U.S. foreign policy has driven sharp swings in global
markets this summer, drawing investors into the relative safety of the U.S.
where growth and earnings are considered steadier.
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.
In recent weeks, 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.
Despite declines early Wednesday, the S&P 500 has risen
3% this quarter and is trading within roughly 2% of its all time high, while
the MSCI AC World ex-USA Index has fallen around 2.8% this quarter and is down
around 8% 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.
Still, Turkey’s recent currency-market 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 2% 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.
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