US: Drop in equities has spilled over to drag global markets lower – BBH

The second largest drop in US equities this year has spilled over to drag global markets lower as the MSCI Asia Pacific Index fell nearly 0.5%, snapping a four-day advance and cutting this week's gain in half, explains the analysis team at BBH. 

Key Quotes

“The Dow Jones Stoxx did not completely escape the US carnage yesterday, but losses are accelerating today, with a nearly 1% decline following a 0.6% decline yesterday.”

“Despite the better than expected retail sales figures earlier in the week, US yields have fallen this week.  The 10-year yield is back below 2.20%, off four basis points.  Today's yield 2-3 basis points decline in European bonds leaves most bond markets (except Spain) little changed on the week.”

“A combination of the terrorist strike in Spain and developments in Washington are cited as the major drivers of the slide in US equities, which was seen in the consensus view as a trigger to the dollar and drop in yields.  Such explanations are surely part of it, but we would also underscore the importance of what the Fed said in the minutes.  We cited it yesterday, but think is so important, we repeat it today: "vulnerabilities associated with asset valuation pressures edged up from notable to elevated."   The Fed upgraded its concern about asset prices (read stock market and long-term bonds).  The following the day the stock market sells off and yet few draw a connection.”

“The US political tension escalated importantly this week that is potentially important for investors.  Up until now, it seemed that the leadership of the large US companies were willing to work with the new president, despite his unorthodox ways.  The economic agenda, tax reform, deregulation, and infrastructure initiative had much to commend itself to them.”

‘However, what has happened in recent days, is that the national bourgeoisie wing of the coalition has begun defecting.  That part of the reason that rumors of NEC Director Cohn stepping down elicited such a strong market response.   Confidence that Trump's economic agenda will be implemented has waned in recent months, as the health care reform floundered, and one drama or another distracted.   We did not emphasize Trump's declining support as a market factor because his base held.  There are signs of it cracking.  Heightened policy uncertainty may not be conducive to the investment climate and the same moment the Fed raises the decibel of its warning about asset prices.”