Fears over the scale of crisis that Donald Trump’s presidency faces hung over markets on Thursday, with European stocks weaker and those in the US expected to open lower following their worst one-day drop since September.
The Stoxx Europe 600, the region’s benchmark, was down 0.8 per cent in mid-session trade while futures suggest the S&P 500 will slip by 3 points to 2.354 when Wall Street opens. Haven assets such as US government bonds were in demand while EM assets were under pressure.
Investors are focused on “fears that the emphasis on tax cuts and regulatory relief could be stalled by the new political drama that may be unfolding”, said Tobias Levkovich, an equity strategist at Citigroup.
The appointment of a special counsel to lead the Justice Department’s investigation into ties between Russia and the Trump campaign is raising stubborn questions about the president’s ability to push through his pro-growth policies.
That leaves the lofty market valuations established since his election facing scrutiny from investors, who sold off stocks and the dollar in favour of haven assets on Wednesday.
Beyond the US and Europe, emerging markets currencies were also exposed on Thursday with Brazil’s down 1.5 per cent in early trade, amid the growing political crisis centred on its president, Michel Temer.
But analysts also cautioned that the market moves had to be kept in perspective.
“Some commonsense and calm is starting to prevail as investors recognise that the developments in the White House are unlikely to have much global economic impact,” said Koon Chow, strategist at UBP.
“The perceived probability of President Trump’s key economic proposals materialising — trade protectionism and tax cuts — has already been dropping. Moreover, if the president were to become increasingly beleaguered politically speaking, it might actually be a positive in terms of curtailing his team’s ability to drive through other unorthodox policy proposals.”
“The classic adage of markets being able to price risk but not uncertainty comes into play today, finally around US political events,” said Timothy Ash, of Bluebay Asset Management. “They simply do not know which way this is going to go.
“The plus in all this is that it makes it less likely that the Federal Reserve will move more assertively in terms of rate hikes/normalisation, and that is being reflected in the performance of US Treasuries and the dollar.”
A sense of unease still set the prevailing tone for EM currencies. The Turkish lira fell 1.5 per cent against the dollar while the Mexican peso slipped 1.6 per cent and the South African rand lost 1.8 per cent.
Gold prices rose to their highest level in two weeks as investors sought safety amid falling stock markets, gaining 0.3 per cent to $1,263 a troy ounce.
“We now consider that we are still at the start of a risk-off move and that gold is set to strengthen further,” said analysts at Swissquote bank.
Concerns over the US also weighed on industrial metals and iron ore, with copper falling 1.2 per cent Thursday to $5,541 a tonne, down from its peak this year at $6,204 a tonne on February 13. Iron ore futures in China fell 1.9 per cent to a low of Rmb467 ($68) a tonne.
“What happens to the metal prices if Trump goes? Well they probably fall with the exception of gold,” said Matthew Hasson, an analyst at Numis.
Wednesday’s heavy selling in the US shattered the calm that had led to Wall Street stocks hitting record levels this week.
The S&P 500 dropped 1.8 per cent, causing the CBOE Vix index, a measure of implied volatility known as Wall Street’s fear gauge, to surge 46 per cent — although its close at 15.6 was still below the historic average of about 20.
The US dollar index slid to its lowest level since Donald Trump was elected US president in November and investors sought perceived safety, pushing benchmark Treasury yields down 11 basis points, while propelling the Japanese yen and gold both 2 per cent higher.
Additional reporting by Henry Sanderson