White House woes fuel Trump dump, but fundamentals sound

Singapore

INVESTORS in Asia dumped stocks and the US dollar on Thursday as mounting pressure on US President Donald Trump raised fears of policy deadlock in Washington.

But analysts see underlying strength in the US economy, and expect improved fundamentals to provide some buffer against increased volatility ahead.

This resilience came through in later trading, with most Asian markets closing less than one per cent off, save for Japan, whose Nikkei index shed 1.32 per cent.

Former Federal Bureau of Investigations (FBI) chief Robert Mueller was appointed overnight by the US Justice Department to lead an inquiry into Russia's role in the 2017 election that Mr Trump won.

The appointment fuelled speculation about the possibility of a Watergate-level scandal, especially coming on the heels of reports that Mr Trump had asked recently fired FBI chief James Comey to stop investigating former national security adviser Michael Flynn, who had failed to disclose contacts with Russia.

Whether or not Mr Trump will eventually face impeachment, as former US president Richard Nixon did in the Watergate matter, the expectation now is that the White House will be too distracted by Russia and obstruction of justice allegations to carry out meaningful policy.

"Despite a notable lack of concern on the part of Republicans, Trump's Russia troubles aren't going away," DBS wrote in a report.

"Our sense is they owe more to naivete and inexperience than to things truly sinister but the fact remains that political capital is being frittered away and the odds of achieving much in the way of reform, de-regulation or investment stimulus this year or next are falling rapidly.

"Trump could well turn out to be the new Obama when it comes to execution. Add a protectionist / isolationist tone to what remains of the policy agenda and America's star appears to be fading faster than either the optimists or pessimists thought possible."

Equities

The Singapore stock market showed some resilience when it shed 35 points but recovered to close at 3,221.66 for a net loss of only 2.44 points. In the broader market, 275 counters closed lower, compared to 167 gainers.

There were 13 stocks down for every two up at 9.02am on Thursday, an unusually lopsided opening for the market.

In Hong Kong, the Hang Seng fell 0.62 per cent, or 157.11 points, to close at 25,136.52.

Risk owners may have been particularly quick to unload given the strong rallies since Mr Trump's election in November 2016.

"The latest crisis hitting the Trump administration has provided investors with an excuse to take profits on markets that are already trading at at least 12-month highs," Credit Suisse head of South-east Asia research for private banking Kum Soek Ching said. "Allegations of the Brazilian President's role in a cover-up scheme also stoked fears of renewed political crisis in Brazil, adding to the risk-off mood in the Asian markets."

Currencies and rates

In the currencies market, the US dollar took a beating, falling against other key currencies.

The greenback was trading at 112.1 yen at 8pm, coming off from 112.05 yen in New York. The US dollar fell to 0.8997 euro, and 0.7727 against the British pound.

"Sustained Trump-related political woes (impeachment chatter) dragged Eurozone/US equities lower, depressed the US Treasury curve further and took the US dollar-Japanese yen below 111.00 as the greenback retreated against its G10 counterparts and the yen gained universally on a safety bid," OCBC analyst Emmanuel Ng observed.

"On other fronts however, the Australian dollar and Canadian dollar also underperformed across the board as risk aversion began to materialise."

Although the US dollar has weakened, significantly smaller risk appetites could limit how much Asian currencies can strengthen against the dollar, Mr Ng said.

"Contagion on the risk appetite front may thus increasingly put a floor on US dollar-Asia," he said.

But economists do not see any major change in fundamentals, even for the US economy.

Bank of Singapore chief economist Richard Jerram noted that the US Federal Reserve has not been depending on expectations of big changes in fiscal policy to set interest rates.

"Rate hike expectations have understandably dipped, but this just looks like a short-term knee-jerk reaction," Mr Jerram said. "The Fed is still likely to hike rates again in mid-June. US dollar has naturally sold off along with the shift in the expectations for the Fed, but we do not expect this to run."

Mark McFarland, Union Bancaire Privee's chief economist for Asia, highlighted that US consumer confidence remains relatively strong, while earnings-friendly tax cuts are still making their way through the legislative process regardless of what happens with President Trump. Even if the Fed delays its pace of interest rate increases, that might be good for Asia.

"What's interesting in the relationship between US interest rates and emerging markets is that when interest rates are not expected to rise quickly, that's usually good for emerging markets in Asia," he said.

Gold

Gold eased slightly on profit taking on Thursday, coming off 0.17 per cent to US$1,258.76 just after 5pm.

CIMB economist Song Seng Wun, however, said that gold has been relatively resilient given all the uncertainties and volatility.

"Gold, all through the last few months, has held up well whether there's risk on or risk off, because there's still enough of fear out there for people to hold on to gold as an insurance policy, even through the French election," Mr Song said.

"Enough things on the economic and political fronts give people that nagging fear that I should still have a bit stashed away in gold," he said.