Trump turmoil could lead investors to reassess risk appetite

Thu May 18, 2017 11:16am EDT
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By Jamie McGeever

LONDON (Reuters) - The turmoil in Washington surrounding Donald Trump's presidency is rattling world markets, and the burst of volatility could force investors into a strategic or tactical rethink of how much risk they are happy to face.

Increasingly damaging revelations about the Trump administration's and election team's dealings with Russia triggered the biggest fall on Wall Street on Wednesday since last September and a stock market slump around the world.

After months of major stock markets posting record highs and historically low volatility across a range of asset classes, a reversal was always on the cards.

Now that it has come, the question is whether it ends up being a one-off or marks the start of a prolonged reversal which sees investors cut back on risk and adopt more defensive positions.

A broad U-turn would likely require one or a mix of the following scenarios: impeachment proceedings against Trump get underway, his growth-boosting legislative reform agenda is delayed, the U.S. economy begins to contract.

None of them are mutually exclusive, and it remains to be seen if events play out that way to any degree. But the "Trump trade" that lifted stocks, the dollar and bond yields appears to have evaporated.

The dollar, two- to 10-year Treasury yield curve and yields on 10-year Treasury Inflation-Protected Securities (TIPS) are all back where they were before Trump was elected in November. After months of relative plain sailing, investors are now bracing for stormier weather.

"We have to be cognizant of volatility. It's a question of keeping risk levels appropriate, and that's something we were doing anyway. Our portfolios were well-positioned," said James Athey, portfolio manager at Aberdeen Asset Management in London.   Continued...

FILE PHOTO: U.S. President Donald Trump waves as he walks on the South Lawn of the White House in Washington, U.S., before his departure to Groton, Connecticut, May 17, 2017. REUTERS/Yuri Gripas/File Photo