The Overnight Report: Wall Street Cracks

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By Greg Peel

The Dow closed down -372 points or -1.8% while the S&P fell -1.8% to 2357 and the Nasdaq dropped -2.6%.

First Cab

They say that one day in the markets is a long time. This business with Trump and the Russians has been simmering away for some time, not completely ignored by Wall Street but rather considered a sideshow attraction. But when last night in the US – business hours in Australia – it was alleged Trump had asked the FBI director to drop investigations into his dealings with Russia before ultimately sacking him, it was one step too far down the road to scandal.

Wall Street had been watching from a distance and moving little, allowing the Australian market to do its own thing. That own thing recently has been the bank tax response, but on Tuesday it appeared the worst was over and the banks, and market in general, had settled down again to a level where the buyers were happy. But when this latest news broke, the game changed.

Money immediately began flowing out of US stock futures and into bonds and gold. It exited the US dollar for the safety of the yen. The Australian stock market was open and could only follow the flow. The -1.1% fall for the ASX200 featured selling across the board, the one exception being the materials sector, which rose 0.6% as investors piled back into gold stocks.

The banks were the hardest hit, dropping -1.8%. Aside from everything else going on in local bank land, it was the US banks that led the Trump rally from day one and thus it was assumed, correctly as it transpired, the banks would lead the Trump trade exodus. Australian bank fortunes, for reasons that are not always entirely clear, are inexorably linked to those of US banks.

Australian investors, and investors in Australia, anticipated a volatile night on Wall Street. They were right. The index fell -64 points yesterday, crashing through support at 5800. The futures are down another -62 this morning.

As an aside, for what it’s worth at present, Australian wages grew 0.5% in the March quarter to maintain an annual rate of 1.9% growth, steady from the prior quarter – the slowest pace since records began being kept in 1998. With headline inflation running at 2.1%, real wage growth has fallen into the negative, which does not bode well for consumer spending.

Last Straw

Inevitably, the name “Watergate” is now being bandied around. If the memo the former FBI director claims to have containing details of the discussion he had with Trump when he was told to back off proves damning, impeachment is on the cards.

It’s a big leap from memo to impeachment, and it has been pointed out all night that it took years for Nixon to be impeached. Whatever the case, Wall Street was no longer prepared to give Trump the benefit of the doubt last night. Uncertainty reigns. If it transpires Trump is cleared of any misdoing, the path towards that clearance may yet be a protracted one. This implies a further stalling of progress on that which matters to Wall Street – tax, deregulation and infrastructure polices.

I have mentioned recently of the unease many a US trader has expressed over the low level to which the VIX volatility index on the S&P500 had fallen. Such implicit complacency typically precedes a sudden burst of volatility. Last night the VIX jumped 46% to 15.6.

US bond yields had shot up with US stocks in the initial Trump trade, but have since drifted back down again as Trump policies fail to progress. Last night the US ten-year yield fell -11 basis points to 2.22%, below the election launch point. That’s the biggest one-day fall in eleven months.

Gold is up over twenty dollars.

I also mentioned only yesterday that there was concern building with regard the ongoing strength in the big name tech stocks, sending the Nasdaq to continual new highs. Last night’s fall in the S&P of -1.8% was the biggest since September. The -2.6% fall in the Nasdaq was the biggest since July.

The Trump trade has been worth 15% for Wall Street, prompting many a commentator to suggest over the last few months that a pullback is inevitable given reality would not be able to keep pace with the hype. A correction of at least -5% would be healthy, it was suggested, bringing the market back to earth. Last night saw -2%. Wall Street closed on its lows, which is a sign more is likely to come before panic subsides.

Said commentators were not expecting a pullback to be driven by scandal.

I will throw one thought out there, however. When Nixon was impeached, he was replaced by Ford, his VP. Hence I assume were Trump to be impeached, he would be replaced by Pence.

Unlike many a token VP of past administrations, Pence is considered to be the real manager of Trump’s agenda. The brains to Trump’s brawn. He is well respected in Washington. Were Pence to take over, could this not be a win-win? Get rid of the Twitter-happy firecracker but maintain the most important policy objectives? Dump the controversial polices – border tax, wall – along the way?

Just a thought.

Commodities

Gold is up US$24.20 at US$1260.90/oz. The US dollar index is down -0.8% at 97.43.

It’s a difficult situation for real commodities. The weaker greenback provides a boost, but if all that Trump has promised cannot be relied upon, then demand is under question. It’s early days, and completely uncertain.

Aside from a 1% rally back for lead, base metals closed very flat in London.

Iron ore rose US$1.10 to US$61.50/t.

West Texas crude rose US73c to US$48.96/bbl.

The Aussie is caught between the boost from the weaker greenback, and the implications of why the greenback is weak. It’s up 0.1% at US$0.7432.

Today

The SPI Overnight closed down -62 points or -1.1%. Strap in.

Australia’s April jobs numbers are out today.

James Hardie ((JHX)) will report earnings.

Beadell Resources ((BDR)), Galaxy Resources ((GXY)) and Sino Oil & Gas ((SHE)) will hold AGMs.

Note that Westpac ((WBC)) goes ex-dividend.

Rudi will twice travel to Macquarie Park twice. First to feature with Carson Scott and Shaw's Martin Crabb, probably, from noon til 2pm. He then later re-appears to be interviewed by Peter Switzer at around 7.15pm.

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