Wednesday, May 17, 2017

Markets have worst day in 8 months on Trump worries

Dow plunged 372 finishing at the lows, decliners over advancers almost 4-1 & NAZ dropped 158.  The MLP index lost 5+ to the 303s & the REIT index added 1+ to 341.  Junk bond funds fell & Treasuries had a sharp rally.  Oil rose to the 49s & gold shot up in price (more below).

Dow Jones Industrials

Live 24 hours gold chart [Kitco Inc.]

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The Dow tumbled more than 370 points, Treasuries rallied & volatility spiked higher as the turmoil surrounding the Trump administration roiled financial markets around the globe.  Major US stock indexes headed for the steepest losses since Sep, while the CBOE Volatility Index jumped more than 30, shattering the calm that gripped markets in the past month as the crisis threatened to derail the policy agenda that helped push equities to records as recently as Mon.  The $ dropped for a 6th day, while Treasury 10-year yields tumbled below 2.25%.  The spread between 10-year & 2-year yields narrowed to less than 1 percentage point, the flattest since before the US Election.  Emerging-market equities halted a 7-day rally.  Crude rose after US inventory data.  After a protracted period of dormancy, financial markets are beginning to react to developments in DC in a more unified manner.  With stock & bond volatility muted, investors have looked for a clearer reaction to the political din in currency markets.  The $ now sits at its lowest level since the day of Trump's win, a retracement some blame on perceptions his legislative agenda faces deeper challenges.  Even here, though, traders have been divided on what is moving the US currency, with some seeing catalysts beyond politics.  One explanation for the retreat might be weaker-than-expected readings on US inflation & economic growth in the past month, data that have coincided with easing perceptions of political & economic risks in Europe.  While traders continue to price in 2 interest rate increases by the Federal Reserve this year, speculation is rising that European counterparts are preparing to withdraw their own stimulus measures.

Dow Sinks More Than 300 Points on Trump Turmoil

The bond market is interpreting what could be the deepest crisis of Trump's presidency as throwing the Fed off its path for interest-rate increases this year.  The odds that the central bank raises its benchmark rate next month are about 60%, based on the current effective fed funds rate & the forward overnight index swap rate, down from 80% a week ago.  The chances they move in Sep are also on the decline & the fed funds futures market isn't pricing in a full hike until Nov.  The $14T Treasuries market over the past week took in stride the firing of FBI Director Comey & a report that Trump disclosed sensitive intelligence to Russian officials.  Yet the latest revelation sent benchmark 10-year yields down 11 basis points to 2.22%, the steepest decline since Jun 2016 & rattled financial markets worldwide.  Fed officials project raising interest rates 2 more times this year.  Strategists have forecast a move in Jun to provide flexibility for policy makers to either raise again in Sep or Dec, depending on financial conditions, or introduce a plan to trim the central bank's balance sheet.

Fed's Rate-Hike Odds Tumble After Washington Chaos Hits Bond Market

Gold prices rallied to tally a 6th straight session of gains.  The $ & equities took a hit as political uncertainty surrounded the Trump administration, prompting investors to take refuge in the perceived safety of gold.  Jun gold rose $22.30 (1.8%) to settle at $1258 an ounce, the highest since Apr 28

Gold Prices Settle At Highest Level Of The Month

Treasury Sec Steve Mnuchin & National Economic Director Gary Cohn held a private meeting with the Senate Finance Committee's Rep & Dem members to discuss tax reform.  As the Trump administration reached across the aisle on tax reform for the first time, Dems communicated some demands of their own regarding the tax overhaul.  Those requests included a middle class tax cut & that the overall bill not be part of a reconciliation package.  These 2 criteria were viewed by the Dems as a starting point for a “productive conversation about real tax reform that benefits everyone.”  Cohn & Mnuchin laid out the administration's blueprint for a sweepng tax overhaul last month, which included a simplification of the tax code, a cut to individual & corp rates & the elimination of most tax benefits on the personal side.  The administration's proposal calls for the collapse of the current 7-tier tax bracket system into just 3 brackets: 35%, 25% & 10%.  Mnuchin has repeatedly said the goal of the administration is middle class tax relief, but he has refused to guarantee it under the proposed plan.  “I can’t make any guarantees until this is done and on the president’s desk.” he said.  The administration also said it planned to fast-track both health care & tax reform through reconciliation, a budgetary process requiring a simple majority for approval.  This would help eliminate pushback from Dems if Reps can get on the same page.

Mnuchink, Cohn Meet Privately with Senate Finance Committee On Tax Reform

The goings on in DC are getting a large share of attention as people are looking for quick answers in a very fuzzy area.  Months from now much of these events could be forgotten as other issues, especially on health care, tax reform & infrastructure spending grow in importance.  Today Trump's guys are pushing plans for tax reform, a sign of encouragement for the bulls.  However, they will not get a good night of sleep tonight.

Dow Jones Industrials


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