Political Unease Leaves Markets Vulnerable
Mounting unease has the market reeling. Scandal on Pennsylvania Avenue is taking on a life of its own and may embroil President Trump in an ongoing saga of accusations, investigations and possibly criminal proceedings. The story took a noted turn for the worse in early May with the firing of FBI Director James Comey and has only added to questions centered on the Trump administration, possible ties to Russia, Russian interference with the US election process and what Trump knew and when. The market proved resilient through it all but the last straw came this past week when new allegations suggest Trump tried to curb FBI investigation into Michael Flynn.
The market reaction was not positive. Traders around the world went ducking for cover and fleeing to safe have trades. Price action has left many wondering if the Trump trade is over but longer term fundamental trends remain intact so the answer is not likely. Near term corrections in the market have already hit respective support and resistances and begun to bounce which means the Trump slump is a buy-the-dip event for equity markets.
The S&P 500 fell a little more than -2% before it began it’s bounce. The index is now deep within the March trading range and moving up off from short-term support and a long-term up trend line. Stochastic and MACD are both pointing lower following bearish crossovers and indicate support will probably be tested again. A move below 2,350 would break support and may indicate deeper correction but should not be acted upon without confirmation. A bounce from the current price level is trend following.
The dollar fell to new lows versus the euro and yen as the Trump agenda came into question. The question? If Trump is embroiled in scandals will he be able to move his agenda forward? The Dollar Index, expecting a pro-growth environment and tax reform fell below near-term support levels and to 6 month lows. Both stochastic and MACD are bearish and suggesting weakness in the near-term although economic data remains dollar strong. The FOMC meeting is in less than 1 month with a roughly 75% chance of producing an interest rate hike, normally a bullish event, but with expectations on the decline and the ECB expected to do something hawkish it looks like the Dollar Index is likely to remain range bound near current levels for the next few weeks.
Oil markets are one trade not affected by Trump antics but nonetheless volatile. Prices for WTI and Brent have been moving higher on growing expectation a proposed extension to the OPEC/Russia production cap will be extended until next spring. WTI bounced from newly set lows to gain more than 10% in the first half of May on the news although prices did not move straight up. Rising US rig counts, increasing US production and bullish inventory data all helped to keep prices from rising too fast. Now that WTI is breaking above $50 again it is likely to retest January highs near $56 a barrel.