LONDON (Reuters) - Global stock markets this week suffered their biggest shakeout since November’s U.S. election amid growing disappointment at President Donald Trump’s failure to deliver more details on promised tax cuts, infrastructure spending and financial deregulation.
The trigger appears to have been the new administration’s struggle to get its prioritized healthcare reform bill through Congress and what that says about the likely timing of and opposition to the rest of his fiscal stimulus plans.
But the tiring of the so-called “Trumpflation trade”, which has lifted world stocks about 10 percent since the election, is not the only factor that has been unnerving markets. Following are 10 others that have contributed to the sudden bout of investor angst this week:
The near-decade of super-easy money, QE worth trillions of dollars, euros, yen and sterling, zero (and even negative) interest rates is over. Yes, there’s still a huge amount of stimulus cash washing through the world financial system. But the tide is turning. The Federal Reserve has raised U.S. interest rates twice and wants to raise them further, and the European Central Bank has intimated it is considering lifting one of its key interest rates far sooner than expected. Even if this is a gradual process akin to an oil tanker changing direction, markets are getting unnerved.
Stories on ECB preparing to raise deposit rate:
While Fed interest rates and short-term U.S. yields may be rising, longer-term yields aren’t. This narrowing of the gap between the two, dubbed the “flattening” of the yield curve, suggests investors don’t believe growth or inflation will be strong enough to warrant interest rates going much higher. Flatter yield curves often herald the onset of slower growth or even recession.
A flatter yield curve is bad news for banks, who make much of their money by borrowing cheaply at the short end and lending longer term at higher rates of interest. The steepening curve following Trump’s election sparked a surge in financial stocks - U.S. banks jumped 30 percent and European banks 20 percent - which led the broader market rally. But that has fizzled since the start of March. U.S. financials are down 10 percent from that peak, and there may be more selling to come. Investors are heavily long bank stocks, according to Bank of America Merrill Lynch’s last fund manager survey. U.S. financials .BKX fell 4 percent on Tuesday, the biggest fall since June.
One eye-opener from the BAML survey was this: stocks are their most overvalued in 17 years. That might not come as too much of a surprise given the extent of the post-U.S. election rally. The Dow took 42 days to make the 1,000-point journey from 19k to 20k, and just 24 days to get up to 21k. As BAML’s Michael Hartnett noted, valuation and positioning argues for a “risk rally pause in March/April”. Positioning is getting stretched in other assets too: long dollars is far and away the most “crowded trade” in the world, and bond allocations are the lowest in three years, according to the survey.
In so-called normal times, markets display certain routine behaviors. When the dollar rises the price of commodities like oil often falls, and vice versa. That’s because commodities are priced in dollars, so there’s often an inverse relationship between the two. But this week, the dollar, oil, copper and other commodities have all fallen in tandem. Oil is down more than 10 percent in the last week, and the dollar is at a 6-week low. The breakdown in this correlation suggests a broader investor shift into “risk off” territory.
As the market mood turns darker and asset markets head south, key levels become targets. In some cases, they are just big, round numbers that markets zero in on for no other reason than that they are big, round numbers. The dollar index broke below 100.00 this week, Brent crude oil broke below $50 a barrel, and the 10-year U.S. Treasury yield has been unable to hold above 2.50 percent. Big levels holding or breaking often signal significant market turning points, especially when positioning is stretched. Tuesday was the first time since October - before the U.S. election - that the S&P 500 and Dow had fallen more than 1 percent. No surprise that the VIX index of market volatility - Wall Street’s so-called “fear gauge” - spiked to its highest in over two months.
While the world economy is ticking along at a steady if unspectacular pace, the momentum may be fading. Over the past month, Citi’s economic surprises index of the world’s leading economies have been mostly flat-lining or gradually turning lower. The most notable slow-downs have been in the UK and euro zone indexes, while Japan’s has plunged into negative territory. This suggests that much of the positive economic impact from the anticipated Trump stimulus is fading. Not a good sign for financial markets.
Britain’s decision last June to leave the European Union didn’t have the dire economic consequences many experts had feared. But that appears to be slowly changing. Just as the Brexit process formally gets underway on March 29, UK growth is slowing, business investment has frozen, inflation is rising sharply and real incomes are being eroded as a result. If that weren’t enough, the deep uncertainty surrounding Brexit for business and markets has been compounded by demands for a second Scottish independence referendum.
Calendar dates matter. Particularly the end of each quarter, when investment firms, funds, banks and other market participants tidy up their books for accounting purposes. Only a week away from the end of Q1, a bout of profit-taking may be underway. It has been a pretty lucrative three months too for those who have ridden the wave of rising markets - solid gains in stocks, credit, corporate bonds and emerging markets.
The S&P forward price to earnings ratio has jumped to above 18 from 16.6 on Election Day, making U.S. equities their most expensive since 2004. At the same time, the index’s dividend yield sits just above 2 percent, losing some of its allure against the 10-year Treasury note which may have slipped lately but is still a good bit higher at 2.40 percent. Can earnings pick up against the backdrop of such uncertainty?
Reporting by Jamie McGeever; Editing by Hugh Lawson