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Consequence of a corruption scandal involving the actual Brazilian president

23 May 2017

Political risk was back last week, and this time it is not coming from Europe. Donald Trump is being attacked on 2 fronts:

  • He reportedly asked James Comey, former head of FBI (fired by Trump since then) to stop investigating on Michael Flynn (former National Security Adviser), this is an obstruction of justice
  • He reportedly shared classified information with Russia via Sergueï Lavrov (the Russian Foreign Minister)

Market reaction has been quite dramatic on Tuesday and Wednesday, US 10 years yield dropped 20bps, Yen shot up 3% (which penelized us) and equities were down 3%. Markets have been coming back since then, mainly because of a video showing James Comey declaring he was never asked such thing. In short, markets needed an excuse to correct after several weeks of euphoria. To our eyes, it does not change the big picture and the trend is still there. We think as well that the chance to see Trump impeached is very low, just like fiscal reform by the way…

The second political stress last week was coming from Brazil, with President Michel Temer being involved in a bribery scheme (he said “great” when a CEO told him he was paying off two judges and he reportedly took bribes from a company between 2010 and 2015). Market reaction was huge with Brazilian equities down 10% and the currency down 7%... Next step should be Michel Temer out and possibly millions of people in the street with new elections.

On the macro side, not much highlights for markets:

  • Portuguese GDP at 2.8%, above expectations
  • Average US data (Philadelphia Fed above, but real estate disappoints)
  • Chinese data was slightly disappointing, especially industrial production. Retail sales were broadly in line
  • Last, French unemployment rate at 9.6%, lowest since march 2012. The former president François Hollande managed to make unemployment rate go down during his tenure
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