Market Overview by Wayne Cole

There is an old saying that when the U.S. sneezes, the world catches a cold. But if the malady is a self-inflicted wound, is contagion inevitable? There might be a hint of that in Asian markets today; the Nikkei is flat even though the S&P 500 shed 2.4% on Monday. Usually, it would be down 1,000 points, and that’s despite a stronger yen.

After all, the money fleeing U.S. assets has to go somewhere, and not just to European defense stocks. According to LSEG Lipper data, investors bought a net $11 billion in European equity funds and $3.6 billion in Asian equity funds in the week to April 16, while U.S. equity funds saw an outflow of $10.6 billion.

Since then, President Trump has upped the stakes by attacking Fed Chair Powell for not cutting rates as speedily as he would like. It’s not clear if he has the power to fire the Chair, but just the appearance of threatening the independence of the central bank is another body blow for investor confidence.

As a result, the dollar hit another decade low against the Swiss franc at 0.8842, bringing losses since “tariff day”—calling them reciprocal is an insult to the English language—to more than 8%. The euro has popped above $1.1500, and the dollar is testing the 140.00 yen bulwark. Foreign investors in the U.S. who were unhedged have had a particularly painful April.

Yields on 10-year Treasuries climbed to 4.41%, extending the recent jump in term risk. If Trump were to consider forcing Powell out and appointing a loyalist, then the idea of replacing Treasuries with zero coupon perpetual bonds might not seem unthinkable.

It’s also counterproductive for Trump, since now the Fed might be less willing to cut rates for fear of being seen as bowing to political pressure. It is noteworthy that Fed fund futures are down and remain 90% against a rate cut in May.

There are at least five Fed speakers on the schedule today, and it will be interesting to see how they handle this thorny political issue.

Key developments that could influence markets on Tuesday:
– ECB members Knot and de Guindos speak, BoE’s Breeden
– Fed members speaking include Jefferson, Kugler, Barkin, Kashkari, and Harker
– EU consumer confidence, US Richmond Fed survey

(By Wayne Cole; Editing by Muralikumar Anantharaman)