Trump trade takes a turn for the worst as UK labour market surprises

The big theme this morning is the growing Russia/ Classified information/ FBI scandal that is engulfing President Trump and seems to be growing, octopus like, as we progress through this week. This is beginning to look a lot like Nixon’s Watergate scandal, in the sense that the Trump administration is fighting new fires everyday. The big question now is will one fire put an end to his Presidency altogether?

Too early to speculate on impeachment?

It’s too early to speculate what will happen to Trump at this stage, however, even Republicans have been talking about subpoenas, and there is certainly the will to get to the bottom of this. At best, Trump’s misdemeanours could delay economic policy from coming into action, which could weigh on stocks and the dollar. At worst this could lead to impeachment, which would be risk negative in our view and could cause a spike in volatility, which has fallen to rock bottom levels in recent days.

The end of the road for rock bottom volatility

The Vix has already jumped above 11 this morning, up from 10.40 earlier this week, this jump is reflected in substantially weaker US futures prices, the Dow Jones mini is expected to open 88 points lower at the US open, while the S&P 500 is expected to drop 12 points. The Nasdaq is also expected to open lower, suggesting that even US corporate titans like the Fangs (Facebook, Apple, Google, Netflix and Amazon) aren’t immune to Trump’s political woes.

What‘s next for Trumpgate?

At this stage, although risk is selling off, we aren’t in panic mode just yet. US Treasuries are higher today and yields have been falling, however at 2.29%, 10-year yields are above the low reached last month before “Trumpgate” saw the light of day. Obviously, if we do get more revelations in the coming days then the drip feed effect of bad political news could continue to erode confidence in the markets and trigger a larger sell off, but we are not there yet.

UK labour market defies Brexit fears, again …

There was some good news for the UK labour market, jobs created in the first three months’ of the year were 6 times higher than expected at 122k, expectations were for a mere 21k. The unemployment rate shrunk further to 4.6%, and wages rose a touch to 2.4% from 2.3%.  There was another record in the number of people employed, suggesting that the “Brexit” effect is not biting the labour market just yet.

The FTSE 100 defies global risk sell off

The pound jumped on the back of the data, and GBP/USD remains at 1.2940, having recovered part of yesterday’s sell off. For GBP/USD 1.30 still looks like a stretch too far right now, as the dollar stages a mini recovery on Wednesday after a sharp sell off this week. The FTSE 100 has also bucked the sell off in European stocks and is one of the only European indices to bounce around in positive territory today, led by materials and consumer staples. Interestingly, volume in the FTSE 100 has jumped today, compared to other European indices, potentially as the oil price continues to push higher, boosting the materials sector.

Overall, all eyes will be on Washington today. If Trump’s crisis looks contained then we could see stocks recover, however any new revelations could trigger a sharp spike higher in volatility and a deeper sell off for risky assets. This is no ordinary Presidency, and it could be the biggest threat to global risk prices this year. Right now, a record low in the Vix index looks like yesterday’s news, and we could see volatility start to creep higher in the coming days and weeks.