While the European markets moved to the rhythm of the French presidential elections over the first part of the year, the polit-ical news about the US and Brazilian presidents has had major repercussions on the markets this week.
US newspapers revealed that FBI Director James Comey, dismissed by President Donald Trump on 9 May, would have written in a memo that Trump had asked him to drop his inquiry into the ties between Michael Flynn, who was briefly National Security Advisor, and Russia. Deputy Attorney General Rod Rosenstein has announced the appointment of a special prosecutor, the highly-respected Robert Mueller, who was FBI Director for 12 years, to supervise the inquiry into ties between Trump's campaign team and Russia. This extremely rare procedure is a very hard blow to the US president and has turned up the volume on talk of a possible impeachment.
This has caused the primary safe havens to appreciate dramatically. The yen, Swiss franc, and gold have all appreciated. The equity markets have lost ground, and the US 10Y gave up 9 bp over the week, going from 2.33 to 2.24%.
What about Trumponomics? One of Donald Trump's ambitions was to bring economic growth back up above 3% over the long term, via an ambitious infrastructure investment plan and broad-based tax reform. The first point met with resistance from a large number of Congressional Republicans, who hold to a certain fiscal orthodoxy; and the second was already becoming complicated before the appoint-ment of a special prosecutor, and will probably move even slower after the latest developments. The protectionist platform of the presidential campaign has been greatly diluted. However, we should note that many deregulation measures have been adopted. Ultimately, many hopes of rapid "reflation" have been disap-pointed: the dollar (measured by the Fed's basket of currencies) and inflation expectations are back where they were during the US presidential election.
Another president has been under the spotlight this week, the Brazil president Michel Temer. A Brazilian newspaper article reported that tapes involving the president Michel Temer were presented to the prosecutors as part of plea bargain agreement of JBS, the largest meat processing company in the world. In the tapes, president Michel Temer is alleged to have talked about cash payments to the former president of the Chamber of Deputies of Brazil, Eduardo Cunha, who is currently in jail. The money would be a way to keep Mr Cunha “silent” and not implicate the government in the scandals of corruption.
The Supreme Court has authorized a corruption probe into Michel Temer: many asked him to resign and some evoked a possible impeachment procedure” (keep in mind that Michel Temer became president in August 2016 after Dilma Rousseff had been impeached and the next presidential elections are expected to be held in October 2018). This opens a new era of political uncertainty in Brazil. The reaction of financial markets has been violent as the Bovespa index fell 8.8% (Thursday) and as the Brazilian real (BRL) fell 7.5% vs the USD. Volatility should remain high for some time.
While the election of Emmanuel Macron had contributed to dissipate somehow the political risk in Europe, the news this week show that the political developments will continue to be one of the main determinants of financial markets in the coming months.
In 2013, the fixed-income markets were kept in suspense by the Fed and by the next move it planned to make in the asset-buying programme it had set up in September 2012, the QE3 that meant $85 bn in assets purchased each month ($45 bn in Treasury bonds and $40 bn in MBS). After catching the markets off guard in September, the Fed decided, at the 18 December FOMC, to taper its asset buying to $75 bn per month ($40 bn in Treasury bonds and $35 bn in MBS) starting in January 2014. At the press conference following this meeting, Ben Bernanke said he was expecting "similar moderate" cuts in asset purchasing "going forward through 2014.”
Strategy and Economic Research at Amundi
The yuan’s depreciation vs. the US dollar over the past 10 days may seem to be of a limited extent (1.3% between February 17 and February 28) but it was nonetheless its sharpest drop since the great devaluation of 1994! Yet, forecasters were agreing that the Chinese currency will continue to gain ground slowly but surely in 2014, as it had done since May 2010. It is clearly this consensus that is raising a problem with the Chinese authorities as it has exacerbated capital inflows betting on an appreciation of the yuan (with the carry trade also exploiting high rates in China, 5.5% for the 3 month SHIBOR vs almost zero in the United States).
Strategy and Economic Research at Amundi