LCG: Stocks dive on rising political risks amid Trump’s official impeachment inquiry

25 september 2019

Global equities sold off as the US House opened a formal impeachment inquiry for President Donald Trump, amid revelations that he may have forced Ukrainian President Volodymyr Zelenskiy to investigate Jo Biden, who is seen as the favorite Democratic candidate for the upcoming 2020 presidential election in the US.

The political turmoil around Donald Trump’s official impeachment inquiry, combined to rising fears of a no agreement with China in October trade talks turned the risk sentiment off across the global markets.

Though came some good news from China, who said it is preparing to buy more pork from the US amid pork prices went through the roof after African swine fever decimated a third of China’s pig population this year. It is unsure whether China’s increased pork purchases from the US farms would suffice to improve the outcome of the upcoming US-China meeting, but it sure won’t cause any harm.

Back to the equity markets, the S&P500 (-0.84%) fell the most in a month. The Dow Jones closed 0.53% lower, as Nasdaq dived 1.56%. US futures were mixed in Asia.

Equities in Japan traded in the red, as the Japanese yen rallied to 107.00 against the US dollar on a safe-haven rush.

Hang Seng (-0.95%) and Shanghai’s Composite (-0.57%) fell, as well. News that China’s startup boom may be dwindling due to drying venture capital pools amid heightened trade tensions between the US and China may have further demoralized investors, on top of rising anxiety that Chinese Communist Party’s 70th anniversary celebrations on October 1st may tear Hong Kong and China further apart and fuel violence over the coming weekend.

The US dollar recovered a part of Tuesday’s losses in Asia, but its gains remained limited. The New Zealand dollar was the only gainer against the greenback among the G10 currencies after the Reserve Bank of New Zealand (RBNZ) kept its official cash rate unchanged at 1% as expected.

Developed countries’ sovereign yields fell, as risk-averse investors moved capital to less risky government bonds. The US 10-year yield crashed below 1.63%, as gold rallied to $1535 an ounce.

Oil prices tumbled on the back of a dampened market mood amid Trump’s impeachment inquiry and news that Saudi made a better-than-expected progress in restoring output in the world’s biggest oil production plants. WTI crude is preparing to challenge the 200-day moving average, at $56.40 a barrel. A further fall toward the $55 mark is now on the cards.

The FTSE 100 closed below the 7300p mark on Tuesday. Energy and mining stocks were the worst performing industries in London and should follow up on Asian session losses as investors in London walk in at the Wednesday open.

The FTSE is expected to open 17 points lower at 7274p.

The pound sterling, on the other hand, advanced to the 1.25 mark against the US dollar after the Supreme Court decided that Boris Johnson’s suspension of Parliament was unlawful and allowed British MPs to reconvene immediately. The Parliament will resume today. But we are forced to note that the court decision didn’t inspire the pound-bulls that much. Gains in sterling remained timid, as the quick fix to prevent a no-deal Brexit by the end of October or bringing Parliament back wouldn’t solve the core Brexit problem.

Although there has been no progress in Brexit talks this week as Johnson met key European names on the occasion of UN General Assembly, the political frame in the UK is a touch better than what it was following Boris Johnson’s election as Prime Minister. Parliament is back and Johnson has his hands tied with a legal ban to crash the country out of the European Union if there is not a satisfactory deal by October 31st. Such deal is unlikely.

Then, what happens? A snap general election appears to be the most plausible scenario to overcome the deadlock among British policymakers. Highly cautious, Labour Party leader Jeremy Corbyn wants the election to happen just after the October 31st deadline, to avert the risk of a potential no-deal exit, if Johnson happened to find a loophole to get around the legislation that forbids him to seal a no-deal Brexit with the EU. ‘We can’t trust Johnson not to crash out with no deal’, Corbyn said.

Tuesday’s price action gave a rapid insight on the upside potential in sterling. It appears that the thick layer of offers above the 1.25 mark against the US dollar will stand strong against a further positive attempt, if there is no concrete progress in Brexit talks, or if the US dollar doesn’t take another dive due to the overheating political scene across the Pacific amid Trump’s impeachment talks.

Opening calls

FTSE to open 17 points lower at 7274

DAX to open 60 points lower at 12282