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European markets join selling as Trump trade falters

Stock markets suffered their worst falls since the election of Donald Trump as Wall Street worries about the prospects for the US president’s pro-business agenda triggered a rush for financial havens.

US markets led the declines, with the benchmark S&P 500 index tumbling 1.2 per cent and breaking a run of 109 trading days without a drop of 1 per cent or more. The Dow Jones Industrial Average and Nasdaq indices also suffered their biggest falls of the year.

The selling continued in Europe in mid-session trade on Wednesday. London’s FTSE 100 fell 0.8 per cent and Frankfurt’s Xetra Dax 30 was 0.6 per cent weaker. The region-wide Euro Stoxx 600 fell 0.7 per cent, with metals stocks, miners and banks making the biggest declines. US futures trade was pointing to further opening losses on Wall Street, with the S&P 500 expected to fall a further 0.1 per cent.

A wobble on healthcare reform overnight dented optimism about Mr Trump’s ability to enact his campaign promises on tax cuts, infrastructure spending and deregulation. In the so-called Trump trade, investors have been hoping those reforms would boost economic growth and lift earnings.

“The rally has been a great story but it hasn’t had real conviction behind it. A lot of people are uncomfortably long equities and I don’t think these pullbacks will surprise anyone,” said Andrew Scott, head of Asia-Pacific flow strategy at Société Générale. “I don’t think a delay to healthcare reform is worth much more than 1 per cent off the S&P, but when people were looking to sell, it gave them a reason.”

Asian bourses followed the downbeat move, with benchmarks in Sydney and Tokyo also suffering their worst days since early November. The ASX 200 closed down 1.6 per cent while Japan’s Topix dropped 2.1 per cent, hitting a three-week low.

Tokyo’s falls were exacerbated by a rush for the yen, a traditional haven asset whose strength weighs on the country’s exporters. The currency reached four-month highs, pushing the dollar back to ¥111.4.

Dollar weakness lifted the euro to a high of $1.0818, a six-week high.

Gold, another typical haven, rose 1 per cent overnight to $1,247 a troy ounce and its highest in almost three weeks.

For the S&P 500, Tuesday’s falls broke its longest stretch without a decline of that size since 1995, according to FactSet data.

The tumble came as inter-party divisions jeopardised Mr Trump’s effort to repeal Obamacare, the largest initiative so far in his presidency. In a visit to Capitol Hill on Tuesday, Mr Trump cranked up the pressure on lawmakers, warning that “the danger of your not voting for the bill is people could lose their seats”, according to Walter Jones, a member of the House of Representatives.

“Political risks surrounding healthcare reform continue to mount the pressure on the Trump administration and the [Republican party] to deliver, and time is running out,” said Alan Gayle, director of asset allocation at RidgeWorth Investments. “All the time they are spending on healthcare reform, they are not spending on tax reform.”

Small-cap stocks, seen as the biggest beneficiaries of a corporate tax cut, turned negative for the year, with the Russell 2000 index tumbling 2.7 per cent.

The 10-year Treasury yield fell 4 basis points to trade at 2.41 per cent, a three-week low — and far below its 2.63 per cent levels just ahead of the Federal Reserve’s interest rate rise earlier this month.

“We have a mismatch in timing,” said Michael Arone, chief investment strategist at State Street Global Advisors. ”You have monetary policy tightening and we were expecting that fiscal policy would be moving ahead, and certainly the market has responded to the fact there are a few bumps here, evidenced by the challenges in moving the healthcare plan forward.”

The Federal Reserve last week lifted interest rates by 25 basis points, its third increase since first beginning to tighten monetary policy in 2015. Although markets initially greeted with euphoria the US central bank’s reluctance to accelerate its rate increase plans, some investors are worried that markets are underestimating the dangers of the Fed moving more aggressively later this year.

There has also been mounting concern over US equity valuations, with more investors saying stocks are overpriced than undervalued than at any point since at least 2001, according to Bank of America’s latest investor survey on Tuesday.

Nonetheless, some investors argued that a decline was overdue. Rebecca Patterson, chief investment officer at Bessemer Trust, pointed out that “what is not normal is that we hadn’t had a correction in four months”.

“I always prefer equity markets to go up, but when you are in a medium-term bull market it is normal to have pullbacks and I think those corrections can be healthy,” she said. “It does not necessarily mean the good times are over.”

Reporting by Nicole Bullock, Joe Rennison, Adam Samson and Robin Wigglesworth in New York and Jennifer Hughes in Hong Kong

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