Stocks falter, bonds rise on Trump troubles
The dollar broke its five-day losing streak, which helped deliver a reprieve for emerging-market stocks
London — Stocks faltered and bonds rose on Wednesday as US President Donald Trump’s political position was threatened by the criminal convictions of two former advisers, while the dollar steadied after five consecutive days of losses.
S&P 500 futures turned lower as markets digested the conviction of Trump’s former campaign chairman on eight counts of financial wrongdoing and a guilty plea by his former personal lawyer, in separate cases.
While the immediate market reaction was not large, the developments represented further uncertainty over Trump’s leadership for investors to navigate.
US bond yields dropped as investors sought safety in treasuries, and a dip in S&P 500 futures spread to European shares, which opened lower.
US 10-year yields were trading at 2.8297%, compared with Tuesday’s close of 2.844%.
"Trump has weathered quite a few allegations before this, where many people were quick with the ‘I’ word (impeachment), so we need to see whether this could open a new chapter or if it will calm down again and markets move on," said Commerzbank rates strategist Christoph Rieger.
MSCI’s all-country world stock index was unmoved by the uncertainty, rising 0.1% after the S&P 500 hit a record intraday high of 2,873.23, topping the 2,872.87 set on January 26.
The index was poised for the longest-running bull market in its history. Its relentless rise highlights the divergence in fortunes between US stocks — turbo-charged by tax cuts and share buybacks — and the rest of the world.
Year-on-year earnings growth in the US is expected to be about 24% this year. Europe is forecast to deliver about 9%. European shares were muted as the market awaited US-China trade talks, set to resume under the cloud of Trump’s prediction that they would make no real progress.
"The key point is these are midlevel officials," said Donough Kilmurray, MD and head of the investment strategy group for Europe, Middle East and Africa at Goldman Sachs. "It’s good they are talking, but at that level of engagement we doubt anything significant will come out of it."
The dollar inched up, however, after heavy selling following Trump’s criticism of the Federal Reserve’s rate rises in a Reuters interview.
The dollar index was 0.1% higher at 95.334, while the euro fell 0.1% on the day at $1.1558.
Emerging-market stocks climbed 0.3%, leaving 13-month lows further behind as the dollar’s losses helped ease pressure on emerging-market assets, which entered bear territory last week.
"If you look at the transmission from economic growth to earnings growth to shareholder returns, it’s strongest in the US, it’s OK in Europe and pretty weak in EM," said Kilmurray, who has been underweight emerging markets for five years.
"The question we’re getting asked now by investors is whether what we see in EM is a sign that something bigger is going wrong in the global economy. Our answer to that is no, these issues have been local issues," he said.
The threat of more US sanctions on Russia hit the rouble and backed the market’s view that Russian sanctions would increase in severity regardless of the Trump administration.
Chinese investors sold shares across the board, sending the Shanghai composite index down 0.5%, after the country’s central bank said it would not resort to strong stimulus to support growth.
Investors were also looking to Wednesday’s release of minutes from the US Federal Reserve’s August meeting and a speech by Fed chairperson Jerome Powell on Friday for clues on future rate hikes.
"This could present the opportunity for the Fed to discuss longer-term issues, potentially including discussion around the balance sheet and the implementation of monetary policy," said Jim Reid, strategist at Deutsche Bank.
In commodity markets, US crude rose 0.7% to $66.29 a barrel and Brent crude climbed 0.8% to $73.24 a barrel.
Copper prices declined ahead of the US-China trade talks.
Spot gold slipped from a one-week high, down 0.2% to $1,193.87/oz.