Trump uncertainty hits local markets

The ASX suffered a predictably torrid morning of trade after Wall St suffered its worst session of losses in eight months amid rising chatter the US president may face impeachment proceedings. But its far too early too panic, local professional investors and analysts say.

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In mid-morning trade, the benchmark S&P/ASX 200 index had slumped 85 points, or 1.5 per cent, to 5701, as investors sold almost indiscriminately. The benchmark measure has now shed 150 points over yesterday and this morning, bring the accumulated losses in market capitalisation to close to $40 billion.

Adding to the environment of rising tension, this morning news emerged that the US Justice Department has appointed former FBI Director Robert Mueller as special counsel to investigate possible collusion between President Donald Trump’s 2016 campaign team and Russia, as well as alleged Russian interference in the US election.

The rapidly developing story looked to have finally punctured the air of complacency that has pervaded US stockmarkets, where record highs have been matched with extraordinarily low levels of volatility.

Indeed, Investors had been “sleepwalking” into last night’s sell-off, ANZ analysts said this morning.

Despite the dire headlines emerging from Washington, so far traders are more likely to be treating the market moves as a correction than a true crisis in the making.

“If you look at what our US desk is saying, there’s no sense of panic coming out of them at this stage,” Citi director of equities sales Karen Jorritsma said. “And globally, some of our clients are seeking value and come back in, to add reflation exposure cheaply given the pullback.” ‘The whole reflation trade’

“It’s an opportunity to step back into market that’s been overheated,” she said. “Overall, the guys here are pretty relaxed. It’s too early to say if this’ll last.”

Of key concern to investors is that the Trump controversies will delay the implementation of the US president’s pro-growth policy agenda.

Those policies, in conjunction with a general cyclical upswing in the economy, were supposed to underpin a solid pick-up in growth later this year and into the next.

“The markets are continuing to question, with more urgency, the effectiveness of Trump in getting through his manifesto items,” BT Investment Management’s head of fixed interest Vimal Gor said.

“We had a large run-up on the expectation that Trump would be very good for US business. That might still be the case, but there’s a lot more doubt.

“It really brings into question the whole reflation trade.”

Reflecting this heightened uncertainty, investors piled back into bonds, as yields on US Treasuries, which move inversely to the price, dropping as low 2.21 per cent overnight. Mr Gor labelled it “a material move”.

The pullback in markets had the potential to be healthy, Perpetual Investments head of investment strategy Matthew Sherwood said.

“The one thing we have to remember is that while low volatility is really good, it can really lure investors into a false sense of security, thinking that all the risk is dissipated,” Mr Sherwood said. No dramatic impact – yet

And while investors might be feeling the pain of falling share prices, the fundamental impact on locally listed companies at this stage looks limited.

“In terms of earnings outlook, there’s no dramatic impact from this, other than for a handful of companies which have US economy exposure,” Mr Sherwood said. “It’ll be valuations where the downside is felt.”

“I think for us the situation in North Korea is also front of mind,” Ms Jorritsima said. “It’s never great for the ASX to see a Wall Street pullback, but there are other issues for us as well.”

And falling US bond yields were a positive for local bond holders, Mr Gor said.

“We think [Aussie bonds] offer significant value on their own basis anyway,” Mr Gor said. “While this is a further tailwind, it’s not the only reason we think Australian bonds will perform well in the coming period.”

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