Global shares tumble after Trump’s Fed battle heats up

Long-dated US Treasuries and stock futures fell on Tuesday after President Donald Trump said he was firing a Federal Reserve governor, an unprecedented move that fuelled investor concerns about the Fed’s independence.

French stocks and bonds also tumbled as its minority government looked increasingly likely to be ousted next month, raising the spectre of renewed political instability in one of the euro zone’s biggest economies.

World stocks edged off this month’s record highs, with focus on US markets after Trump said he was removing Lisa Cook from the Fed’s board of directors, citing alleged improprieties in obtaining mortgage loans. Cook said she had “no intention of being bullied to step down” from her position.

Gold prices touched a two-week high, US equity futures fell and the dollar was on the backfoot, as Trump also renewed tariff threats on trade partners.

Japan’s Nikkei closed down almost 1 per cent and Europe’s broad STOXX 600 index was last down 0.8 per cent as the US president’s latest salvo on the Fed muddied the outlook for Fed policy.

“Since he took office, Trump has managed to get his way on most things he has turned his attention to,” said RBC BlueBay Asset Management Chief Investment Officer Mark Dowding.

“In this context, it may seem reasonable for markets to conclude that he may end up getting his way with the Federal Reserve.”

In early London trade, the benchmark US 10-year Treasury yield rose 2.5 basis points (bps) to 4.30%, while 30-year bond yields rose 5 bps to 4.94%.

The two-year Treasury yield, which typically moves in step with interest rate expectations for the Fed, fell 2.5 bps to 3.69% in a sign that investors continue to anticipate lower rates.

Trump has regularly threatened to dismiss Fed Chair Jerome Powell, and earlier this month he fired a top labour Department official after accusing her, without evidence, of manipulating jobs data that had disappointed him.

Trump, who lacks the legal authority to fire the Fed chair except “for cause”, has backed away from that threat as Powell gets closer to the expiration of his term next May.

Cook’s exit from the central bank could speed up the president’s reshaping of the Fed and the rate-setting Federal Open Market Committee (FOMC). Her term had been due to end in 2038.

“The move is another example of concerns over Fed independence weighing on the dollar and has implications for the potential makeup of the FOMC going forward,” said OCBC currency strategist Christopher Wong. “That adds to rate cut prospects and a softer dollar outlook.”

Data for August due before the Fed’s September 16-17 meeting could still sway policy.

The US personal consumption prices reading, due on Friday, is considered the Fed’s preferred inflation gauge. Hotter-than-expected US producer price data last month raised questions in some quarters over the certainty of a cut.

Extending months of turmoil over on-again, off-again tariff policies, Trump also threatened “subsequent additional” import duties on countries with digital taxes.

In currency markets, the euro was steady at about $1.1619. The yen was flat at 147.82 per dollar after earlier jumping more than 0.5 per cent.

The dollar index, which tracks the greenback against a basket of currencies, retreated 0.05 per cent after a 0.7% gain on Monday.

Tim Graf, head of macro strategy for EMEA, State Street, said he remained bearish on the outlook for the dollar.

“We’ve started to see a lot of selling of the dollar from institutional investors again,” he said. “They are willing to build overweights in euros.”

In Europe, French bonds and stocks tumbled, particularly banking shares, as the minority government looked increasingly likely to be ousted next month.

Main opposition parties said they would not back the government in a September 8 confidence vote called by Prime Minister Francois Bayrou over his plans for sweeping budget cuts.

France’s blue chip CAC40 index was last down over 2 per cent having fallen 1.6 per cent late on Monday, with banking giants BNP Paribas and Societe Generale each down more than 6 per cent.

France’s 10-year government bond yield rose around 4 basis points to 3.53 per cent, its highest since March, though was last steadier at 3.50 per cent. When a bond’s yield rises, its price falls.

“We are heading into budget season which is why this (French selloff) is happening,” State Street’s Graff said. Elsewhere, Brent crude oil weakened 0.8 per cent to $68 a barrel and US crude fell almost 1 per cent to $64.

The prospect that France’s minority government could collapse soon triggered a sharp selloff in French stocks and bonds on Tuesday, pushing political risks from the euro zone’s second biggest economy back to the forefront of investors’ minds.

Three main opposition parties said they would not back a confidence vote which Prime Minister Francois Bayrou announced for September 8 over his plans for sweeping budget cuts.

France’s blue chip CAC40 index fell over 2% to its lowest level in almost three weeks, having fallen 1.6% late on Monday. Banking giants BNP Paribas and Societe Generale slid more than 6% each, while midcap stocks slid nearly 3%.

Reuters