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It’s All Political These Days: Full Week Ahead Preview

Donald Trump likely won't be in a good mood as the new week dawns.

Donald Trump likely won’t be in a good mood as the new week dawns.

Over the weekend, GOP lawmaker Justin Amash threw his support behind impeachment citing, amusingly, the fact that unlike most lawmakers on Capitol Hill, he actually read the Mueller report. “Contrary to [Attorney General] Barr’s portrayal, Mueller’s report reveals that President Trump engaged in specific actions and a pattern of behavior that meet the threshold for impeachment”, Amash wrote on Twitter.

“Justin is a loser”, Trump responded. “[I was] never a fan”.

“Loser” or no, Amash has added a Republican voice to the impeachment debate. At the very least, that’s something the president could do without right now, as the White House is engaged in an around-the-clock effort to fend off congressional subpoenas. The president is said to be particularly concerned about the prospect of Robert Mueller testifying. Jerry Nadler had set a tentative May 23 date for the special counsel to appear, but asked on Friday whether that’s likely to pan out, Nadler said “I would assume not.”

Trump’s domestic political problems have become something of a side show over the past two weeks. There’s talk of a shooting war with Iran and the decision to blackball Huawei casts considerable doubt on the prospects for a quick resolution to renewed trade tensions with China.

Read more: The US Is Stumbling Towards Two Worst-Case Scenarios

US stocks are coming off their first two-week losing streak of the year. 10-year yields are back near the March lows, reflecting ongoing concerns about the outlook for global growth as the specter of an all-out trade war once again haunts the market.

We’ll get the May Fed minutes this week. They’ll be hopelessly stale in light of the trade escalation, but traders will parse the meeting account for clues about the consensus around Powell’s “transitory” characterization of the factors weighing on inflation – especially in light of cooler-than-expected reads on wage growth and CPI.

“The FOMC minutes should confirm the Fed’s ‘patience’ [and] we expect the discussion to reflect the upbeat tone in the statement and the market will be watching whether the view of softness in core inflation being driven by transitory factors is widely shared between members”, Barclays wrote Sunday, adding that “if most of the members express the same opinion towards the weakness in inflation, it is likely to sound hawkish, but recent inflation data show some concern about the dominance of the transitory factor and the minutes could be discounted by markets.”

“We will look for discussions around the Fed’s balance sheet [as] we suspect there were discussions around the maturity structure of the Fed’s portfolio and some officials’ desire to shorten the average duration of assets on its balance sheet similar to the structure prior to the financial crisis”, BofA writes, in some perfunctory commentary. “Additionally, we will read for any new insight into the ceiling tools and the Fed’s decisions to cut IOER by 5bps.”

Again, all of that will sound dated given what’s happened on the trade front. The tariff escalation and the distinct possibility of duties on the remainder of Chinese exports to America could ultimately drive consumer prices higher and dent growth, putting the Fed in a no-win situation. Meanwhile, rate cut bets continue to be pressed.

In Europe, the EU elections will be in focus. Market participants are concerned about the prospect of a strong showing for euroskeptic, populist parties. Matteo Salvini is spearheading the pre-election push and has recently sharpened his rhetoric with regard to Italian fiscal policy, to the detriment of Italian assets. The FTSE MIB managed a gain last week, but Italian equities are still on track for their first monthly loss since December.

The BTP-bund spread looks like it may well have a date with 300bp again.

ECB minutes are on deck as well. Europe got some good news late last week when the Trump administration confirmed earlier reports that a decision on auto tariffs will be delayed by up to six months, but it’s far from clear that’s going to be enough to shore up sentiment amid economic concerns, political tumult and a derisive “Japanification” label that looks like it’s going to stick.

“We expect EURUSD to remain heavy into the European Parliament elections, which likely will reinforce concerns about Europe’s medium-term outlook, yet without significant surprises, we think it is unlikely that the election results will roil markets”, Barclays says, noting that “the roughly 25bp breakeven move priced into EURUSD options over the election dates appears broadly fair [which] is not to say that the bad news is in the price, but rather that the EUR faces ‘realization’ risk as market fears of the interaction between Europe’s increasing political fracture and rising threats to near-term growth and to long-run stability are confirmed.”

Read more: Matteo Salvini And Europe At The Crossroads

Politics will also be in focus in Australia and India. Scott Morrison’s “shock” victory down under will likely reverberate across markets at a critical time given the country’s sensitivity to the trade war. The Aussie was staring down a potent one-two punch from expected RBA cuts and an escalation of trade tensions. “Domestic and international factors are combining to drive [the currency] down as rate-cut bets coincide with a grim outlook for key trading partner China that’s sent the yuan tumbling”, Bloomberg’s Garfield Reynolds wrote Friday.

Rate cut bets have bolstered Australian equities, though. They’re sitting near an 11-year high. “Focus will [now] turn to a speech by Governor Lowe, as markets are pricing in high probability of a June cut and unemployment rose to 5.2% in April”, BofA said Sunday.

In India, exit polls predicted a victory for Prime Minister Modi’s Bharatiya Janata Party-led coalition. That’s expected to cheer both the rupee and the local equities.

Meanwhile, there were so many headlines out of the OPEC+ meeting in Jeddah that trying to make sense of them all and craft a coherent narrative is well nigh impossible – but that’s to be expected on days when OPEC headlines are coming in hot and heavy. Apparently, the JMMC decided they needed to “keep monitoring” the situation with an eye towards “managing inventory” and keeping the market balanced. I’m not entirely sure what else they’d be doing if not that. One delegate said there was no formal recommendation on extending cuts into the second half of the year.

Al-Falih was all over the wires. He called compliance with the cuts “healthy but uneven” and implored nations not in full compliance to “catch up”. OPEC+ cuts could be adjusted, he said, but for right now, he doesn’t think it’s necessary. The state of the market will be reassessed at the June meeting in Vienna.

Obviously, the standoff between Washington and Tehran is casting a pall over OPEC. On Sunday, Al-Jazeera reported that Baghdad’s Green Zone was hit with an explosion near the US Embassy.

It’s politics – everywhere and always.

Full calendar via BofAML

 

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