similar amount while the Nasdaq (-2.57%) suffered its worst day since the aftermath of the Brexit vote back on June 24th. Financials were also hit hard with the S&P 500 Banks index plummeting -4.00% which was also its worst day since June 24th. US small caps also tumbled with the Russell 2000 falling -2.78%. At the same time measures of volatility surged with the VIX climbing nearly 5pts (or 46%) to close at 15.59 and the highest since April 13th.

It was also the biggest one day climb in % terms since June 24th. Credit spreads were hit even harder with CDX IG just shy of 4bps wider by the end of play. That big risk-off move fuelled a strong bid for safe havens. Gold (+1.95%) rose by the most since Brexit. The Yen (+2.02%) rallied by the most since July 29th. Meanwhile in Treasuries 2y, 10y, and 30y yields finished the day 5.3bps, 10.1bps and 7.6bps lower, respectively. That rally for the 10y to 2.224% is the biggest since March 15th. The odds of a June Fed rate hike also dipped as low as 58% at one stage according to Bloomberg’s calculator (which slightly  overstates) from 100% as recently a go as May 10th. It is back at 82% this morning though. The  USD index (-0.54%) fell for the fifth day in a row and hit its lowest level since November 4th.

It wasn’t just US assets which saw wild moves yesterday. In Europe the Stoxx 600 (-1.20%), DAX (-1.35%), FTSE MIB (-2.31%) and CAC (-1.63%) all sold off sharply. The MSCI EM equity index finished -0.63%. European credit indices were wider particularly in financials with senior and sub iTraxx indices closing 3.5bps and 10.0bps wider, respectively. Sovereign bond yields across Europe were also anywhere from 3-9bps tighter depending on the country (10y Bunds rallied 5.7bps and the most since January 23rd).

In Asia this morning the fallout in markets from the Trump headlines over the past 24 hours has continued. The Nikkei (-1.44%) and ASX (-1.24%) have seen the biggest falls, while there have been much more modest moves for the Hang Seng (-0.25%), Shanghai Comp (-0.05%) and Kospi (-0.53%). US equity futures are however slightly positive. Data this morning showed that property price growth in China’s biggest cities eased in April. New home prices rose in 58 of the 70 cities, down from 62 cities in March. Meanwhile in Japan GDP printed at +0.5% qoq for Q1, matching consensus estimates. The annualized rate was  +2.2% qoq which is up a full percentage point from Q4. That makes it 5 continuous quarters of growth in Japan, the longest run since 2006. Finally it’s worth noting that Brazil is back in the spotlight overnight after the country’s O Globo newspaper ran a story suggesting that President Temer was involved in an alleged cover up scheme involving paying a witness to stay silent during a testimony.

Before we look at the day ahead, it was a pretty quiet day for data yesterday but for completeness, in Europe the HICP inflation rate for the Euro area was confirmed to have risen +0.4% mom in April, putting the annual rate at +1.9% yoy (vs. +1.5% in March). The core rate was confirmed to have increased +1.2% yoy, up from +0.7% in March. Here in the UK we learned that employment climbed a better than expected 122k in the 3 months to March, while the ILO unemployment nudged down one-tenth to 4.6%. Average weekly earnings were also confirmed as rising one-tenth to +2.4% yoy although ex-bonus growth was down one-tenth to +2.1% yoy. There were no data releases in the US yesterday. We did however hear from the Fed’s Kashkari who warned against using rate hikes to address unwanted asset bubbles. Also speaking was former Fed Chair Ben Bernanke. He said that the US economy has already approached the limits of its capacity and that unemployment is as low as it can go

Looking at today’s calendar, while it’s likely that the US political developments dominate much of the newsflow, there is also some economic data due out. This morning in Europe we’re due to receive the Q1 employment indicators in France, while later on this morning we get the April retail sales report in the UK. Due out just after midday are the ECB minutes from the last policy meeting. In the US this afternoon the data includes initial jobless claims, Philly Fed business outlook for May and conference board’s leading index for April. Away from the data there is a fair amount of central bank speak scheduled. Over at the Fed we’re due to hear from Mester at 6.15pm BST when she is due to speak on the US economy and monetary policy. ECB President Draghi also speaks this evening at 6pm BST while other ECB speakers scattered throughout the day include Weidmann, Mersch, Lautenschlaeger and Nowotny. Away from that, US Treasury Secretary Steven Mnuchin is due to offer his first congressional testimony since taking office when he appears before the Senate this afternoon. A pre-release of the testimony suggests that Mnuchin will say that he wants “free and fair” trade deals for US businesses and workers, make banking rules more  efficient, and also that he wants to make sure there is ample credit available for housing. Finally this evening UK politicians (not including PM May) are due to take part in a live televised debate.