It won’t necessarily surprise political analysts that President Trump’s Chief Strategist Steve Bannon has been removed from his post. It had been speculated on in recent times and it certainly won’t shock that the event garnered much air time on Friday and the weekend press.
It is not just a media story though, but market participants have questioned if Bannon could be a disruptive figure now he has returned to Breitbart, where all signs point to a man set to wage “war” against mainstream Republicans. Some have also questioned who is next on the chopping block?
Let’s also remember Bannon has previously detailed he wanted to push for a government shutdown if the 2018 budget doesn’t include funding for the wall with Mexico. To this point, there has been increased focus on the US debt ceiling from strategists on Friday and through the weekend, with CBO projections, the US Treasury’s cash reserves could be exhausted by mid-October. One suspects the debt ceiling negotiations, which perhaps were not expected to be a major market influence should garner greater attention now given the more fragmented political situation in the US. Naturally, it’s all eyes on US fixed income markets and yields on short-term maturities.
US equity markets saw follow-through selling after Thursdays 1.54% sell-off in the S&P 500 and 1.8% fall in the Russell 2000. Granted, we did see a small rally in the S&P 500 into 2440, with the US ten-year treasury yield increasing from 2.16% to 2.21%, on the Bannon headlines (market participants were concerned about Bannon’s “economic nationalism” policies), but the goodwill didn’t last long and both markets drifted lower into the close. The moves in US bond yields also weighed on the USD index, which closed -0.2%.
Interestingly, and from a semantics perspective, the fact we have seen the S&P 500 closing -0.2% was actually the first time since 24 to 27 June 2016 that the index has closed lower the day after a 1% sell-off. One clearly questions the “buy the dip” mentality from here and whether with the US debt ceiling now in play, little, if any chance of tax reform likely this year, amid a far more isolated White House, and earnings growth baked into the cake, are we see for far more erratic and potentially volatile markets in the months ahead? It is looking likely and we can see small caps leading the charge, with the Russell 2000 trading below its 50-, 100- and 200-day moving averages.
The S&P 500 found sellers on the re-test of the 10 August low of 2437.75, finding good supply, so a break (should it come) below the 100-day average at 2417 and subsequently the 29 June low of 2405.70 will add weight to those who feel a more protected pullback is on the cards.
On a positive note, if these concerns are lingering we certainly didn’t see it in the credit markets with the US high yield credit default swap (CDS) two basis points tighter, while the NYSE:HYG ETF (iShares corporate high yield ETF) gained 0.2%. We also saw some selling of volatility structures, with the US volatility index (“VIX”) pulling into 14.26% (-8.3% on the day) and closer to the year-to-date average of 11.47%.
While we did see a solid rebound in the University of Michigan sentiment survey (to 97.6), the US interest rate markets lifted their implied probability of a December rate hike a touch to 37%. So while equity markets are looking a touch more vulnerable, there were some positive indicators in other markets and one to watch this week with the Jackson Hole symposium in focus and Janet Yellen due to speak on 26 August at 00:00 aest on “Financial Stability” and also Mario Draghi five hours later.
We can also point to upbeat moves in the commodity complex, although BHP’s American Depository Receipt closed up 8c higher and hardly firing up after a 3% rally in US crude and a 3.4% gain in spot iron ore. Dalian futures markets have worked nicely too, with iron ore and steel futures gaining 2.2% and 1.1% respectively. A good day, one suspects for FMG to report full-year numbers, in which the market is eyeing EBITDA of $4.911b, underlying profit of $2.275b and sales of $8.679b. The market is also eyeing a weaker path for earnings in 2018, with consensus expecting 2018 EBITDA of $3.44b.
So, short-term traders should give FMG attention their full today, especially noting the average change in the share price after reporting FY earnings since 2006 is just over 6%. Energy names should also see some interest, with US crude closing at $48.52 (+3%) and the US oil rig count falling by five rigs. The broader ASX 200 should open on a flat note, with SPI futures closing 4 points lower, although with a busy week on the reporting calendar this could, in theory, be the calm before the preverbal storm, although the prospect of another week with the ASX 200 holding the 5800 to 5675 range seems elevated.
There is little in the way of economic event risk today and futures markets (which open at 8 am AEST) should open largely unchanged, although there could be some focus on the geopolitical side with Korea and the US conducting joint military exercises.