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Markets hit by biggest fall since Trump election

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 slumps of the year.

Asian bourses echoed the downbeat move, with benchmarks in Sydney and Tokyo also suffering their worst days since early November. The ASX 200 was down 1.6 per cent at 5,683 while Japan’s Topix fell 1.9 per cent to 1,534, 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, a four-month low.

Gold, another typical haven, rose 1 per cent over the US day to $1,245 a troy ounce by late-morning in Asia, nearing a three-week high.

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 heat 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.

A wobble on healthcare reform dented optimism about Mr Trump’s ability to enact his campaign promises on tax cuts, infrastructure spending and deregulation, that investors hope will boost economic and earnings growth and which produced the so-called Trump trade.

“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 2.42 per cent, a three-week low.

Energy stocks were hit by another fall in oil prices but US bank stocks drove the S&P 500’s losses, with the sector down nearly 4 per cent, for the steepest decline since the wake of the Brexit vote. Bank of America, one of the largest US lenders, faced a near 6 per cent sell-off.

The decline for an industry that has been among the best performers since the election came as US government bond yields fell, and investors grew anxious that Mr Trump’s proposals to loosen financial regulations will take longer than expected to enact.

“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.

. . . when you are in a medium term bull market it is normal to have pullbacks and I think those corrections can be healthy

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

Via FT