Futures Slide On Trump Legal Fallout As S&P Bull Run Hits Record

It's official: today the S&P 500's bull run turns 3,453 days old, which makes it the longest such streak in history, surpassing the prior record of 3,452 days between October 1990 and March 2000, which culminated with the bursting of the dot com bubble.

The anniversary was certainly not without fireworks, and followed what some have said was the worst day in Donald Trump's presidency which saw a guilty plea by Trump’s former attorney, Michael Cohen to illegal campaign-finance charges as well as a conviction of Trump's former campaign manager, Paul Manafort to 8 different counts of financial wrongdoing, news of which sent U.S. equity futures and global markets modestly lower after the S&P hit a new intraday all time high on Tuesday, and initially sparked mild demand for haven assets, though many moves pared and there was little sign of a pronounced impact in markets beyond America.

Trump’s latest legal troubles added to a complex picture across global markets. U.S. stocks are trading near record highs while 10-year Treasury yields remain well below 3%, as investors grappled with the evolving dynamics of the American tax cut, an escalating trade war and turmoil in emerging markets. Fed minutes released on Wednesday may give more insight into monetary policy after Trump decried interest-rate increases. Later in the week a gathering of central bankers at the Jackson Hole retreat in Wyoming may offer further clues on rates.

"This market will focus on a couple of factors: does this change the math for the mid-term elections, does this cause polls to shift in a material way?" said Morgan Stanley's Andrew Sheets, in a Bloomberg TV interview. "The market’s going to be watching very closely Friday in Jackson Hole. Does the Fed continue to sound like they are going to continue to tighten policy?

Indeed, as shown below, while US index futures traded mildly in the red, they bounced from the lowest levels in Asian trading as stocks in Europe and Asia were mixed as traders tried to gauge the fallout from the Trump legal drama.

While the immediate market reaction was not large, the developments represented further uncertainty over Trump’s leadership for investors to navigate. "Trump has weathered quite a few allegations before this, where many people were quick with the `I’ word (impeachment), so we need to see whether this could open a new chapter or if it will calm down again and markets move on," said Commerzbank rates strategist Christoph Rieger.

Besides the fallout from the Trump political scandal, investors were also looking to Wednesday’s release of FOMC minutes from the August meeting and a speech by Fed Chairman Jerome Powell on Friday for clues on future rate hikes.

"This could present the opportunity for the Fed to discuss longer-term issues, potentially including discussion around the balance sheet and the implementation of monetary policy," said Jim Reid, strategist at Deutsche Bank.

Treasuries held steady, and the dollar fluctuated, initially spiking with the European open, then sliding to session lows while the euro advanced after Eurozone wages rose 2.2% in 2Q vs 1.7% in Q1, the highest since 2012.

Stocks around the global did not appear too concerned with the Trump turmoil, with the MSCI all-country world index unchanged by the uncertainty, rising 0.1% after the S&P 500 hit a record intraday high of 2,873.23, topping the 2,872.87 set on Jan. 26, before sliding on the Cohen news.

European shares were muted as the market awaited U.S.-China trade talks, set to resume under the cloud of Trump’s prediction that they would make no real progress.

“The key point is these are mid-level officials,” said Donough Kilmurray, managing director and head of the Investment Strategy Group for EMEA at Goldman Sachs. “It’s good they are talking, but at that level of engagement we doubt anything significant will come out of it.”

Stocks were mixed in Asia, with the record high in the S&P followed by another soggy session for Chinese equities, again, which saw the Shanghai Composite drop 0.5%, after the country's central bank said it would not resort to strong stimulus to support growth, and refrained from liquidity operations and with both US and China said to be pessimistic heading into trade discussions starting today.

Emerging-market stocks climbed 0.3%, leaving 13-month lows further behind as the dollar’s losses helped ease pressure on EM assets, which entered bear territory last week. "If you look at the transmission from economic growth to earnings growth to shareholder returns, it’s strongest in the U.S., it’s ok in Europe and pretty weak in EM," said Donough Kilmurray, managing director and head of the Investment Strategy Group for EMEA at Goldman Sachs. "The question we’re getting asked now by investors is whether what we see in EM is a sign that something bigger is going wrong in the global economy. Our answer to that is no, these issues have been local issues," he said.

Stocks were also little changed in Europe in another low volume summer trading session, although Germany’s DAX Index erased gains after tiremaker Continental AG cut its guidance (sees 2018 revenue now €46BN from €47BN, EBIT margin of 9%, from 10%, free cash flow of €1.6BN, was €2BN), sending its stock plunging over 14%, the most since June 2016. The news sent other European automakers sliding: France’s Faurecia (-4.7%), Michelin (-3.9%) and Valeo (-3.4%) were among the biggest decliners.

European markets were muted as they awaited the outcome of the latest round of U.S.-China trade talks, set to resume under the cloud of Trump’s prediction that they would make no real progress. "The key point is these are mid-level officials," said Goldman's Kilmurray: "It’s good they are talking, but at that level of engagement we doubt anything significant will come out of it."

In FX, the U.S. dollar initially inched up after heavy selling following Trump’s criticism of the Federal Reserve’s rate rises in a Reuters interview. However, shortly after the European aopen, the USD eventually weakened against most of G-10, while the AUD underperformed as PM Turnbull was under pressure from own party. The threat of more U.S. sanctions on Russia hit the rouble and backed the market's view that Russian sanctions would increase in severity regardless of the Trump administration.

The Mexican peso jumped on Tuesday night after the US was said to announce ‘handshake’ NAFTA agreement related to Mexico on Thursday, according to reports in Politico. However, there were later comments from the Canadian  government that it has no notification of a NAFTA agreement being imminent, while Mexico was also said to have denied the existence of a NAFTA handshake deal.

As SocGen's Kit Juckes writes, the top currency this week is ZAR, followed by GBP. The bottom two are BRL and TRY, though a 1% USD/TRY rise doesn't really count as a move any more. The dollar is the week's G10FX loser, correcting some of its recent strengths.

US Treasury yields dropped as investors sought safety in Treasuries: 10-year yields were trading at 2.824%, 2bps below Tuesday’s close of 2.844 percent. In Europe, Bund futures edged lower as the curve flattens;

In commodity markets, following a larger than expected decline in API crude inventories last night (-5.170M vs. Exp.-1.500M) , WTI (+1.3%) and Brent (+1.1%) trade on the front foot while concerns continue to linger over the potential repercussions of US oil related sanctions against Iran due to come into effect in November. Elsewhere, spot gold (+0.1%) is relatively uneventful, while copper retreated ahead of US-China trade talks taking place today and tomorrow.

Home sales and mortgage applications figures are due. Scheduled earnings include RBC, Lowe’s, Target and Analog Devices.

Market Snapshot

  • S&P 500 futures down 0.3% to 2,854.00
  • STOXX Europe 600 down 0.04% to 383.99
  • MXAP up 0.4% to 164.03
  • MXAPJ up 0.2% to 531.34
  • Nikkei up 0.6% to 22,362.55
  • Topix up 0.8% to 1,698.37
  • Hang Seng Index up 0.6% to 27,927.58
  • Shanghai Composite down 0.7% to 2,714.61
  • Sensex up 0.02% to 38,285.75
  • Australia S&P/ASX 200 down 0.3% to 6,265.98
  • Kospi up 0.1% to 2,273.33
  • German 10Y yield fell 0.7 bps to 0.324%
  • Euro down 0.1% to $1.1555
  • Brent Futures up 0.9% to $73.30/bbl
  • Italian 10Y yield fell 2.6 bps to 2.717%
  • Spanish 10Y yield fell 1.4 bps to 1.354%
  • Brent Futures up 0.9% to $73.30/bbl
  • Gold spot down 0.2% to $1,193.66
  • U.S. Dollar Index up 0.1% to 95.36

Top Overnight News from Bloomberg

  • Some Wall Street observers say the possibility that Trump himself will launch a sustained campaign to weaken the dollar as a way to reduce the U.S. trade deficit can’t be dismissed
  • Trump could forgive Paul Manafort’s crimes and grant a pardon that allows him to escape all punishment. Or Trump could make a less politically risky move, like waiting and eventually commuting Manafort’s sentence, which would free him from prison but leave his conviction intact
  • Progress has been made during five weeks of discussions between the U.S. and Mexico on issues including rules for cars, but there’s no broader agreement on reshaping Nafta, two U.S. administration officials said Tuesday night
  • This month’s trading volume in Italian bond futures has already exceeded that of any August since the futures market opened in 2009 amid heightened volatility in the country’s debt assets ahead of the new government’s much-anticipated budget next month
  • On Friday, Norway’s government will get a report from an expert committee mapping out the case for divesting the fund’s more than $40 billion in petroleum holdings. The administration will then make a recommendation to parliament later this year, based on the expert committee’s report
  • A Barclays Plc foreign exchange trader must face criminal charges he manipulated currency option markets, a U.S. judge ruled
  • Russia added more gold reserves in July than any other month this year as it continues to buy up the metal in the face of U.S. sanctions
  • Euro- area wages are on the rise, giving another boost to the European Central Bank’s view that it’s the right time to change policy tack. Collective wages rose 2.2 percent in the second quarter, the most since 2012, according to updated data

European equities are trading mostly higher (Eurostoxx 50 +0.3%) with underperformance in Switzerland’s SMI (-0.2%), weighed on by heavyweights Nestle (-0.3%) and Roche (-0.5%). The consumer discretionary sector underperforms amid Germanlisted Continental downgrading guidance. Company shares fell 13.8% following the announcement, dragging the DAX 30 and the likes of Michelin (-5.3%), Pirelli (-3.8%) and Valeo (-5.8%) in sympathy.

Top European News

  • Avast Rises After First Post-IPO Earnings Reassure Investors
  • Continental Plunges After Cutting 2018 Sales Guidance

Asian equity markets traded mixed with the region indecisive due to the events stateside where the elated mood from the fresh record highs in the S&P 500 eventually deteriorated on political concerns due to legal troubles for President Trump’s former inner circle. This was after Trump’s former campaign manager Manafort was found guilty on 8 counts including tax fraud, while former Trump lawyer Cohen also pleaded guilty at a court hearing and stated he violated campaign financing laws at the direction of a 'candidate' which his lawyer further elaborated on and alleged that Trump directed Cohen to commit a crime. ASX 200 (-0.3%) declined from the open with the index weighed by financials although telecoms outperformed on M&A news with TPG in merger discussions with Vodafone Hutchison Australia, while Nikkei 225 (+0.6%) was also initially pressured but then recovered as auto names cheered recent reports that US auto tariffs could be delayed. Elsewhere, Hang Seng (+0.6%) and Shanghai Comp. (- 0.7%) were mixed in which the mainland underperformed after the PBoC refrained from liquidity operations and with both US and China said to be pessimistic heading into trade discussions. Finally, 10yr JGBs saw initial gains as prices tracked the overnight rebound in T-notes and with the BoJ also in the market for JGBs in the belly to super-long end, but then gradually pared throughout the session.

Top Asian News

  • Crypto Trading Firm Rents World’s Priciest Offices, Paper Says
  • Japanese Stocks Rise as Nafta Development Spurs Trade Optimism
  • Santos to Buy Quadrant Energy for $2.15B
  • Ping An, Betting Big on Tech, Says Investors Aren’t Won Over Yet

In FX, the DXY held above the 95.000 level as Dollar/majors consolidate post-Trump. The index has pulled up just shy of 95.400 from almost 95.000 when the fall-out from US President’s tirade vs Fed tightening and Usd strength (partly due to FOMC hikes, but also Chinese/EU currency manipulation) was more pronounced. In EM, domestic and geopolitical factors still plaguing several nations in the region and currencies, like the Try, Zar, Rub, Brl. Indeed, the Rand only derived fleeting support from SA inflation data that topped estimates on the headline front, albeit with a more benign core. FX pairs as much as 0.7% firmer. AUD - The clear G10 underperformer as political uncertainty combines with RBA stability on the policy front and the aforementioned general Greenback rebound. Aud/Usd is back below 0.7350 after topping out around 0.7380 on Tuesday, and eying decent option expiry interest at the 0.7375 strike (circa 800 mn) on Thursday. Back to the RBA, Deputy Governor Labelle sees downward pressure on inflation subsiding eventually, but would like to be more confident that CPI will be sustained at target, adding that current accommodative policy will support this outcome, while returning to politics latest reports suggest that Liberal Party members are calling for a leadership meeting later tonight. CHF/EUR/CAD - Bucking the overall trend and holding gains vs the Dollar as the Franc remains at the upper end of 0.9855-25 parameters, the single currency hovers just under 1.1600 and firmly above its 21 DMA (1.1547) after finding a base just ahead of 1.1500, and the Loonie maintains NAFTA/oil price momentum within a 1.3045-15 range, even though Canada denies knowledge of any official notification that a deal is imminent (in response to response about a handshake agreement between the US and Mexico tomorrow).

In commodities, following a larger than expected decline in API crude inventories last night (-5.170M vs. Exp.-1.500M) , WTI (+1.3%) and Brent (+1.1%) trade on the front foot while concerns continue to linger over the potential repercussions of US oil related sanctions against Iran due to come into effect in November. US National Security Advisor Bolton, in an press conference, stated the US will do “other things” beyond economic sanctions to pressure Iran. Meanwhile, the Kuwaiti Oil Minister said he expects the oil market to remain stable until year-end, adding he expects oil exporters to reach an agreement on the mechanism to monitor oil supply by the end of the year. Elsewhere, spot gold (+0.1%) is relatively uneventful, while copper retreated ahead of US-China trade talks taking place today and tomorrow.

Looking at the day ahead, there is little of note in Europe. In the US, we get July existing home sales data for the US along with minutes from the latest FOMC monetary policy meeting. Away from data, Lowe's and Target will report their earnings.

US Event Calendar

  • 7am: MBA Mortgage Applications, prior -2.0%
  • 10am: Existing Home Sales, est. 5.4m, prior 5.38m
  • 2pm: FOMC Meeting Minutes

DB's Jim Reid concludes the overnight wrap

Markets were feasting again yesterday and it feels somewhat apt that with the S&P 500 (+0.21%) last night hitting all-time intra-day highs again, today marks the longest ever run without a ‘bear market’ (defined as a 20% drop). The record will stretch back an amazing 3,453 days assuming we don’t see a dramatic oncein-a-lifetime crash today. The all-time intraday high is the first since January 26 earlier this year, though the market did pare gains through the afternoon to close 0.19% off its peak. The DOW (+0.25%) and NASDAQ (+0.49%) were also higher yesterday and the Russell 2000 (+1.14%) closed at a new all-time high.

However if you wanted to maximise your local currency returns yesterday you would have been best served in the Caracas stock exchange in Venezuela where the index climbed 53.69% after the long (but traumatic) weekend. However as we discussed yesterday, given that the Bolivar was devalued by 95% over the weekend, such a return means you would have lost around 40% in dollar terms. As an interesting aside the local stock market is up 277% in August and 26,590% YTD. Shame about the -97% and -99.9998% fall in the currency over the same period. Nevertheless it’s a reminder that if you do see high inflation/hyperinflation and huge FX devaluations, the usual story through history is that bonds and cash get wiped out. Although real assets are likely to underperform initially in inflation adjusted terms, they can offer you some protection if you’re relatively diversified and not too exposed to individual investments that may get wiped out along the way with the economic destruction.

Anyway from the most volatile market in the financial world currently to discussing how much less volatile DM markets are looking now relative to this time last week. Volatility is all of all sudden back to testing the lower end of the range and the direction of travel is certainly a lot more positive for risk. Indeed the VIX touched an intraday low of 12.09 yesterday (intraday highs of 16.86 last week) which is the lowest in seven sessions while currency vol (based on the CVIX) is at the lowest in eight sessions. The European V2X index touched an eight-session low of 13.38 yesterday as well.

Staying with Europe, markets were firmer yesterday amid positive news that low-level trade talks between the US and China are proceeding positively. The Euro Stoxx index closed 0.24% higher, led by financials and energy stocks. Credit also tightened with Main down -2.7bp with Crossover -11.6bp. Meanwhile Atlantia’s 3y CDS tightened -25.7bp to 263.3bp yesterday after widening +184bp since the recent bridge tragedy in Italy.

Elsewhere the softer USD – partly a function of Trump’s comments on Monday about the Fed and foreign currency manipulation – helped EM currencies to broad based gains including the likes of the Polish Zloty (+1.14%), South African Rand (+0.92%) and Turkish Lira (+0.09%). The Brazilian Real underperformed (-1.97%) to its weakest level in 2.5 years after Bloomberg reported that polling showed that electoral support for the Workers Party of ex-President Lula da Silva increased by 5 percentage points to a field-leading 37.3%. Oil (+0.64%) appeared to act as bit of a tailwind for markets while the relative risk on tone was also evident across rates with Treasury (+1.1bps) and Bund (+2.8bps) yields edging higher. At the other end of the spectrum 10yr BTPs (-2.7 bps) fell to 2.98%, closing below 3.00% for the first time since August 10, and a 23 bps rally from the intraday highs of last week.

After the bell in the US, Bloomberg reported that President Trump’s former lawyer - Michael Cohen admitted to the Federal Court that he committed campaign finance violations ahead of the 2016 election. Elsewhere the president’s former campaign chairman Paul Manafort was convicted on eight counts of tax and bank fraud charges. In Asia this morning markets are trading mixed with the Nikkei (+0.56%), Kospi (+0.30%) and Hang Seng (+0.51%) all up while the Shanghai Comp. (-0.51%) and futures on the S&P (-0.2%) are down as we type. Meanwhile treasuries pared back gains to trade broadly flat while the Yen is slightly down. Elsewhere the CNY is also relatively stable which follows the theme of the last 24 hours or so after the PBoC announced that China would not use the CNY as a tool in the trade war, and instead keep the rate “basically stable at a reasonable equilibrium level”. Back in the US, the Politico cited unnamed sources that noted the US plans to announce a “handshake” deal with Mexico on Thursday after reaching a breakthrough in the NAFTA talks.

Moving on now and while yesterday may have been fairly quiet for headlines, the good news for those of us that have to write about something for a living is that we’re now approaching the business end of the week for some of the more potentially market sensitive events. Today we should get news about the US placing new sanctions on Russia related to the UK nerve agent attack. In a report published last week, DB’s Peter Sidorov noted that the first round due today should only have a muted impact but the potential prospect of a second round of sanctions in three months’ time, which could range from mild to severe, brings greater uncertainty through to the US mid-term elections on 6 November. What should be worth watching though is the Russia response which could come as soon as today. As well as this the US and China will also attempt to revive trade talks today, although as we know President Trump has already said that he has “low expectations” for the talks this week and appears to be in no rush to resolve the dispute.

Also on the cards today are the latest FOMC minutes from the Fed meeting earlier this month. Given that it was a meeting with almost nothing material to come from it, the minutes are unlikely to throw up much of interest, although  our US economists noted that this could present the opportunity for the Fed to discuss longer-term issues, potentially including discussion around the balance sheet and the implementation of monetary policy (e.g. floor v corridor system), especially given the speech from NY Fed Markets Group chief Simon Potter immediately following the FOMC meeting earlier this month. We may also get more info on how policymakers are thinking about the counter-cyclical capital buffer or the monetary policy framework (e.g. price level targeting).

Ahead of that, the Fed’s Kaplan published an essay yesterday which broadly reiterated the Fed’s progressive path of getting back to neutral rates. In his view, rates can increase 3 to 4 times before it hits the neutral level, but from  there, he is “inclined to step back and assess the outlook of the economy….before deciding further actions” while adding that he does not “discount the significance of an inverted yield curve”. Notably Mr Kaplan next votes on monetary policy in 2020.

As for yesterday, the highlight of another incredibly quiet day for data was the July public finances stats in the UK. The July budget surplus came in at a better than expected £2bn (vs. £1.1bn expected). That meant it was also the biggest July surplus since 2000, and with the overall borrowing numbers slightly below the OBR estimates, there might be a bit more fiscal wiggle room for the UK Chancellor than previously thought. Speaking of surpluses, the latest IFO institute forecasts which came out on Monday in Germany are worth flagging. The institute expects Germany’s current account surplus to remain the largest in the world this year – the third year running - and a near $100bn bigger than the next largest, Japan. This certainly got people talking in markets early yesterday and could yet become a political hot potato for Germany.

Coming back to the UK, Brexit was also back in the spotlight yesterday with technical discussions between the UK and EU resuming. At a press conference in the late afternoon, the EU’s Barnier and UK’s Raab sounded relatively positive. Barnier said we must “de-dramatize the issue” of Northern Ireland, potentially signaling a pragmatic resolution to one of the thorniest outstanding issues. Further, he also added that the two sides will negotiate on Brexit “continuously” from now on and that “we can find common ground”, although it does require Britain to “respect the single market”. Sterling rallied 0.82% versus the dollar, though closed flat versus the Euro.

Looking at the day ahead, there is little of note in Europe. In the US, we get July existing home sales data for the US along with minutes from the latest FOMC monetary policy meeting. Away from data, Lowe's and Target will report their earnings.