Opening Bell: Risk-On Returns; VIX Climbs, SPX Plunges; Gold Rises

by Pinchas Cohen

In what can only be considered a supreme irony, the escalating and increasingly chaotic White House drama that's taking on Shakespearean proportions continues to be the focus of global attention, with U.S. President Donald Trump himself now driving the negative headlines and the leaks he's spent months accusing others of circulating. Both on the campaign trail and during his oval office tenure, Trump has repeatedly vilified opposition candidates, the press and even his own staff for leaking classified information; it appears now that the President himself stands accused of leaking the most highly classified intelligence to a visiting delegation of Russian diplomats. The White House denies this.

But coming directly on the heels of the President's firing of FBI Director James Comey and yesterday's revelations that he asked Comey to arrest members of the press for this reason, as well as to drop the investigation into former national security advisor Michael Flynn's alleged ties to Russia, Trump now faces growing accusations of obstruction of justice.

Whether Trump truly did these things and what the legal ramifications might be, as far as markets are concerned, is beside the point. The real question is how will all this affect the President’s, as well as the Republican party's ability to execute their agenda? What specifically concerns investors: if in four months, with relatively fewer scandals, Trump failed to deliver on his pro-growth promises, what happens now that the President could be bogged down by legal battles?

This morning, all equity and future markets, in every region, are red as investors smell blood. After equity investors shrugged off the shock of the Brexit referendum, followed by the surprise US election result and then the Italian referendum, it seems political risk has finally taken a toll on markets.

The VIX climbed sharply, while the S&P 500 plunged beginning on Monday, when the initial reports of Trump’s actions were first released.

The Dollar Index resumed its decline. There is an argument to be made regarding how much of the decline is Trump's fault and how much can be blamed on Friday's disappointing inflation data, when the dollar already had a second day decline of 0.38%. Whatever the cause, the greenback has fallen for a fifth day.

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Crude extended its losses for a second day, after the American Petroleum Institute (API) reported the addition of 882,000 barrels in US crude supplies for the week ended May 12. Also fueling to the commodity's fall were new concerns of production cut compliance fatigue among OPEC and NOPEC producers. A similar deal in 2009 didn’t last, and currently there isn’t full compliance either, though Saudi Arabia and Russia continue to hold to the deal.

However, it will be very difficult for them to continue to do so, as this income is important to both the Russian and Saudi economies. Still, they can’t afford to let the price of oil deteriorate either. The question, of course, is if they can boost it. It's a bit of a devil's bargain regarding what they need more— immediate income or some way to live with oil's ongoing price deterioration.

Today's Key Events And Announcements

• OPEC’s internal Economic Commission Board holds a meeting in Vienna on preparations for their much anticipated May 25 meeting.
• The US Energy Information Administration is expected to report that crude oil inventories were reduced by 2.67 million barrels in the week that ended May 12, according to a Bloomberg survey of analysts.
• UK average earnings rose only 2.1 percent for the month of March, headed in the wrong direction, down from 2.2 percent for the month of February.

Market Movers

Currencies

• The Dollar Index is flat, at 98.080, 25 pips below yesterday’s close, after reaching a low of 97.864, but rebounding from its price level before US elections, to form a Hammer, signalling possible selling capitulation.
• The yen is up 0.6% to 112.45, after yesterday’s climb of the same percentage.
• The euro rose 0.2 percent to $1.1107, extending Tuesday’s 1-percent surge.

Stocks

• S&P 500 Futures fell 0.6 percent after the index touched an all-time high of 2,405.77 on Tuesday. The Stoxx Europe 600 Index closed little changed.
• Japan’s TOPIX slid 0.5 percent, while Australia’s S&P/ASX 200 Index lost 1.1 percent, with banks having the biggest impact on both markets. South Korea’s KOSPI index fell 0.2 percent and Singapore’s Straits Times Index declined 0.4 percent.
• The Shanghai Composite dropped 0.2 percent, while the Hang Seng declined 0.1 percent. Chinese shares traded in Hong Kong fell 0.5 percent.
• Yesterday, the FTSE 100 hit a new record, as it closed above 7,500 for the first time, closing at 7,533.70, as UK inflation jumped to 2.7%. The current environment, compounded by languishing wages will probably push the index back down.
• Volatility on the Nikkei 225 increased the most in a month, a day after the equity benchmark came within two points of topping 20,000. A similar volatility measure on the S&P 500 rose 2.2 percent on Tuesday.

Bonds

• The yield on 10-year Treasuries slipped three basis points to 2.29 percent after dropping two basis points Tuesday.
• Yields on Australian government notes with a similar maturity sank six basis points to 2.52 percent.

Commodities

• Gold rose 0.5 percent to $1,243.53 an ounce, extending gains for a fifth day.

Written By: Investing.com