Political junkies were in heaven today. Thirty minutes after US stock markets opened testimonies were delivered by President Trump’s former lawyer, Michael Cohen, US Fed Chair Jerome Powell, and US Trade Representative Robert Lighthizer. Comments from Lighthizer and Powell had more of an impact on the financial markets, but Cohen’s testimony will likely receive more media coverage. The US dollar was slightly higher against most of its major trading partners, while equities maintained a softer tone.
Cohen – I do not know if Trump colluded with Russia, but I have my suspicions
Powell– Fed will fairly soon announce plan for balance sheet unwind
Lighthizer – Maintains hardlines with China
President Trump’s former lawyer, Michael Cohen testified before House Oversight Committee calling the President a racist, conman and cheat, while providing some documents that highlighted payments and financial statements. Cohen will be going to prison for lying to Congress and making false statements. The testimony went as planned with Democrats digging for potentially damaging details against the President, while Republicans focused on discrediting the disgraced attorney. Cohen had accused the President of bank fraud and of being aware his campaign met with Russia. As expected, financial markets had little reaction to Cohen’s testimony.
The second day of Fed Chair Powell’s testimony to the House Financial Services Panel affirmed the Fed’s patient approach to both rate hikes and assessing the economy, while delivering further clarity on the balance sheet unwind. Powell confirmed that the Fed will fairly soon unveil their plan on the ending the balance sheet reduction. The balance sheet will be driven by demand for liabilities and that will likely influence the timing of the unwind. Regarding what is on the radar for the Fed, he noted that collateralized loan obligations (CLO’s) pose a macro economic risk, but not a systemic one. His testimony was in-line with recent Fed speak and cemented the view that markets will need to wait a couple months for fresh data before assessing the Fed’s next move.
US Trade Representative Robert Lighthizer delivered most of the market moving headlines today. The trade hardliner noted that increased Chinese purchase of American goods is not enough to make a trade deal. That comment alone helped erase the gains that the yuan saw earlier in the day. He affirmed the President’s goal for significant structural changes to China’s economic model. The potential trade deal will need to have new rules on currency manipulation, intellectual property and forced technology transfers. It will be difficult to see how the key structural issues will be enforced, but it appears talks are poised for taking the next step.