London Quick Take – 26 August – A dose of political uncertainty

Political uncertainties are hard for markets to deal with. We are going through one of those periods today. After a long summer calm, get used to it.

US President Donald Trump announced he is firing Federal Reserve governor Lisa Cook, “effective immediately”. It’s the latest salvo in the Fed wars and shows how increasingly politicised the central bank is becoming. It’s going to be virtually impossible for the next chair to do anything other than Trump’s bidding. This should be negative for the dollar. The question for markets right now is about the September meeting but be in no doubt that we are witnessing a regime shift like we have not seen in decades.

Meanwhile there’s political turmoil in Europe as France’s PM has called a confidence vote that could see the government toppled next month (8 Sep). That has pushed up French bond yields and could see them rise above Italy’s. France’s stock market, the CAC 40, is down over 2% early on Tuesday as a result of the uncertainty. Markets invariably struggle with this sort of political uncertainty but in this case it’s a bit more obvious what is at stake. The vote is over the budget which is required for fiscal consolidation – delaying or ditching reforms will make the debt situation more untenable, and weigh on the economy. But there is a wider issue at stake over the fragile nature of the ruling coalition and whether Macron is just delaying the inevitable election that could see Marine Le Pen’s FN take over. The problem France has is that the fudge Macron worked to keep the FN out of power was never going to survive a serious vote. For now, political uncertainty = economic weakness.

US stock markets stalled after Friday’s big jump. Monday saw the S&P 500 down 0.43% and the Dow Jones down 0.77%. Nvidia’s 1% rally initially lifted the Nasdaq but the index finished 0.22% lower for the session. The chipmaker’s earnings this week are going to be a major macro event that moves the broader market. Stocks in London traded down over half a percent along with Frankfurt as there was a broad tug on risk with investors eyeing the Fed and France.

Stocks had bounced after Fed chair Jay Powell signalled last week in Jackson Hole that he is looking at the possibility of rate cuts. There is a lot that can happen before the September policy meeting however. A new round of employment and inflation data is due before the 16/17 Sep meeting. And we have a fresh injection of political uncertainty.