Trump slump: dollar, shares skid on reflation trade doubts

March 27, 2017 10:06 AM

The dollar and share prices tumbled on Monday, as investors worried that U.S. President Donald Trump's defeat over healthcare reform foreshadowed difficulties delivering other key campaign promises, in particular, fiscal stimulus. 

Trump's failure to rally enough support from his own Republican party—which controls both houses of U.S. Congress—to repeal and replace Obamacare spurred a rush to safe-haven assets such as gold, the Japanese yen and the Swiss franc.

Bets that pro-business policies promised by Trump would boost growth and consumer price rises after years of very low inflation, leading to a faster pace of U.S. interest rate rises, took stocks to record highs earlier this year and the dollar to its highest levels in 14 years.

But those "reflation trades" have since come under selling pressure as Trump has concentrated his efforts on areas other than economic reform, and that selling intensified after the healthcare bill's failure late on Friday.

The dollar index slipped below 99.0, its lowest since Nov. 11, two days after the results of the presidential vote.

Shares on the financial market looked set to follow Europe and Asia downwards, with U.S. stock index futures falling as much as 1 % to a six-week low.

"A tidal wave of risk aversion has flooded the financial markets, ... with global stocks under intense selling pressure after Donald Trump's failure on healthcare reforms sparked concerns about his ability to move ahead with tax cuts and fiscal spending," said FXTM analyst Lukman Otunuga.

Safe-haven U.S. Treasury yields fell to a one-month low of 2.35 %, while borrowing costs across the Eurozone also fell, as investors ditched riskier assets and unwound bets on higher inflation and interest rates.

Analysts said bets that the European Central Bank could look to tighten monetary policy sooner rather than later were being scaled back.

Risk aversion 
The fall in risk appetite dominated European stock markets, with the pan-European STOXX 600 index—which has risen around 10 % since Trump was elected—falling around half a percent on the day.

The Basic Resources index was the biggest sectoral loser, down 2 % to a two-week low as copper prices slipped, while the banking index was down 1.2 %.

Fresh off its healthcare bill defeat, the White House warned rebellious conservative lawmakers on Sunday that they should get behind Trump's agenda or he may bypass them on future legislative fights, including tax reform.

"It needs to be seen if (the healthcare defeat) will result in a 'correction' or if traders are willing to hold out and see if Trump will have more success with his next bill," Markus Huber, a trader at City of London Markets, said.

Bucking the weaker trend among European stocks were precious metal miners such as Randgold and Fresnillo, both up more than 1 %, as risk aversion boosted gold, traditionally used as a safe haven at times of market angst.

Gold prices climbed more than 1 % to a one-month high of $1,259 an ounce.

The safe-haven yen also gained more than 1 % against the greenback, touching 110.12 yen per dollar, its strongest since mid-November, while the Swiss franc gained as much as 0.8 % to trade at its highest levels since Nov. 10.

The euro rose 0.8 % to a 4-1/2-month high of $1.0882.

In Asian trading, falls in stock prices were more moderate, with MSCI's broadest index of Asia-Pacific shares outside Japan down 0.1 % after posting its first weekly decline last week in three weeks.

In terms of relative valuations, U.S. stocks are trading well above their historical averages while Asian stocks are still broadly in line with theirs despite a recent bounce.

Japan's Nikkei, though, fell 1.5 % as the yen rebounded in the face of renewed U.S. dollar weakness.

Oil fell further towards $50 a barrel, pressured by uncertainty over whether an OPEC-led production cut will be extended beyond June in an effort to counter a glut of crude.

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