The firing of the former FBI Director, James Comey, by U.S. President Donald Trump, has unleashed a wave that is threatening to drown the Trump’s presidency. The resulting economic uncertainties is what the market is worried about.
With U.S. President Donald Trump facing his strongest criticism over possible collusion with Russia during his election campaign, investors are increasingly getting nervous and are rethinking their strategies which were based on the premise of the Trump administration delivering economic growth.
Right from stock to bond holders and even those dealing in the forex market, a bevy of traders who have been in fashion since Trump’s surprise victory in November, are now dialling back, with some even shredding his reform agenda.
The uncertainty surrounding Trump’s future got heightened in the last 24 hours over allegations that Trump sought to end Comey’s investigation into ties between his first choice of national security adviser, Michael Flynn, and Russia, with some Republicans even calling for a deeper probe into possible obstruction of justice.
As a result, the U.S. Stock market saw the harshest sell off since Trump got elected and jettisoned into positions that were tied to the notion that his policies would stoke inflation and economic growth.
“The Trump Trade is over as of today,” said Ross Gerber, co-founder and CEO of Gerber Kawasaki Wealth and Investment Management, who revealed that they have been selling short for the past 45 days.
“We’ve seen cracks all year, but today, this is the first institutional selling we are seeing,” said Gerber.
Incidentally, some “Trump trades” have been unwinding for weeks, especially in the currency and bond markets where bets on inflation risks and economic growth prospects are most prevalent.
“This has created opportunities for investors,” said Richard Benson, managing director, co-head of portfolio investments, Millennium Global Investments.
He revealed that they have been going short on the greenback against European currencies.
“And right now, we’re looking at these opportunities.”
The U.S Dollar, which had surged to more than 5% after Trump won the elections, was effectively back to square one – back to its Election Day level.
Stocks took the brunt of the fall. The S&P 500 stock index had risen by more than 12% since Trump assumed office, with Trump firing Comey, the stock index fell by a whopping 1.7%, its largest one-day fall in over 8 months.
“It doesn’t mean that institutions are saying: ‘its time to leave the U.S.’, but for various reasons it’s time to go to the sidelines,” said Michael Purves, chief global strategist at Weeden & Co.
Julian Emanuel, executive director of U.S. equity and derivatives strategy at UBS Securities, said clients were “certainly concerned because it increases the uncertainty”.
With Washington policymakers busy firefighting Trump’s political problems, investors are betting on a longer timeline for tax reforms.
“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,” said Edward Perkin, Chief Equity Investment Officer at Eaton Vance.
This was the concern that U.S. House Speaker Paul Ryan was addressing when he tried to control the damage by saying, Republicans were determined to keep pursuing tax reform.
However, as per Democratic Representative Jim Himes, a member of the House Intelligence Committee, “legislative agenda…(was) lying in ruins”. This is what he told MSNBC.
As a result, in recent weeks, investors have become increasingly bearish on US equities versus international assets and have pulled out a total of $11.2 billion from U.S.-based domestic stock funds, as per Thomson Reuters Lipper data.
“We have been contemplating an increase in international stocks to kind of hedge our U.S. equity bet,” said Phil Blancato, CEO of Ladenberg Thalmann Asset Management in New York. “So we are very much remodeling our portfolios.”
With a small but growing number of Republicans calling for an independent probe into Trump’s possible collusion with Russia during his 2016 campaign, the chances of him getting impeached are getting stronger.
Investors have indicated that were Vice President Mike Pence to take over the Administation, the market may not necessarily take it negatively.
“Policy wise it might not make such a difference,” said Frances Hudson, Global Thematic Strategist at Standard Life Investments in Edinburgh.