Donald Trump and his administration are under scrutiny.
In just the past week, the future of Donald Trump’s presidency has come under a cloud after his former FBI chief called him a liar, besieged British Prime Minister Theresa May was described as a “dead woman walking” and a defiant North Korea launched its tenth missile test of 2017.
The response from equity investors? They pushed stock markets around the world higher, in many cases to record or multi-year highs.
For all the media headlines and market commentary about the risks of a Trump presidency, a “hard” Brexit or potential nuclear war on the Korean Peninsula, not to mention the possibility of renewed China-US tensions, markets appear remarkably relaxed.
The global Economic Policy Uncertainty Index produced by three American academics is elevated well above its long-term average, yet stocks markets on Wall Street, in Europe and the Asia Pacific are generally grinding higher.
Traders on the floor of the New York Stock Exchange. Michael Nagle
Market volatility, measured by the so-called fear index, recently slumped to its most benign since 1993.
A few bearish analyst reports warning about overvalued technology stocks triggered a mini tech tumble in the past two trading days.
But talk of a Watergate-like Trump impeachment connected to an investigation into Russia’s interference in the 2016 election (perhaps farfetched) and Prime Minister May possibly being forced to step down after a disastrous UK election that has her clinging to minority government have done little to impact the buoyant mood among share investors.
The MSCI World index is up almost 10 per cent this year.
T Rowe Price global equity portfolio specialist Kurt Umbarger said, “On the one hand it’s a bit puzzling, on the other hand markets are trying to stay focused on relatively good economic and earnings fundamentals.”
New York Daily News cover, June 9, 2017.
“The markets are definitely looking at and assessing the political surprises but not overreacting because the economic implications are still rather unclear.”
The Trump bullish reflation trade has largely unwound, as the political gridlock and White House turmoil in Washington force analysts to dial back hopes for tax cuts, infrastructure spending and deregulation in the foreseeable future.
After the US dollar surged to a 13-year high versus the euro and US bond yields spiked soon after the November US election, those trades have retreated.
But equity prices on Wall Street and globally have held up thanks to a synchronised upturn in world economic growth. Reflecting this, US corporate earnings rose nearly 15 per cent in the first quarter. Multinational companies with foreign earnings were among the best performers.
Sacked FBI director James Comey made allegations against Donald Trump that are likely to be investigated. AP
China’s debt-plagued economy has averted a hard landing, at least for now.
New York-based Trilogy Global Advisors chief investment officer William Sterling said markets found it difficult “handicapping politics” and preferred to focus on economics.
“Markets try to look through the noise of politics and follow more the fundamental economic signals,” Mr Sterling said.
“You could argue much of the rally in global equity markets is based on economic fundamentals.”
Britain’s Prime Minister Theresa May is under pressure to keep her job after clinging to minority government. Jonathan Brady
Beyond the recent plunge in tech stocks, equity market volatility remains tranquil.
One factor contributing to this relative calm may be the supportive role central banks continue to play with their ultra-easy monetary policies.
Though the US Federal Reserve is tipped to raise interest rates this week for the third time since December, the 10-year US Treasury yield has fallen from a post election high of 2.6 per cent to around 2.2 per cent.
The European Central Bank and Bank of Japan are persisting with aggressive asset buying programs, keeping market interest rates anchored.
North Korea fires what appears to be a slew of missiles. Supplied
“Central bank policy is still very market-friendly,” Mr Sterling said.
“If you’ve got decent growth, supportive central banks and unattractive bond yields, that all helps equity markets.”
T Rowe Price’s Mr Umbarger said the economic implications of Brexit and a Trump presidency remained unclear, so markets were awaiting more clarity.
“I don’t think we should be complacent and say politics don’t matter to markets,” he said.
“Politics do matter but policies matter more.”