Asia Morning: The DC Impeachment quagmire thickens

Market Analysis /
25 Sep 2019

Nancy Pelosi announced an impeachment inquiry into President Trump as pressure grows over alleged abuses of power saying the Presidents Ukraine phone call is a breach of his constitutional duty. 

In the semantic quagmire known as Capital Hill, proceedings have turned decidedly mucky as the impeachment quagmire quickly thickens suggesting that Washington's (DC) political swamp might not be able self drain this time around. Even more so, as the Democrats may have the numbers on their side suggesting the political storm clouds building over the Foggy Bottom are unlikely to dissipate anytime soon and could open with a deluge at any time leaving DC political landscape scarred and irreparably tarnished. 

According to a tweet from a Politico reporter, 23 out of 44 of the Democrats' most hardened swing members now support the impeachment of US President Trump.

There are 435 seats in the House of Representatives, and a simple majority of 218 is required for impeachment. There are 235 Democrats, 199 Republicans, and 1 Independent in the House. If you assume that all the non-swing Democrats vote for impeachment plus the 23 swing members, that makes for 214 Democrats. That is four Democrats away from getting the 218 votes required.

Stocks tanked whipsawed by fears of US political unrest sideswiping investors at a time when geopolitical angsts and trade war uncertainties mire investor sentiment.

Trump's speech at the United Nations (UN) lacked any semblance of endearment towards China, but instead, he used this opportunity to reignite US-China tensions while renewing his attacks on America's largest technology companies. 


Gold Markets

Gold hit the highs of the day when news of potential impeachment of US President Trump hit the wires. The perceived odds of which, according to "Predict It "rose to 59% this afternoon from 31% two days ago. Stocks and yields are both lower, which is supporting Gold as well.

Gold sprang to life and is now managing to put some substantial distance from the $1500 pivot level for the first time in two weeks.

Keep in mind this move is also getting exacerbated by weak macro surveys in the wake of poor Eurozone PMIs on Monday and the huge miss the US September Consumer Confidence data.

Indeed the move on Gold looks convincing enough to warrant some attention as its unlikely the political storm clouds over Washington are about to dissipate any time soon which might continue to weigh on equity market sentiment, possibly send US yields lower and could undermine confidence in the US dollar. Indeed, these factors could be viewed as the holy grail of bullish Gold price indicators if there was ever such a thing. 

Geopolitical risks are high in Iran and Hong Kong. Neither Brexit nor trade wars are likely to be resolved. The US presidential election next year looms large, and a possible impeachment is rising even more massive. All of which suggests Gold could be in demand 

The Conference Board noted that "the escalation in trade and tariff tensions in late August appears to have rattled consumers. However, this pattern of uncertainty and volatility has persisted for much of the year, and it seems confidence is plateauing. However, the survey results around the labour market don't look encouraging since its these negative labour market perception which eventually feeds into consumer spending behaviour. This revelation in the data is quite significant as the US consumer has been singlehandedly buttressing the US economy this year. 


Oil Markets

Oil prices have been under pressure all week on reports that Saudi Arabia was doing fast work on restoring output after the terrorist attacks. However, price action is getting exacerbated by a plenitude of blustery bearish headwinds.

Futures dropped nearly 1% in New York late Tuesday after the American Petroleum Institute reported an increase in oil stockpiles. That followed a hefty + 2. % drop after President Trump uncompromising United Nations speech where he flayed China during his UN address today, accusing the nation of breaking promises to the international community to "adopt promised reforms." 

While the broader risk markets continued to skirt the terrorist event as a one-off phenomenon, those lingering demand worries are competing for centre stage again after global manufacturing PMI plumbed the depths this week which is returning focus to trade wars economic devastation.

The other issues the market is left dealing with is this soupy impeachment process that might occupy the administration's resources, reducing the odds of more meaningful progress on the trade war front. Mind your things were looking muddy on that front even before the impeachment storey broke after Trump lashed out at China during his UN speech. Not to mention China might sit back and watch the impeachment saga unfold. 

Still, there remains much focus on the restoring of Saudi output, especially given the extremely ambitious timeline offered up by Aramco executives. 


Currency Markets

Extremely murky markets for the dollar to navigate as political storm clouds build over Washington threating to undermine investor confidence in the US dollar.

RBA and the Australian Dollar 

RBA Governor Lowe says the economy has reached a gentle turning point and that further monetary easing may well be required. However, the RBA primary narrative confirms the growing sense that central banks are less keen to cut at these low levels than even a few months ago. The supports our views central banks will maintain a jogtrot, not a sprint to zero. So, the RBA rate cut probabilities have predictably fallen from 84% to around 65% today. Also, the RBA has a proclivity to move rates at SoMP meetings (FEB, MAY, AUG, NOV) so while easing bias is still in the cards it could be pushed out to November which might give the Aussie dollar a longer reprieve.

RBNZ and the New Zealand Dollar 

However, one central bank that remains in the spring to zero is the RBNZ, but more on that after the rate decision, where everyone is likely lined up to sell on any NZD uptick.

The New Zealand August trade deficit NZD1,565.0 million vs NZD1,400.0 million n consensus adding more downside momentum to a defenceless Kiwi dollar .

Mexican Peso 

MXN funding exploded higher, with overnight swaps cost implied trading above 11%. It appears everyone was caught long USD balances with a no-arbitrage left to take out it left traders scrambling to cover short MXN through the near dates. So, if you are long Mexican Peso, it comes and an unexpectedly excellent opportunity to pick up some yields.


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