Investors hide in U.S. as Washington stirs markets abroad
Move to American stocks grows as White House policies intensify volatility overseas
U.S. foreign policy has driven sharp swings in European and Asian markets this summer, drawing investors into the safety of the U.S. It is also raising questions about how long U.S. markets can continue to outpace the rest of the world.
The White House’s recent actions on trade and international sanctions have amplified steep declines across markets in Turkey, Russia and China at a time emerging economies were already grappling with a stronger dollar and decelerating global growth.
U.S. stocks have beaten foreign stocks in part as investors seek a more stable market during the rocky period, analysts say. Strong U.S. economic and earnings growth has helped. While the S&P 500 has risen 4.5% this quarter and is trading within roughly 1% of its all time high, the MSCI AC World ex-USA Index has fallen 1.3% this quarter and is down nearly 7% for the year so far.
“Whether it’s sanctions, tariffs or central-bank policy…it seems the U.S. equity market reacts quite calmly, and most of the action is happening outside the United States,” said Ed Keon, Newark, N.J.-based chief investment strategist at QMA, a unit of Prudential Financial.
Fund investors have pushed their allocations of U.S. stocks and bonds near postelection highs, according to data from the Institute of International Finance.
The U.S. has also regained its crown as the most favored region for stocks for the first time in five years, according to fund managers surveyed by Bank of America Merrill Lynch.
The flip side: Such positioning means foreign markets could be poised to catch up should tensions ease or U.S. growth falter.
An example from the recent past of U.S. policy pushing overseas markets around, but then later seeing a big reversal: the Mexican peso. It quickly rebounded
from steep falls triggered by uncertainty over U.S.Mexican trade, jumping 27% against the dollar between January and July of 2017.
Turkey’s recent currencymarket crash has illustrated the U.S.’s contributions to volatility in overseas assets, at least in the short-term.
The Turkish lira sank to a record low, driven in part by a dispute with the U.S. over the detention of an American pastor. The country—already hit by unorthodox economic policies by Turkey President Recep Tayyip Erdogan, accelerating inflation and high external debt—saw its currency fall further after President Trump’s announcement on Friday doubling steel tariffs on Turkey.
Other markets have been caught in the crossfire of U.S. policy this summer.
The price of oil has seesawed after President Trump in May pulled the U.S. out of a 2015 international agreement to curb Iran’s nuclear program and put sanctions in motion last week.
The Russian ruble has fallen roughly 4% and Russian stocks have skidded since the U.S. last week announced new sanctions on Moscow over a nerve-agent attack on a former Russian spy and his daughter and threatened to follow through with a second round.
In China, the Shanghai Composite Index has continued to slide into the third quarter after falling into a bear market earlier this summer, hit in part by the potential for punitive U.S. trade policies. A locally driven economic slowdown is also at play.
Europe, closely tied to both the U.S. and emerging markets for trade, has suffered, too, with the Stoxx Europe 600 down 1% for the year and the auto sector, the target of threatened tariffs, among the biggest decliners.
Others have felt an impact from Turkey. The Indian rupee fell to an all-time low Tuesday and the Indonesian rupiah and Thai baht were down for the quarter amid news that the three countries were also put on notice they could lose some duty-free privileges.
“A combination of trade [tensions] and sanctions is a very difficult environment for emerging markets,” said Larry Hatheway, chief economist and head of investment solutions at GAM Holding.
If growth picked up or there were relief on trade questions, emerging-market assets “would be our first port of call, but it’s on hold at the moment,” Mr. Hatheway said.
There is also a question of blowback. The strengthening greenback could leave U.S. multinationals vulnerable to a decline in earnings should the dollar continue to strengthen.
The ICE Dollar Index has risen to its highest in about a year, climbing roughly 2% this quarter and 5% this year as the Federal Reserve continues to raise interest rates.
Meanwhile, the impact of tightening U.S. monetary policy and the strengthening dollar on emerging markets may be greatly amplifying the market’s reaction to political uncertainty.
“The tide of liquidity has started to ebb away, and that itself creates conditions in which triggers which previously were being looked through are having a much more meaningful impact,” said James Athey, senior investment manager at Aberdeen Standard Investments.