Trading Day: Trump crosses Fed Rubicon, market shrugs

Market Reactions to Trump's Fed Threat

By Jamie McGeever

Key Market Moves

ORLANDO, Florida, Jan 12 (Reuters) - Investors on Monday brushed aside the dramatic news of the Trump administration's threat to criminally indict Fed Chair Jerome Powell, lifting the S&P 500 to an all-time high, while precious metals also soared to new peaks.

Investor Sentiment

I dig into this in my column today, asking the question how long Wall Street can shrug off the 'visible hand' of U.S. President Donald Trump, who is increasingly playing the role of 'activist investor in chief' in corporate America.

Implications for Financial Stability

If you have more time to read, here are a few articles I recommend to help you make sense of what happened in markets today.

1. Trump administration probe of Fed's Powell drawspushback 2. Some Republican lawmakers unsettled by probe of Powell,warn of impact on Fed 3. Financial stocks fall as Trump's credit card rate capplan rattles investors 4. Alphabet hits $4 trillion valuation as AI refocus liftssentiment 5. EXCLUSIVE-BHP to wait out Rio-Glencore talks, no plan tobid, sources say

Today's Key Market Moves

* STOCKS: S&P 500 and Dow hit record highs - Dow a whiskerfrom 50,000 - and Nasdaq a 10-week peak. Europe, UK, MSCI Worldall record highs too, China a 10-year high. * SECTORS/SHARES: U.S. financials -0.8%, energy -0.7%, theonly two sectors in the red. Synchrony Financial -8%, CapitalOne -6.4%, Amex -4%. Consumer staples +1.4%. * FX: Dollar knocked off 1-month high, has biggest fallsince December 23. Notable falls vs GBP, NZD, ZAR. Biggestgainer is CLP. * BONDS: U.S. Treasury yields rise 2 bps at the long end,slightly bear steepening the curve. * COMMODITIES/METALS: Gold and silver surge to new highs,copper pushes towards last week's record peak. Oil +1% - Brentat 8-week high - as investors assess Venezuela, Iran.

Today's Talking Points

* Testing dependence on independence

The Trump administration has rapidly escalated its war on the Fed, threatening Chair Jerome Powell with criminal charges related to the Fed building renovation saga. Powell has fired back with an unprecedented rebuttal. The gloves are off.

While this is uncharted territory, the direction of travel has been clear for a long time. The question now for investors is do they think an independent Fed is in the dustbin of history or can it still be saved? If it's the former, it has yet to show up in asset prices.

* Precious metals maintain momentum

If doubts over the Fed's independence do deepen, where will investors seek safety? Traditional harbors like Treasuries, the dollar, Swiss franc or Japanese yen seem flawed to varying degrees for various reasons. The clear winners appear to be gold and precious metals.

Last year was so historic - gold, silver and platinum rose between 65% and 150% to record highs - that momentum must surely slow this year, right? Ordinarily, yes. But this is shaping up to be no ordinary year. Annual gains of 150% will be hard to replicate, but new peaks look certain. And lots of them, too.

* Putting money to work

Despite the challenges and risks facing markets at the start of this year - see my latest column below - investors are putting their money to work. And not just in perceived 'safe havens' like gold and precious metals.

Industrial bellwether metal copper is at a record peak, U.S. corporate debt issuance last week topped $90 billion and global issuance exceeded $300 billion, U.S. high-yield spreads are the tightest since September, M&A activity is bubbling up, and stocks are hitting all-time highs. Buy the dip? What dip?

How long can Wall Street shrug off Trump's 'visible hand'?

If record-high U.S. stock prices accurately reflect investors' assessment of the first year of Trump 2.0, then it's a glowing scorecard for the most interventionist government in decades. 

    It's yet another example of the topsy-turvy economic world where the global norms and orthodoxies of the last 40 years are being questioned and sometimes discarded by the U.S. president, who is rapidly becoming the market activist-in-chief. 

Under Donald Trump's direction, the U.S. government has taken direct equity stakes in companies, called for the firing of CEOs, attempted to dictate CEO compensation, ensured the government cuts from Big Tech chip exports, and sought to fire Federal Reserve officials.

On top of that, Trump has ordered the purchase of $200 billion of mortgage-backed securities, directed U.S. oil companies' activities in Venezuela, tried to ban defense firms from buying back shares unless they speed up production, and called for a one-year cap on all credit card interest rates as his Justice Department has threatened to indict Fed Chair Jerome Powell. And that's just in the past week. 

    INEFFICIENT MARKET HYPOTHESIS?

    Consider an alternate reality in which Kamala Harris won the 2024 U.S. presidential election and was now approaching her first year in office, having pursued a similarly controversial clutch of unorthodox policies. Would markets be shrugging this off so easily?

    We will never know, but it's reasonable to assume that there would have been notable pushback from investors. 

    In the real world, apart from the brief turmoil following Trump's "Liberation Day" tariff announcement in April, there has been virtually none. 

    Indeed, last year was a record year for stocks and many other asset classes. Hedge funds - no friend of government meddling in the free market and private sector - saw assets under management soar above $5 trillion, as they recorded their best year since 2009, according to HFR. 

    William Henagan, research fellow at the Council on Foreign Relations, agrees it's something of a "conundrum" that the Trump administration's highly interventionist approach to Wall Street and Main Street hasn't triggered more lasting damage to public markets.

    "Investors don't necessarily see the series of market interventions as substantively eroding the rule of law and property rights that underpin financial markets and the economic system," Henagan says. 

    "Perhaps public markets are not all-seeing, all-knowing, or the most efficient."

    But if the rule of law, property rights, and constitutional protections are key to what has made the U.S. financial system the biggest and most dynamic in the world, then investors ignore the erosion of these foundations at their own risk.

CASE FOR THE DEFENSE 

    But the question of market confidence is often binary. Investors have confidence in market structure and the financial system until they don't.

    Of course, government intervention in a market economy is nothing new, nor is it a bad thing. Indeed, many sectors welcome it, and it can be necessary for reasons such as national security, energy security, or the provision of a social safety net. 

    But a year into Trump's second term, the "visible hand" of the president is being felt by many parts of USA Inc, shoving aside the invisible hand of the free market posited by the eighteenth-century economist Adam Smith.

    Trump's capriciousness can still ignite volatility in certain stocks and sectors, of course. Defense giant Lockheed Martin's shares slumped 7% late last Wednesday after Trump said he would block defense firms' dividend payments or buybacks, then rebounded 8% in after-hours trading when Trump called for a 50% increase in the defense budget to $1.5 trillion.

    But the broader market continues to rise on the back of short-term exuberance and momentum, seemingly unaffected by the most interventionist administration in decades. To be sure, Wall Street lagged its global peers last year by some margin. Perhaps this is a sign that Trump's visible hand is unnerving investors, but, for now, the warning signal is certainly not flashing red.

What could move markets tomorrow?

* Japan current account (November) * U.S. CPI inflation (December) * U.S. Treasury auctions $22 billion of 30-year bonds * U.S. Federal Reserve officials scheduled to speak includeSt. Louis Fed President Alberto Musalem and Richmond FedPresident Thomas Barkin

Want to receive Trading Day in your inbox every weekday morning? Sign up for my newsletter here. 

Opinions expressed are those of the author. They do not reflect the views of Reuters News, which, under the Trust Principles, is committed to integrity, independence, and freedom from bias.

(By Jamie McGeever; Editing by Bill Berkrot)