• Trump Impeachment inquiry has limited effects on financial markets
  • Fate of US-China trade deal remains uncertain
  • High beta currencies fall on weak economic data

 

US equities hit a new record high on Wednesday as the first public hearing in the Trump impeachment inquiry kicked off. Several hours of Q&A with two State Department officials about US policy in the Ukraine did not seem to move markets. Investors felt there hadn’t been any new information that will garner Senate Republicans support to remove President Trump from the White House.

As long as the impeachment inquiry doesn’t force any major shift in opinions, especially within the Republican party, the whole process will be considered as noise with little or no impact on financial markets.

What seems to matter the most at this stage is the signing of the Phase one US-China trade deal. Equity markets have been rallying across the globe over several weeks in anticipation of this getting through before year-end. This suggests a large portion of such an agreement is already priced in, and to see another leg higher in risk assets depends on the details of the deal and whether another one comes through in the forthcoming months.

The latest reports weren’t encouraging. The Wall Street Journal reported that the US and Chinese negotiators had hit a roadblock over agricultural purchases. According to the Journal, China is hesitant to commit to specific purchase amounts of farm products. The US also wants concessions from China on intellectual property protection and forced technology transfer but this hasn’t been agreed so far.

If a deal doesn’t go through in the next couple of weeks, the optimism seen in financial markets will rapidly turn into pessimism and I wouldn’t be surprised to see a 5-10% correction in equity markets. At this stage, markets are in a wait-and-see mode until further developments emerge.  

In a speech yesterday, Fed Chair Powell reiterated that he is content with the communication of a pause in interest rate cuts and the current stance of monetary policy will remain appropriate as long as incoming data is consistent with the Fed’s outlook.

Uncertainty over trade and poor economic data from China, Australia, and Japan, led investors to the safety of the Japanese Yen and Swiss Franc as high beta currencies got hit. Retail sales, industrial production, and fixed asset investments from China all surprised to the downside. Meanwhile, Australian employment suffered its largest drop in three years, suggesting that further stimulus is still needed.

The Australian dollar fell below 0.68 for the first time since mid-October, meanwhile the Yen strengthened against its major peers.

The Euro continued to hover around 1.10 against the Dollar as investors await German GDP which is expected to show a 0.1% contraction for Q3. Unless we see a significant surprise in German growth figures, I don’t expect the Euro to move either way. Markets have already priced in a technical recession in Germany, but forward-looking indicators such as the ZEW survey have been pointing towards an improved outlook for the economy.

 

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