Precious metals jump to record levels. The US dollar is falling. The stocks fluctuate.
It’s all about “Sell America” trading on Monday after Federal Reserve Chairman Jerome Powell made the bombshell announcement that he is under criminal investigation – which market participants see as a sign that President Donald Trump is interested in stripping the central bank of its political independence.
“This is clearly risk aversion,” said Krishna Guha, head of global policy and central bank strategy at Evercore ISI.
Guha said a so-called “Sell America” trade could be similar to what happened in April, when the stock market plunged after Trump first announced his plan for broad, high tariffs. Global investors will place a higher risk premium on U.S. assets, while safe haven investors will Gold In response to the turmoil, the government should go a step further, he said.
The Dow Jones Industrial Average fell nearly 500 points at times in morning trading, during which US dollar index Lost 0.2%. But the popular safe haven trades with gold and Silver rose to all-time highs in the session.
“The market obviously doesn’t like this,” Ed Yardeni, president of Yardeni Research, told CNBC on Monday.
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JPMorgan’s trading team also highlighted “Sell America” as a key driver for the market on Monday.
Beyond the Powell investigation, the department noted that oral arguments are scheduled before the Supreme Court in the case on whether Trump can fire Fed Governor Lisa Cook later this month. Additionally, bank stocks fell after Trump called for a one-year cap on credit card interest rates of 10%.
“Overall, the ‘Sell America’ theme may be the dominant narrative,” JPMorgan wrote to clients.
Of course, JPMorgan said the macroeconomic and corporate backdrop supports a tactically bullish stance on the stock market. However, the team said the overhang caused by concerns about the Fed’s independence raises concerns in the near term.
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In a video statement, Powell characterized the investigation as a result of the Fed setting interest rates according to what it believed was best for the economy, rather than “following the president’s preferences.” Trump has repeatedly criticized Powell for what he believes are too high interest rates and has previously threatened to fire the Fed chairman from his post.
According to Evercore ISI’s Guha, markets had become accustomed to such “hostile banter” and halted trading around Fed independence without further evidence of risk. But Powell’s announcement of an investigation could provide a reason to bring worries about Fed independence back to the forefront for traders, he said.
Economists have largely supported Powell and stressed that they view the investigation as an attack on the Fed’s apolitical stature. Former Fed Chair Janet Yellen told CNBC on Monday that she was “surprised the market isn’t more concerned.”
The CBOE Volatility Index (VIX) – also known as Wall Street’s fear gauge – rose in Monday’s session. But it hasn’t broken out of its recent range, which may mean investors aren’t yet sure this will be a long-term story.
Stocks rebounded late morning from Monday’s session lows, another signal that investors may be hesitant to jump into the “Sell America” trade until there are more signs that Trump is moving ahead with the credit card plan and his attempt to oust Powell. The S&P 500 climbed to a new all-time high after trading lower earlier in the day.
Still, international markets outperformed U.S. stocks – with the iShares MSCI ACWI from the US ETF (ACWX) up about 0.8% – underscoring the Fed’s pressure on investors.
“In the short term, volatility is likely to dominate the markets,” said Mark Malek, head of investments at Siebert Financial. But the VIX’s muted move shows “that investors are expecting this to be over, or they simply don’t want to focus on it as we enter fourth-quarter earnings season later this week.”
—CNBC’s Jeff Cox contributed to this report.