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May 17, 2017

Drama in Washington Rattles Wall Street, and Stocks Dive | Dealbook May 17, 2017


nytimes.com
 
Kate Kelly and Alexandra Stevenson

“I think it’s a reasonable concern, obviously,” Mr. Bernanke said. He later added that after years of a strong economy, statistically speaking, it was time for a slowdown.
“Over the next four years,” he told an audience of hundreds of investors, “there is a pretty good chance we’ll have a downturn.”
The question is whether it began on Wednesday.
The New York Times report Tuesday that Mr. Trump had asked James B. Comey, then the F.B.I. director, to scuttle an investigation shook markets around the world.
Stocks ended lower in Asia and Europe on Wednesday. In trading in the United States, the benchmark Standard & Poor’s 500-stock index tumbled 1.8 percent, its sharpest decline since September. Wall Street’s fear gauge, the volatility index known as the VIX, spiked 46 percent after a long streak at historically low levels. And the dollar weakened against other currencies, with the Bloomberg dollar index falling to its lowest level since the election.
Investors flocked to markets considered safer in times of political risk. The price of gold rose nearly 2 percent, while Treasury securities rallied. The yield on the 10-year Treasury note, a benchmark for many interest rates, fell to 2.22 percent from 2.33 percent on Tuesday. (Yields and prices move in the opposite direction.)
One day in the markets does not make a pattern. Still, the reaction contrasted sharply with investors’ earlier complacency. The surprising firing of Mr. Comey last week and even the news early this week that Mr. Trump had shared confidential intelligence details with Russian diplomats had little discernible effect on markets.
But the revelations on Tuesday that a memo written by Mr. Comey detailed a plea by Mr. Trump to shut down a federal investigation into his former national security adviser, Michael Flynn, over his ties to Russia, seemed to be more than investors could stomach.
“This piece of news, the market appears to be acting differently towards,” said Curtis Schenker, co-founder of Scoggin Capital Management. “For the first time, there is real concern that Trump has overstepped his boundaries, which may create some chaos in the market.”

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The Dollar Against the Euro

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The political risk has existed for months, with Mr. Trump’s provocative Twitter posts drawing scrutiny. Questions have been raised about links to Russia in his campaign team and administration, and the White House has fumbled its legislative agenda.
Yet throughout the president’s first months in office, stock investors focused not on the questions and the missteps, but on the pro-business policies he had promised.
These included health care changes that would save the government money, paving the way for lower taxes, and help private insurers. One important pledge has been lighter regulation to help banks redeploy their capital and speed infrastructure projects. Perhaps the most anticipated change is a tax overhaul that would lower the corporate tax rate to 15 percent, helping big corporations and small businesses alike.
But with few policy victories in hand and the prospect of tax cuts seeming more distant, the reports on Mr. Trump’s plea to Mr. Comey stimulated a market backlash.
“Equities had been rallying for a long time, without much of a pause,” Stephen Jen, a London-based hedge fund manager, wrote by email Wednesday. “To the extent that the political noises in the U.S. further reduce the prospect of market-boosting measures such as tax cuts,” he added, “a correction in the risk assets,” in this case, stocks, “makes sense.”
Wednesday’s rout was so unexpected that, even with stock futures sagging early, few research notes analyzing the implications of the Comey news were written.
Traders said on Wednesday morning that concerns about the Comey memo could easily blow over, as other recent indications of presidential dysfunction had. But by midmorning, that confidence appeared to be fading.
In Las Vegas, where investors had gathered for the annual SALT hedge fund conference, participants spent the early morning catching up on the news from overnight. Outside a ballroom at the Bellagio Hotel, where the meeting was being held, some people hovered near a television screen tracking the S.&P. 500.
In his remarks, Mr. Bernanke described Mr. Trump as a “very unprecedented, unusual person” with no government background who would have a harder time pushing through tax reforms and infrastructure changes because of his low approval ratings.
Analysts at Japan’s Nomura bank wrote that, while “impeachment still seems a distant prospect,” the “negative impacts that the latest developments have on Trump’s ability to pursue his policy agenda could be more important for markets.”
Still, not every investor was unnerved. With the United States job market robust, the prospect of improving growth and a season of healthy corporate earnings ending, the domestic economy is in good shape, some investors said.
That strong foundation cannot be undermined by possible presidential misconduct, they argued, no matter how serious.
In the absence of more negative economic factors a sustained sell-off in the markets was hard to envisage, Brad McMillan, chief investment officer of Commonwealth Financial Network, wrote in a note to clients.
“We might see a bigger drawdown,” or dip in the markets, “but it is likely to be both limited and reasonably short-lived,” Mr. McMillan wrote. “There will be a time to worry, but right now, despite the very real issues being debated, we are still in a good place as investors.”