US stocks and dollar succumb to Trump worries

What you need to know

S&P 500 sheds 0.4 per cent, Euro Stoxx falls 0.5 per cent
President Trump’s Mexico wall threat rattles markets
Euro supported by solid PMI data
Oil prices gain ground after US inventories data
Treasuries and gold rise
Overview

US stocks and the dollar gave back some of the previous day’s gains as comments from Donald Trump, US president, regarding the possibility of a government shutdown rattled global markets.

The euro found support from another encouraging round of eurozone survey data, reaching an eight-year high against sterling and regaining the $1.18 level against the dollar.

Oil prices pushed higher after news that US crude inventories had fallen for an eighth successive week, while base metals held near multiyear peaks.

Hot Topic

Mr Trump’s latest remarks provided one of the chief drivers of market action as he pledged to build a wall along the border with Mexico, even “if we have to close down our government”.

At a rally late on Tuesday in Phoenix, Arizona, he also warned that it looked probable that the US would pull out of the North American Free Trade Agreement.

Mr Trump’s latest comments came just as the markets appeared to be regaining some belief that promised tax reforms would be delivered.

“We’re seeing an odd mix of hope and fear for the US,” said John Hardy, head of forex strategy at Saxo Bank.

“The noise level on the potential for tax reform has increased sharply, with hopes of lower corporate taxes and a repatriation tax holiday akin to the 2005 Homeland Investment Act.

“On the fear side, the US president was busy in Arizona being Trump, and threatened a showdown over the budget ceiling if funding isn’t included for the border wall promised in his campaign. Negative comments on Nafta were also on offer.

“It’s always difficult for observers to separate the bluster from the real potential to impact policy, but the next six weeks are a critical time for Mr Trump’s presidency.”

Fitch, the rating agency, warned that the US’s triple-A sovereign rating could be put on review for a possible downgrade if the debt ceiling were not raised in a timely manner.

Equities

On Wall Street, the S&P 500 equity index fell 0.4 per cent to 2,444, after rising 1 per cent on Tuesday, as weakness for the industrial and consumer cyclical sectors outweighed gains for energy and financial stocks.

The tech-heavy Nasdaq Composite index shed 0.3 per cent.

In Europe, the pan-regional Stoxx 600 index fell 0.5 per cent, although the FTSE 100 in London outperformed as it ended flat at 7,382, as Brexit uncertainty cast a shadow over sterling.

Forex

The pound was down 0.2 per cent against the dollar at $1.2798. But it was the euro’s rise above £0.92 to an eight-year high — notwithstanding October’s momentary “flash crash” for sterling — that grabbed the headlines.

The latest eurozone purchasing managers’ indices offered support to the single currency’s latest leg higher.

The composite PMI edged up to 55.8 in August from 55.7, defying expectations of a weaker reading. The increase was largely driven by an improvement for the manufacturing sector.

Paul Meggyesi, global forex strategist at JPMorgan, said the latest data should help assuage market scepticism that the eurozone economy could live with a stronger currency.

“Neither the economy nor the [European Central Bank] appears to have reached their pain threshold on currency appreciation, and the euro remains at liberty to appreciate until there is evidence of either the economy losing momentum or the ECB losing its composure,” he said.

The euro was up 0.6 per cent against sterling at £0.9231, and 0.5 per cent versus the dollar at $1.1816.

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Fixed income

German government bonds shrugged off the PMI data, instead finding support from the mildly risk-off tone triggered by worries over the US debt ceiling.

The yield on the 10-year Bund, which moves inversely to its price, fell 2 basis points to 0.38 per cent. The 10-year US Treasury yield was 4bp lower at 2.17 per cent.

A speech by Mario Draghi, ECB president, to an academic symposium in Germany offered few clues to the monetary policy outlook. That left the markets eagerly awaiting speeches by both Mr Draghi and Janet Yellen, chair of the US Federal Reserve, at Jackson Hole at the end of the week.

Commodities

Energy stocks moved higher on both sides of the Atlantic as oil prices extended the previous session’s modest gains. Brent settled 1.4 per cent higher at $52.57 a barrel.

The Energy Information Administration said US crude stockpiles had fallen by 3.3m barrels last week — an eighth consecutive decline but much less than the previous week’s 9m barrel drop. Gasoline inventories fell 1.2m barrels.

Copper stayed within sight of Tuesday’s three-year high in London of $6,649 a tonne, while zinc touched a 10-year peak.

Gold was up $5 at $1,290 an ounce.