15 to 21 May: Politically Incorrect

After a 9-month period in which equity markets have stretched their legs into a “perfect calm” of rebounding global growth, last week saw a mid-week stagger as a 1-2 political punch combo threatened to derail momentum. First, allegations surfaced that President Trump fired FBI Director James Comey to cover up his own and/or his campaign officials’ improper behaviour. Second, reports suggested Brazil’s President Temer might have been complicit in illicit payments to former speaker of the lower house of Congress Eduardo Cunha.

Taking a step back, we continue to believe the global economy has strong momentum and, whilst this political unrest should prompt a pause for thought, we do not see it as a knockout blow. Markets have enjoyed a serene regime in which all indicators flashed green. Going forward it is likely to be less straightforward.

Our bias, would be that US markets might be underappreciating the significance of the investigation into the President, and the severe lack of political capital to make any progress on pre-election promises. Given also the late cycle positioning of the US economy, we remain cautious on US equities. With respect to Brazil, the economy is in a much better place than 18 months ago, with falling inflation opening the door to aggressive interest rate cuts from the central bank. Pending structural reforms are important to avoid a “double dip” recession, and as such the inevitable delay and loss of credibility will have an impact, but the picture is not unequivocally bad. This is to say, it might be rash to “buy-the-dip”, but it is also too early to give up on the secular recovery story.

In commodities markets, oil moved higher on the announcement that Saudi Arabia and Russia had agreed to extend output cuts.

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