Monday is all about the “Sell America” trade after Federal Reserve Chair Jerome Powell’s bombshell announcement that he’s under criminal investigation — which market participants see as a sign of President Donald Trump‘s interest in stripping away the central bank’s political independence.
“This is unambiguously risk off,” said Krishna Guha, head of global policy and central bank strategy at Evercore ISI.
Guha said a so-called “Sell America” trade could play out similarly to what was seen in April, when the stock market cratered after Trump first announced his plan for broad and steep tariffs. Global investors will place a higher risk-premium on U.S. assets, while safe-haven trades like gold should take a leg up as a response to the turmoil, he said.
The Dow Jones Industrial Average fell nearly 500 points at one point in morning trading, while the U.S. dollar index shed 0.3%. But the popular safe-haven trades of gold and silver surged to all-time highs in the session.
“Clearly, the market doesn’t like it,” Ed Yardeni, president of Yardeni Research, told CNBC on Monday.
Gold COMEX, all-time
Beyond the Powell investigation, the desk pointed out that oral arguments at the Supreme Court are scheduled for the case on whether Trump can fire Fed Governor Lisa Cook later this month. On top of that, bank stocks dropped after Trump called for a one-year credit card interest rate cap at 10%.
“Combined, the ‘Sell America’ theme may be the dominant narrative,” JPMorgan wrote to clients.
To be sure, JPMorgan said the macro and corporate backdrop support having a tactically bullish stance on the stock market. However, the team said the overhang caused by concerns around Fed independence offers reason for caution in the short term.
How concerned is the market?
In a video statement, Powell framed the probe as being driven by the fact that the Fed has set interest rates by what it believes is best for the economy, rather than by “following the preferences of the president.” Trump has repeatedly chastised Powell over what he sees as too high of rates and previously floated removing the Fed Chair from his post.
Markets had become used to such “hostile jawboning” and stopped trading around the Fed’s independence without further proof of risk, according to Evercore ISI’s Guha. But Powell’s investigation announcement can offer a reason to make worries about Fed independence once again top of mind for traders, he said.
Economists have widely come out in support of Powell and emphasized that they see the investigation as an attack on the Fed’s apolitical stature. Former Fed Chair Janet Yellen on Monday told CNBC 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 did not break outside of its recent range, which can mean investors aren’t yet sure that this will be a long-term story.
Stocks rebounded off lows in Monday’s session by late morning, further signaling that investors may be hesitant to commit to the “Sell America” trade until there are more indications that Trump will go forward with the credit card plan and his attempt to cast out Powell. Still, international markets outperformed U.S. stocks, with the iShares MSCI ACWI ex US ETF (ACWX) advancing about 0.6%, underscoring the Fed-related stress on investors.
“Volatility is likely to dominate markets in the near term,” said Mark Malek, investing chief at Siebert Financial. But with the VIX’s muted move shows “that investors expect all this to blow over, or that they simply don’t want to focus on this as we enter Q4 earnings season later this week.”
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