A risk-off mood dominated the overnight session amid growing concern over the turmoil engulfing the Trump administration, as fresh allegations add to deepening political scandals in Washington, the latest coming from Tuesday’s NYT report citing former FBI director Comey’s memo which raises possibility of obstruction of justice, an impeachable offense. The dollar, already in retreat after a report that the U.S. president shared terrorism intelligence with Russian officials, decline again and the Bloomberg Dollar Spot Index dropped for a sixth day, while the VIX index surged over 10% in early trading.

Still, we can’t help but wonder how long until the BTFD algos emerge from their overnight stupor and send futs back to the green. The reason is that while the move lower in S&P futures does not appear overly dramatic, the 12 point drop has wiped out the past month’s market gains and more importantly, for the first time since his inauguration, a scandal impacting Trump has spilled over into the broader market as the probability of Trump passing virtually any legislation in the foreseeable future now appears virtually non-existent.

This morning Bloomberg agreed with our Twitter-take from last night, writing that “after a protracted period of dormancy, financial markets are beginning to react to developments in Washington in a more unified manner. With stock and bond volatility muted, investors have looked for a clearer reaction to the political din in currency markets. The U.S. currency now sits at its lowest level since the day of Trump’s shock win, a retracement some blame on perceptions his legislative agenda faces deeper challenges.”

And after recently crashing to record lows, and staying below 11 for the longest stretch on record, global volatility appears to be stirring.

The US futures selloff has been broadly in line with major index movements in Europe and Asia. In other assets, T-note futures rally while the Bloomberg Dollar Index slumped for a sixth consecutive day, falling to lowest since November. Meanwhile, over in China the PBOC continues to add liquidity injecting 140 billion yuan with reverse repos, setting the CNY fixing at the strongest level since February. WTI crude drops one percent; iron ore futures gain on hope for an imminent Chinese rebound.

“If he’s preoccupied defending himself and if it goes a lot further, then any hope of his legislative agenda coming to the fore is going to be reduced,” John Stopford, the London-based head of fixed-income at Investec Asset Management Ltd., said in an interview with Bloomberg TV. “Clearly at the margin it’s a negative. At the moment there’s a classic environment for yields to rally a bit further and for the dollar to sell off.”

So far, broadly upbeat global growth has underpinned risky assets and supported the multi-year lows in measures of market volatility. But the retreat in the dollar which has now given up all the gains it made since Trump’s election and a pull-back from record highs for world stocks points to investor unease about this week’s headlines, Reuters writes.

“The Trump issue seems to come in waves, and now we have another wave,” said Hans Peterson, global head of asset allocation, at SEB Investments.

“I have been asked if he is going to be impeached. I think that is the type of discussion some (investors) are having,” Peterson said, pointing out that institutional clients are turning cautious.

Meanwhile, the euro zone economy started the year with robust growth that outstripped that of the United States and set the stage for a strong 2017. “At the moment everyone is focusing on the political relief in Europe and the political unrest in the U.S.,” ING’s senior rates strategist Martin van Vliet said.

This is how SocGen’s Kit Juckes summarizes today’s action”

In ‘market Top Trumps’ the US President trumps just about everything else, at least in the very short term. “Comey memo says Trump asked FBI Chief to drop Flynn probe” is the FT headline on the story doing the damage overnight, though we do also have softer oil prices after the release of strong US inventory data. 10-year Treasury yields are 4bp lower than when markets closed yesterday evening, 10bp lower than they were on Thursday before the US CPI and retail sales data releases. European yields are opening lower too, but the 10year has narrowed to 189bp, and the Treasury/JGB spread to 226bp.

Then there is the Fed: while traders continue to price in two interest rate increases by the Federal Reserve this year, speculation is rising that European counterparts are preparing to withdraw their own stimulus measures. “The only political calibration the Fed has is how much Trumponomics we were going to get that they can’t see yet,” Neil Dwane, global strategist at Allianz Global Investors, said in an interview with Bloomberg TV. Even so, U.S. policymakers “are in the mindset to raise as long as the markets are prepared for it.”

To be sure, pressure on the ECB rose as Eurozone Core CPI jumped to a 3 year high of 1.2%. Inflation ex energy and  food showed notable rise across countries, adding to Draghi’s list of reasons why a taper, and eventual rate hike, appear inevitable.

Looking at global stocks, the Stoxx Europe 600 Index fell 0.3 percent, after ending little changed in the previous session. Futures on the S&P 500 Index fell 0.5 percent, after the underlying gauge on Tuesday touched an all-time high of 2,405.77. The MSCI All-Country World Index fell 0.1 percent from a record, with banks having the biggest impact across all regions.

In commodity markets, safe-haven gold hit a two-week high, climbing 0.6 percent to $1,243.31. The precious metal has risen for five straight days.

Data showing an increase in U.S. crude investors hit oil prices as concerns about oversupply despite efforts by top producers Saudi Arabia and Russia to extend output cuts once again weighed.

The yield on 10-year Treasuries slipped four basis points to 2.29 percent after dropping two basis points Tuesday. Benchmark yields in France lost two basis points to 0.87 percent, while those in Germany declined two basis points to 0.42 percent.

MBA Mortgage Applications data due, along with earnings from companies including Target and Cisco.

Global Market Snapshot

• S&P 500 futures down 0.5% to 2,384.75
• STOXX Europe 600 down 0.3% to 394.7
• MXAP down 0.3% to 151.42
• MXAPJ down 0.5% to 494.57
• Nikkei down 0.5% to 19,814.88
• Topix down 0.5% to 1,575.82
• Hang Seng Index down 0.2% to 25,293.63
• Shanghai Composite down 0.3% to 3,104.44
• Sensex up 0.3% to 30,659.65
• Australia S&P/ASX 200 down 1.1% to 5,786.03
• Kospi down 0.1% to 2,293.08
• German 10Y yield fell 2.7 bps to 0.408%
• Euro up 0.08% to 1.1092 per US$
• Brent Futures down 0.4% to $51.45/bbl
• Italian 10Y yield fell 3.9 bps to 1.943%
• Spanish 10Y yield fell 1.4 bps to 1.614%
• Gold spot up 0.5% to $1,243.73
• U.S. Dollar Index down 0.05% to 98.06

Top Global News from Bloomberg

• Comey memo says Trump asked him to drop FBI’s Flynn investigation
• Donald Trump is facing the deepest crisis of his presidency after a memo written by then-FBI Director James Comey surfaced Tuesday, alleging that the president asked him to drop an investigation of former National Security Adviser Michael Flynn.
• Republicans in Congress are increasingly dispirited over the chaos surrounding Donald Trump, with several saying the nonstop revelations are imperiling their legislative agenda and the top Senate Republican signaling he would go his own way on some of the president’s top priorities.
• The terms of debate between the ECB’s 25 Governing Council members over announcing and implementing an exit from unconventional stimulus have coalesced around the pace. In one camp are those who want to move slowly. In the opposite camp: those who want to move extremely slowly.
• Merkel, Macron plan road map for harmonized corporate taxation, Bild reports
• Brexit talks can’t be secret, negotiating documents will be made public: EU draft
• S&P affirms Australia AAA sovereign credit rating; outlook remains negative
• API inventories according to people familiar w/data: Crude +0.9m; Cushing -0.5m; Gasoline -1.8m; Distillates +1.8m
• No Matter What Trump Does, Big Cities Pressing for Cleaner Cars
• Turkey’s Erdogan Met Company Executives in Washington, DC: AA
• Marc Faber Says Invest in Europe Stocks Over ‘High- Priced U.S.’
• Meitu Falls After MSCI Decides Against Adding to Indexes
• IATA Says Wider Laptop Ban Could Impose $1B Costs on Passengers
• Philip Morris Japan to Raise Prices of Marlboro From Sept.
• Dexia, Cognizant in Talks for Long-Term Pact on Info Technology
• Elbit Subsidiary Wins $166m Contract for U.S. Army Platform
• Cheniere Says 9 of Its U.S. LNG Exports Have Gone to China
• 3SBio Gains on Eli Lilly Insulin Distribution Rights in China
• DuPont Wins Patent-Infringement Jury Verdict Against Unifrax
• AbbVie Loses Ruling on Validity of One Patent for Humira

Asian equities traded cautious amid weakness in energy and US political concerns after reports of a memo from former-FBI Director Comey which stated that President Trump urged him to drop the investigation into former National Security Adviser Flynn. This pressured US equity futures across the board and set the negative tone for both the ASX 200 (-1.1%) and Nikkei 225 (-0.6%), while touted profit taking by pension funds and poor Machinery Orders added to the disappointment in Japan. Shanghai Comp. (-0.3%) and Hang Seng (-0.2%) traded choppy, although somewhat outperformed their regional counterparts after the PBoC injected CNY 140bIn via open market operations and regulators approved the Bond Connect scheme which would allow foreign investors access to mainland China’s USD 9.5tIn bond market. 10yr JGBs were initially supported alongside gains in T-notes as the risk averse sentiment spurred a flight to safety, while the BoJ were also in the market for a total of JPY 1.03fin of JGBs with 1yr-10yr maturities. However, JGBs then failed to sustain the upside, with prices retreating throughout the session. Mainland China and Hong Kong regulators approved the cross-border link that will allow overseas investors access to the mainland’s USD 9.5tIn bond market. The program will run alongside the 2 connect schemes already in place and will begin with ‘northbound’ trading first, with the official launch date of the scheme and timing for `southbound’ trade to be announced at a later date.

Top Asian News

• Hong Kong Sells Car Park to Developer for Record $3 Billion
• Webb’s Caution List Sinks Dozens of Hong Kong Small-Cap Stocks
• Caution Reigns as U.S. Politics Takes Center Stage: Markets Wrap
• Citi to Bolster Brokerage Business for Hedge Funds in Japan
• Lumen Capital Hires Pictet’s Fluri, Trident’s Lim in Singapore
• Reports on Trump Weigh on Japanese Equities as Yen Strengthens
• HSBC Sees 6% Upside for Emerging-Market Stocks Through End-2017

Likewise in Europe, sentiment for riskier assets soured this morning amid an escalation of US political uncertainty. Amid reports that Trump asked former FBI Director Comey to end investigation into ties between former White House national security adviser Flynn and Russia. This comes days after reports that Trump discussed sensitive national security information with Russian Foreign Minister Lavrov. In turn, this has led to broad based selling across major EU bourses (Eurostoxx -0.4%) with some suggesting that this may fuel fears over Trump’s economic agenda. Energy names sag following the slip in crude prices as the latest API showed unexpected build of over 800k, which comes ahead of weekly DoE’s. EGB’s supported by FTQ trade, although there has been a mild pull back in recent trade, additionally underperformance seen in the German 2yr with the curve showing some mild flattening.

Top European News

• Brexit Talks Can’t Be Secret, EU Says in Transparency Push
• Britons See First Drop in Real Wages Since 2014 as Prices Bite
• European Bonds’ Populism Lull Proves Short as Austria Vote Looms
• EU Financial Transaction Tax Said to Overcome Pensions Rift
• Russia Plans Biggest Debt Sale in Four Years as Yields Decline
• Treasuries Lead European Bonds Higher as Trump’s Woes Mount
• VW CE0 Mueller Probed Over Porsche-Shares, Prosecutors Confirm
• EU-U.K. FTA Won’t Be the Same As Single Market Access, Tusk Says
• Euro Long-Term Bearish Bets Versus Dollar Hit Lowest Since 2009

In currencies, the Bloomberg Dollar Spot Index was little slightly down in early trading, bacl to the lowest level since Nov. 8. The yen rose 0.7 percent to 112.35 per dollar, after climbing 0.6 percent on Tuesday. The euro added 0.1 percent to $1.1094, extending Tuesday’s 1 percent surge  An active 24 hours in the FX markets as fresh revelations of president Trump’s ‘involvement’ in the Flynn probe has set off a fresh wave of risk aversion. USD/JPY has fallen through 113.00 as a result, but fresh demand ahead of 112.00 as arrested the move for now, but stronger support not seen until 111.20-35 lower down. The USD based moves sent the EUR up to the initial resistance area at 1.1120-25, and this has held so far, but the pullback has been shallow as yet. The final reading of EU wide inflation confirmed yoy Apr CPI at 1.9%, so this may underpin the uptrend to a degree, but we have some large 1.1000 expiries today and tomorrow (much larger tomorrow — in excess of 3.5 yards), which could rein in the move.
This has seen EUR/GBP pierce the 0.8600 level, but with the UK wage date this morning more or less in line with expectations, Cable bulls are pressing on the highs again in the quest to push on 1.3000. We did see the claimant count rise, but the unemployment rate in to 4.6%, so all in all, the market feels comfortable with this as we look to the retail sales number tomorrow.

In commodities, there has been some decent price action over the last 24 hours, with focus on the precious metals in light of the latest news on Trump. Impeachment fears are back ‘on the table’ and this has lifted Gold up to levels just shy of USD1245.00, while Silver is now eying a move on USD17.00. Elsewhere, Oil prices are struggling against some notable levels, and USD50.00 is proving a tough obstacle for WTI. USD48.00 is the initial point of support, while Brent is looking comfortable as the backdrop of the output cut extension serves as a prop. Metals all meandering in well-worn territory, with little negative impact from the risk off mood this morning. Copper off better levels though, and in line with modest losses seen across the board with the exception of Platinum.

Looking at the day ahead, the NY Fed is due to the release its Q1 household debt and credit report, while this afternoon former Fed Chair Ben Bernanke is scheduled to speak at a conference. German Chancellor Merkel also speaks at a labour conference. Earnings reports due in the US today include Target and Cisco. It’s likely that US political developments will continue to be a big focus for markets also today.

US Event Calendar

• 7am: MBA Mortgage Applications, prior 2.4%
• 11am: New York Fed to Release 1Q Household Debt and Credit Report
• 11:10am: Former Fed Chairman Bernanke to Speak at Conference

DB’s Jim Reid concludes the overnight wrap

Markets have displayed a level of trepidation over the last 24 hours with politics being the dominant theme. The Trump headlines concerning the revealing of sensitive information to Russian officials were initially at the forefront of that. That was largely attributed to the big drop in the US Dollar yesterday with the Dollar index falling -0.81% and to the lowest level since November 8th. Trump’s national security advisor H.R. McMaster addressed the reports in a press conference downplaying the security leak by saying that the disclosure was “wholly appropriate” and also calling the Washington Post article “false”. Treasuries were a little firmer with the 10y yield down just under 2bps to 2.327% while equities had actually kicked off in positive territory for the first hour or so, before fading into the close with the S&P 500 ending down a modest -0.07%.

There are more developments to report this morning though, and perhaps more serious for markets. After markets closed last night, a story emerged in the NY Times (and now being reported in other press outlets) suggesting that the President had attempted to get former FBI Director James Comey to end the FBI’s investigation into former Trump aide and national security advisor Michael Flynn. The story concerns a memo written by Comey back in February following a conversation with Trump at the White House. Trump’s administration is denying that the President asked Comey to  end the investigation. The Chairman of the House Oversight Committee has now requested all documents from all meetings between Trump and Comey. The Chairman also said that the reports in the press “raise questions as to whether the President attempted to influence or impede the FBI’s investigation as it relates to Flynn”. The question of this being an impeachable offense through obstructing justice has been raised in several news reports and by members of the Democratic Party.

That news has sparked a wave of risk off moves in markets since it broke. Gold (+0.53%) has rallied along with US Treasuries (10y yield down 2.6bps) while S&P 500 futures have dropped -0.60%. The Yen is  also +0.60% firmer versus the Dollar. In Asia major bourses are lower with the Nikkei (-0.63%), Hang Seng (-0.27%), Shanghai Comp (-0.10%), Kospi (-0.33%) and ASX (-0.90%) all in the red. It’s worth noting that China equity markets have been choppy this morning and this follows a dramatic u-turn for China bourses yesterday when after we went to print the Shanghai Comp turned a decline of as much as -0.95% at one stage into a gain of +0.74% by the closing bell. That followed the news that the PBoC had injected 170bn of yuan liquidity into the system, the biggest injection in four months. So worth keeping an eye how markets finish up there.

Back to yesterday where, away from the politics, the US retail sector was back in the spotlight too with a few earnings releases. TJX (-4.08%) delivered a disappointing outlook for Q2 despite Q1 earnings coming in slightly ahead of market expectations. Staples (-3.54%) was a similar story although there was better news to come from Home Depot’s (+0.61%) latest quarterly report. Target and L Brands are next to report today, while Wal-Mart is scheduled to release results tomorrow. Over in Europe yesterday it wasn’t much more exciting for equity markets with the Stoxx 600 (-0.02%) ending the day more or less unchanged following a raft of economic data which for the most part was relatively solid. Credit spreads were however a bit tighter (iTraxx Main 0.5bps,  iTraxx Crossover -4bps). The big news in bond markets was the bumper demand for the 40y Gilt and 30y OAT new issues. The latter attracted over €31bn of orders with the final size coming at €7bn while the Gilt issue attracted £26bn of orders for a £5bn deal. With the French election now in the past there was similarly strong demand for French corporate issuance yesterday too with Rallye attracting €3bn of orders for a €350m bond and LVMH taking in €14bn of orders for its €4.5bn multi-tranche bond deal. Bloomberg was in fact reporting that yesterday was the strongest day for Euro primary issuance volumes since at least 2014 which probably makes it one of the strongest days on record.

Digging through the economic data yesterday, in Europe there was no change in the second reading of Q1 GDP for the Euro area at +0.5% qoq and +1.7% yoy. Germany’s ZEW survey revealed an increase in the both the current situations index (+3.8pts to 83.9) and expectations index (+1.1pts to 20.6) in May. Meanwhile in the UK the April inflation data docket was released. Headline CPI was confirmed as rising +0.5% mom in April (vs. +0.4% expected) with the annual rate nudging up to +2.7% yoy from +2.3% and to the highest level since September 2013. The core rate also rose six-tenths to +2.4% yoy which is the joint highest since March 2013. The timing of Easter holidays was largely cited as explaining the large surge in inflation in April and while we saw Sterling trade in a decent 0.70% range through the day, it closed up a much more modest +0.16% by the end of the day.

In the US the data was a lot more mixed. On the positive side, industrial production was confirmed as rising a much better than expected +1.0% mom in April (vs. +0.4% expected) which was the biggest monthly rise since February 2014. Capacity utilization also bounced to a 20-month high of 76.7% (from 76.1%) with a boost in auto production seemingly being the biggest contributor to the surge. On the other hand data in the housing sector was soft. Housing starts unexpectedly fell in April (-2.6% mom vs. +3.7% expected) along with building permits (-2.5% mom vs. +0.2% expected). It’s worth noting that the Atlanta Fed now have their Q2 GDP growth forecast at 4.1%, up from 3.6% last week.

Looking at the day ahead now. With little of note in the US this afternoon, the focus datawise will be in Europe this morning where we receive the March and April employment indicators in the UK (unemployment rate expected to hold at 4.7%) and the final CPI revisions for the Euro area. Away from the data, the NY Fed is due to the release its Q1 household debt and credit report, while this afternoon former Fed Chair Ben Bernanke is scheduled to speak at a conference. German Chancellor Merkel also speaks at a labour conference. Earnings reports due in the US today include Target and Cisco. It’s likely that US political developments will continue to be a big focus for markets also today.

For the first time since January 2009, sales of cars declined year-over-year in all three of the world’s largest auto markets of Western Europe (-6.8%), China (-1.8%) and the United States (-3.7%).  Combined, these three markets account for roughly 70% of the world’s auto sales (chart per Bloomberg).

And while auto OEMs spent the first part of 2017 ignoring the growing signs of trouble facing their industry, some are finally starting to admit that all is not well in autoland.  As we noted a couple of days ago (see “How Is This Not A Recession? Ford To Slash 10% Of Global Workforce“), Ford just announced plans to cut about 10% of its global workforce.  Meanwhile Nissan Motor is forecasting a surprise drop in profit this year and Toyota Motor expects an 18% decline as well.

As we’ve been saying for months, this is likely just the beginning of what may be a very painful several quarters for the auto industry.  So what else could go wrong?  Here is a just a short summary from Morgan Stanley’s auto team, led by Adam Jonas, of the things that could cause used car prices to crash by up to 50% over the next 4-5 years…which, of course, is probably not great news for new car prices either (Executive Summary:  flood of supply, poor lending standards and desperate OEMs who need to keep new car sales elevated at all costs):

• Off-lease supply: This has already more than doubled since 2012 and is set to rise another 25% over the next 2 years.

• Extended credit terms: Auto loans are at record lengths and lease assumptions (residuals, money factor) are at record levels of accommodation.

• Rising rates: Starting from record low levels in auto loans.

• Overdependency on auto ABS: The outstanding balance of auto securitizations has surpassed last cycle’s peak.

• Record high deep subprime participation: 32% of subprime auto ABS deals were deep subprime (weighted average FICO < 550) in 2016 vs. 5% in 2010.

• Record high units of new car inventory: 2016YE unit inventory levels were near 10% higher than 2015YE, and are continuing to trend higher in 2017.

• OEM price competition: Car manufacturers have capacitized to a 19mm or 20mm SAAR. At this point in the cycle we start seeing more money ‘on the hood’ to move the metal. As new car prices fall, used prices look relatively more expensive, which necessitates a decline in used prices to equilibrate the supply/demand imbalance.

• Increased ADAS penetration: We expect auto firms to achieve nearly 100% active safety penetration by 2020, creating an unprecedented safety gap between new and used vehicles, accelerating obsolescence of the used stock. Rising insurance premiums on older cars could accelerate this shift.

• Trouble in the car rental market: Due to a number of secular shifts, including how consumers access transportation options (e.g. ride sharing), car rental firms are facing stagnant growth, weak pricing and over-fleeted conditions. As these cars hit the auction, the impact on prices could be significant.

And here are the stats…

Off-lease volumes have already doubled since 2012 and are only expected to get worse…meanwhile, lending standards have gradually gotten worse and worse…

…as further revealed by the growing share of ‘deep subprime’ loans in auto ABS deals.

But lenders are starting to get worried and are tightening lending standards for the first time since the great recession.  (Note: Shows net percentage of respondents reporting tightening standards on consumer loans for new and used autos. Negative numbers indicate loosening standards.)

Meanwhile, none of the warnings about a flood of used car volumes about to hit the market has impacted new car volumes being pumped out by the OEMs and pushed on to dealer lots.

All of which results in this fairly brutal outlook for used car prices and, by extension, the auto market generally.

Dear OEMs, the first step is admitting you have a problem.