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What's causing the market selloff? Trump says it's the 'loco' Federal Reserve

Donald Trump (HuffPost)

North American markets tracked lower in mid-day trading on Thursday, continuing the previous day’s broad-based sell-off that extended into Europe and Asia.

As of 3:18 p.m. ET, The Dow Jones Industrial Average fell 1.05 per cent or 268 points to 25,277.22, while the S&P 500 index was off 1.07 per cent or 31 points, at 25,277.22. The S&P/TSX Composite Index dipped 0.81 per cent, or 125 points, to 15,391.78.

The declines come on the heels of an eye-watering Wednesday session that saw the Dow plunge 831.83 points or 3.2 per cent, to 25,598.74. The S&P 500 fell 94.66 points, or 3.3 per cent, to 2,785.68, touching a three-month low. Toronto’s main index lost 336.65 points or 2.1 per cent, to 15,517.40.

So what caused Wall Street’s worst day in eight months, just days after U.S. indices touched record highs?

Fear that the U.S. Federal Reserve will pump the breaks on robust U.S. economic growth with more rate hikes is a good place to start, according to Oliver Jones, a markets economist at Capital Economics.

“The four per cent drop in the S&P 500 so far this week suggests that investors are starting to factor in the prospect of the U.S. economy slowing in response to tighter monetary policy,” he wrote in a research note on Thursday.

The market’s reaction did not go unnoticed at the White House. U.S. President Donald Trump commented the Fed has “gone crazy” and “is making a huge mistake,” on Wednesday. He doubled down on his attack Thursday, saying the central bank is going “wild” and “loco” with its interest rate trajectory in an interview.

Jones points to the U.S. 10-year treasury yield’s 40-basis point surge since mid-August as evidence that investors see higher rates on the horizon. He expects U.S. economic growth will have “fallen significantly” by mid-2019, causing the U.S. benchmark index to retreat by about 15 per cent from it’s recent peak.

Jasper Lawler, head of research at London Capital Group, notes a confluence of well-known risk factors are also stoking fear among investors.

“The trade war, the Italian budget, rising protectionism, a growth slowdown in China, anxiety over U.S. mid-term elections — even Brexit. These are all valid concerns that have shown up in world markets,” he wrote in a note to clients on Thursday.

Lawler said Trump’s corporate tax cuts have shielded U.S. companies from global concerns. Those tax cuts, coupled with a higher available return on cash, pumped capital in to U.S., spurring a record-breaking US$1 billion in share buybacks.

Now he expects many investors see the good times coming to an end.

“Markets are looking 12 months ahead to when the positive impact of Trump’s fiscal stimulus fades, and (are) voting with the feet,” he wrote.

Lawler said a more dovish tone from the Fed would go a long way to convince investors that robust U.S. economic growth and strong corporate earnings are here to stay.

“The current dip in confidence can be allayed were the Federal Reserve to signal it is easing off its quantitative tightening and rate rises,” he wrote. “The idea of the U.S. sneezing and the rest of the world catching a cold isn’t a worry when the American economy has such rosy cheeks.”

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