Markets Wake Up to US Political Risk

Market participants were jittery overnight as calls by US Democrats to impeach president Trump triggered a sell-off. The 1.8% fall in the S&P500 was the biggest since September last year but it comes from a level close to the all-time high. Market volatility has been very low over the past weeks so from a technical basis a breakout was likely. Realistically, impeachment of Trump is still the less likely outcome as it would require a two thirds majority in the senate which would require the support of a large number of Republicans. The consensus view suggests that the market falls are related to uncertainty surrounding whether Trump’s tax cuts and deregulation reforms will be delayed although this is based more on fear than on evidence at the moment.

Risk-off assets were bid overnight with gold climbing approximately $25 per ounce. This move appears to decisively break the downtrend in gold that started in late April. Bond prices also rose (yields fell) as investors flocked to safe-haven assets. The US 10-year yield is now down to 2.22%, significantly off the high of 2.6% reached in March of this year.  

The US dollar index fell overnight providing further support for precious metal and commodity prices. Oil prices have been struggling to find direction recently as the market can’t decide whether the OPEC production cuts are working or not. With the announcement by Saudi Arabia and Russia that they intend to extend the cuts by a further nine months and a drawdown of US inventories this week, WTI oil rose to $49.10.

Today the Australian Bureau of Statistics releases employment data for the month of April. March’s number was a significant beat of expectations with a headline increase in employment of 60,900 so forecasts for April are fairly low with just 4,500 net jobs expected to be created. The unemployment rate is forecast to remain steady at 5.9%. With retail sales data continuing to come in very weak, the RBA will be looking to the employment data for signs of economic strength and this data will factor heavily into future interest rate policy.

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Data releases:

·         Australian Employment Change (MoM April) 11:30am AEDT

·         Australian Unemployment Rate 11:30am AEDT

·         U.K. Retail Sales (MoM April) 6:30pm AEDT

·         U.S. Philly Fed Manufacturing Index 10:30pm AEDT

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This article was written by William O'Loughlin - Local Investment Analyst, Rivkin Securities Pty Ltd. Enquiries can be made via william.oloughlin@rivkin.com.au or by phoning +612 8302 3633.

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