Global markets jittery as Trump fears persist

Global stock markets failed to recoup pre-weekend losses yesterday, with slips in Japan and Europe and stasis in the United States as traders eyed geopolitical uncertainty and hoped for hints from central bank chiefs Friday. US trading opened flat at 1330 GMT after slumps in Europe and Japan, suffering from lingering concern over President Donald Trump’s volatile administration and unclear prospects for achieving economic reform.

Worries over Trump’s stalled economic agenda and upcoming high-stakes Washington fights had hurt global stocks on Friday, with valuations pressured further by the terror attacks in Spain as investors sought haven investments such as the yen and gold. “Global sentiment remains jittery on exacerbated US political uncertainty and geopolitical concerns, while the Fed’s key Jackson Hole symposium looms on the week’s horizon,” commented Schwab analysts. The cautious mood on markets comes as investors look to a central bankers’ gathering in Jackson Hole, Wyoming on Friday for hints about a future with less monetary stimulus on both sides of the Atlantic.

“Traders are keen to get more insight into the plans of the two central banks” direct from Federal Reserve chief Janet Yellen and European Central Bank president Mario Draghi, Oanda analyst Craig Erlam pointed out. The Fed is expected to announce next month that it will wind down its near-$4.5-trillion balance sheet. And ECB policymakers appear set to unveil in autumn a long-awaited “tapering”, or gradual reduction of its tens of billions in monthly bondpurchases.

US stocks dip

US stock indexes edged lower in early trading yesterday, following back- to-back losses for the Standard & Poor’s 500 index over the last two eeks. The S&P 500 lost 2 points, or 0.1 percent, to 2,423, as of 10 am Eastern time. The Dow Jones industrial average dipped 42 points, or 0.2 percent, to 21,632. The Nasdaq composite fell 6 points, or 0.1 percent, to 6,210. The beginning of this week may be slow for markets, with few high-profile events on the schedule. Earnings reporting season is almost over, and roughly 95 percent of companies in the S&P 500 have already said how much they earned during the spring quarter. Few major economic reports are on deck. A calm week may be welcome, following a second straight, shaky week where the S&P 500 had its biggest one-day loss in three months. Worries about politics, both domestic and international, contributed to the nervousness. The S&P 500 has had two days in the last two weeks where it’s dropped by more than 1 percent. It’s had only four for the year so far, which is well below typical levels.

Euro bounces back

The euro rebounded from the day’s lows yesterday but held well below a 2-1/2 year high hit earlier this month as markets bet the single currency’s double-digit gains this year may be too much for a central bank that is still wary of removing stimulus. With very little in the way of top-tier economic data, market watchers are focused on the annual central banking conference in Jackson Hole this week where the world’s top central bankers may signal their next policy actions.

Though bets of a policy change have been reduced in recent days amid the general political turmoil in the US, expectations of a Fed rate hike may rise if Chair Janet Yellen emphasizes that the risks to inflation objectives and financial stability require careful monitoring in her speech on Friday. “If Yellen makes this point in her Jackson Hole speech, that reinforces the likelihood that the FOMC will raise rates again at their meeting in December,” said Jordan Rochester, an FX strategist at Nomura in London. Yesterday, the euro bounced off the intraday lows to trade broadly flat at $1.1763 against the greenback. It rose to a 2-1/2 year high above $1.19 earlier this month. Despite recent losses, it is still up more than 11 percent so far this year, making it the best performing currency in the G10 currency space. In line with the general nervousness in the markets before a key event, implied currency volatility of the euro for one-month shot higher to 8. “Absent some Mario Draghi fireworks this week, buying on dips for euro/dollar may be a better strategy rather than chasing the euro higher at these levels,” said Viraj Patel, an FX strategist at ING Bank in London.

European Central Bank President Mario Draghi will not deliver a new policy message at a Fed conference in Jackson Hole this week, two sources familiar with the situation have said, tempering expectations for the ECB to start charting the course out of stimulus.

But traders are not taking any chances. About $45 billion of euro-dollar currency options on the exchange rate will expire in the three days leading up to the Wyoming meeting. With markets hemmed in tight ranges and the lack of any top tier data this week, the dollar index drifted higher to 93.56 yesterday with latest positioning data showing speculators reducing their bearish bets against the greenback. Investors cut short dollar bets, particularly against the Japanese yen with positioning seen stretched before Janet Yellen’s speech on Friday at the Jackson Hole conference. “With the market now short-USD and with market participants knowing that the preponderance of positions is short-USD, the pace of downward movement almost invariably had to slow,” BMO strategists wrote in a weekly note.

One wild card for markets may lie in Asia, where US and South Korean forces yesterday started their annual joint military exercises. Tensions are higher than usual with North Korea, and Pyongyang in the past has responded to the drills with weapons tests and a string of belligerent rhetoric. In Asia, South Korea’s Kospi index dipped 0.1 percent, Japan’s Nikkei 225 index fell 0.4 percent and the Hang Seng in Hong Kong rose 0.4 percent. —Agencies