Storm Clouds Gather As Trump Headline Risk, Terror Attack Battle Econ Data For Market’s Heart

Well, this market’s mettle is being tested. Again.

On Monday evening we got what might fairly be described as the worst kind of double-whammy: a WaPo report containing new revelations about Donald Trump’s attempts to obstruct justice in the Russia probe and a terrorist attack that killed 22 people in Manchester.

The knee-jerk risk-off move was readily apparent. USDJPY dipped and 10Y yields fell. The broad dollar weakened and indeed the pound was the only G-10 currency to decline against the greenback in the immediate aftermath of the twin tape bombs (one figurative, one literal).

USDJPYYields

EM currencies came under pressure as well after S&P said it may cut Brazil’s sovereign credit rating.

Ultimately, the pound would pare most of its losses despite the UK suffering its worst terror attack in more than ten years. “There’s a little bit of risk aversion but I wouldn’t say it’s been a big driver in terms of the morning,” Richard Kelly, head of global strategy at Toronto-Dominion Bank said, adding that “this has just become the natural direction for markets to consolidate as we don’t have any good news.”

That said, it’s reasonable to assume the dollar will stay jittery. As Bloomberg noted on Monday night, leveraged accounts and short-term macro funds were seen selling dollars against the yen following the Trump report, “and again on a rally led by client demand over the Tokyo fix.”

“Sentiment for the dollar was deteriorating overnight, so that kind of flows generated general bearish sentiment,” Hiroshi Yanagisawa, a dealer at FX Prime by GMO Corp said. “In such an environment, any news could have been a trigger.”

Meanwhile we got some positive econ data out of Europe which produced the following sign-of-the-times-ish headline:

  • Euro PMI Data Overcomes Terrorism Risk-Off

To be sure, in normal times “euro PMI data” wasn’t even exciting enough to “overcome” the Starbucks girl slipping you decaf because she was too lazy to brew a fresh pot of regular. So the fact that decent econ prints are now reason enough to look past a horrific terrorist attack says something about how this market sees what it wants to see.

Anyway, here’s a quick rundown of the important data points:

  • European May Composite PMIs: France 57.6 vs 56.6 est; Germany 57.3 vs 56.6 est; Eurozone 56.8 vs 56.7 est; Markit note signs of input cost pressures beginning to ease, suggesting underlying inflationary forces could moderate
  • German May IFO Business Climate: 114.6 vs 113.1 est; Expectations 106.5 vs 105.4 est

IFO

Of course there was no shortage of OPEC chatter. Khalid Al-Falih told Arabiya that he hopes commitment will be at high levels from all 24 countries in OPEC and outside OPEC, to guarantee markets return to balance. He also noted that Iraq’s oil minister has promised to meet full commitment in May.

“OPEC is very likely to extend the current production cuts till end-March 2018,” FGE said in note emailed to Bloomberg this morning. Here are some quick highlights from that piece:

  • Rollover probability is over 90%; Russia, Iran, Iraq will go along but probably fail to fully comply
  • Initial market reaction likely to be positive, with Brent seen rising $1-$2/bbl to ~$55 before prices begin to sink within a few months
  • “For now, OPEC may succeed to stabilize prices above US$50/bbl in 2017 or possibly mid-2018. But the market may require extended price weakness to come to an eventual balance”

Asian equities were mostly lower while, as mentioned above, Europe turned things around following a batch of decent econ.

  • Nikkei down 0.3% to 19,613.28
  • Topix down 0.2% to 1,565.22
  • Hang Seng Index up 0.05% to 25,403.15
  • Shanghai Composite down 0.5% to 3,061.95
  • Sensex down 0.3% to 30,494.69
  • Australia S&P/ASX 200 down 0.2% to 5,760.19
  • Kospi up 0.3% to 2,311.74\
  • FTSE 7507.61 11.27 0.15%
  • DAX 12687.00 67.54 0.54%
  • CAC 5360.97 38.09 0.72%
  • IBEX 35 10904.20 110.80 1.03%

Ultimately, you’d be wise to internalize the following simple assessment of the situation from Koji Fukaya, chief executive of Tokyo- headquartered FPG Securities:

The market is extremely sensitive to reports related to Trump.

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