Fundamental Analysis

After a Sharp Sell-off, is there Salvation in the Form of Mueller on the Horizon?

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The day started with another wave of selling in the early session, defying some expectations that the markets are due a recovery. European indices are down more than 1% so far today, while the gold price has reversed course and is $10 higher at $1,264 at the time of writing. US index futures are also pointing to a hefty sell off in the US indices when they open later, however there could be a harbour from this storm, in the form of the ex-FBI chief who has been named as the lead investigator into President Trump's ties with Russia.

Can Congress calm the markets?

Now that a former FBI boss, Robert Mueller, is leading the investigation, could he act as a calming influence on financial markets? Mueller is an independent who has been endorsed by politicians on both sides of the political spectrum, which could be a good sign for risk. If Mueller can calm the situation down, squash any leaks and keep the investigation behind closed doors, then the lack of fresh news or scandal surrounding team Trump could calm the markets and help stage a recovery in the coming days.

Is Trump really a lame duck?

There has been lots of concern about the prospect of a lame duck President's ability to push through his market-friendly economic reform programme, which is also considered negative for stocks. However, if Mueller can get both sides of the political aisle to work together on this Russia investigation then it might help build political consensus for the long term, which may help to push through some of Trump's economic plans. This may sound like a long-shot, but it could also be too early to call Trump a lame duck President at this stage.

How long can the sell off last?

Sellers have been reluctant to ease the selling pressure, volume in the main European indices is higher again today, with volume in the Eurostox index jumping 60% and in the FTSE 100 rising 40%, in the past 24 hours. However, this is still lower than the volume seen in the aftermath of the win for Emmanuel Macron in the first round of the French Presidential vote last month. Volume data can tell us a couple of things: firstly, the strength behind a move, and secondly it can hint at how long the move may last. I would argue that there is still room for some downside, but the Trump sell off may not turn into a theme for markets as it hasn't, as yet, captured the imagination quite like the Macron victory. Thus, once the initial shock of the Trump political crisis starts to wane, we could see bargain hunters start to sniff around and come back into the market to buy stocks at a better level. Interestingly, there was some small buying interest in the US markets last night, for example, Apple managed to stay above $150, and JP Morgan attracted some interest above $84. We will watch these two stocks closely today to see if they manage to pick up further from Wednesday's lows, and if yes then this could signal an end to the Trump sell off, for now.

Markets always over-react, so there will be some profit taking at some stage, potentially before the end of this week, as long as no fresh revelations are announced. Until then, the market will be wondering if this week's sell off has been enough to price in the enhanced level of political risk in Washington. With the FTSE 100 coming back slightly as we head into lunchtime, the answer is potentially a yes. Thus, we could experience calmer markets in the second half of the session.

A word on the pound:

Interestingly, as stocks were selling off this morning the dollar was in recovery mode, although that was cut short by GBP/USD's jump above 1.30 on the back of some strong UK retail sales data, which was double expectations for last month at 2%. The high in GBP/USD so far today is 1.3048, with 1.3050 a stretch too far for now. If the FTSE 100 does stage a comeback then the pound could be at risk. If GBP/USD manages to hold above 1.30 today then this will be a major support level and could lead to the next paradigm for this pair between 1.30 and 1.35.

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