Investors on Wednesday were shelving rosy hopes for US tax reform and rethinking strategies premised on US President Donald Trump’s economic growth promises as the president faced his loudest criticism yet over possible collusion between his election campaign and Russia.
From stocks to bonds to the US dollar, a bevy of trades that have been fashionable since Trump’s election in November last year were getting dialed back or in some cases shredded as his reform agenda looked increasingly vulnerable amid the fallout from his firing last week of then-FBI director James Comey.
The uncertainty about Trump’s future increased in the last 24 hours over allegations Trump had sought to end Comey’s investigation into ties between the president’s first national security adviser, Michael Flynn, and Russia, and even some Republicans were calling for a deeper probe into possible obstruction of justice.
The result was the harshest sell off yet in US stocks since Trump was elected and a jettisoning of positions that were tied to the notion that his policies would stoke economic growth and inflation.
“The ‘Trump trade’ is over as of today,” Ross Gerber, cofounder and CEO of Gerber Kawasaki Wealth and Investment Management, who said they have been selling for the past 45 days and continued to be bearish on risky assets today. “We’ve seen cracks all year, but today, this is the first institutional selling we are seeing.”
Indeed, some “Trump trades” have been unwinding for weeks, especially in the bond and currency markets where bets on inflation risks and economic growth prospects are most prevalent.
On Wednesday, one key indicator of the level of inflation five years from now fell to its lowest since late November last year.
Meanwhile, the US dollar, which had surged more than 5 percent after Trump’s election, was effectively back to its election-day level.
The real pain trade on Wednesday, though, was in stocks. Through the end of last week the S&P 500 stock index had gained more than 12 percent since Trump won the White House, and while the index has seen one other day since November’s election in which it fell by more than 1 percent, Wednesday’s drop of 1.7 percent was its largest one-day fall in eight months.
“It doesn’t mean that institutions are saying: ‘It’s time to leave the US,’ but for various reasons it’s time to go to the sidelines,” Weeden & Co chief global strategist Michael Purves said.
Julian Emanuel, executive director of US equity and derivatives strategy at UBS Securities, said clients were “certainly concerned because it increases the uncertainty.”
With Washington policymakers distracted by Trump’s political problems, investors were betting on a longer timeline to get to tax reform.
“Immediately after the election, we asked our analysts to use lower forward-looking tax rates in their models, and now in the last couple of days I’m starting to think whether we should reverse that to assume the ‘status quo’ for tax rates,” Eaton Vance chief equity investment officer Edward Perkin said
US House Speaker Paul Ryan on Wednesday said that Republicans were determined to keep pursuing tax reform, although such efforts could be seriously hampered.
US Representative Jim Himes, a Democratic member of the House of Representatives’ Intelligence Committee, told MSNBC that the “legislative agenda ... [was] lying in ruins.”
Investors have become increasingly bearish on US equities versus international assets in recent weeks, pulling a total of US$11.2 billion from US-based domestic stock funds, according to Thomson Reuters Lipper data, and instead stampeding into US-based stock funds that invest in Europe.
A longshot worry is the uncertainty that could be presented if Trump is actually impeached by the US Congress.
Investors said that was not necessarily a market negative, if US Vice President Mike Pence were to take over.
“Policy wise it might not make such a difference,” Standard Life Investments global thematic strategist Frances Hudson said in Edinburgh.
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