Donald Trump’s trip to the Middle East seems to have taken the focus off his recent domestic woes but the problems will not just disappear. Financial markets have reacted and this week will be important as to whether the fears are quickly brushed aside or whether they prevail and develop into something more concerning. We look at the outlook for forex, equities and commodities and the key factors set to drive markets in the coming days. The Fed minutes and growth numbers will be in focus.
With chatter from congressional Democrats, commentators and social media all abuzz with talk of Donald Trump’s potential impeachment, market sentiment took a hit last week. Equity markets have been especially calm in recent weeks, but with volatility reaching massively complacent levels below 10 on the VIX, the fear gauge suddenly spiked higher with a knee jerk sell-off being seen. A plug has been wedged into the leaking dam with the appointment of former FBI Director Robert Mueller as special counsel over investigation into Trump but could this just be pressing the pause button on a sizeable market correction? The chances of Trump actually being impeached are still fairly thin, with the Republicans holding majorities in both houses, however it makes his job increasingly difficult. Achieving his fiscal expansion plans, in addition to cutting regulation look increasingly difficult with the growing opposition in Congress. We saw further unwinding of any ruminants of the so-called “Trump Trade” (or reflation trade) this week, with the 2s/10s Treasury yield spread back at October levels and the Trade Weighted dollar continuing to unwind. The one asset class notable in its lack of serious retracement is equities. Perhaps faith in Trump is more solid, however, with the Fed tightening and reflation seriously questioned, can equity markets really continue to climb to all time highs? Trump may need to pull something out of the bag, soon.