● Stock markets retreat as investors nervous ahead of Trump-Xi summit
● Fed balance sheet shift and tardy US tax reform sour sentiment
● Dollar index eases 0.1 per cent to 100.45 and 10-year Treasury yields soft
● Euro steady around $1.0670 ahead of ECB minutes and Draghi speech
● Oil prices slip on record US stockpiles and gold holds above $1,250
US monetary and fiscal policy issues are combining to damp investors’ spirits.
Wall Street equities turned solid gains into a loss on Wednesday — and futures on Thursday suggest further declines — after Federal Reserve minutes showed members discussing trimming the central bank’s $4.5tn balance sheet.
Traders are wary about the impact on asset prices once the Fed begins winding back its holdings of bonds and mortgage-backed securities.
Some analysts expressed surprise at how extensive the balance sheet discussion was, while others said the Fed may not have done enough to clarify its intentions.
Around the same time that the Fed minutes hit the wires, the market was also rattled by US House of Representatives speaker Paul Ryan saying that tax reform will take longer to achieve than replacing Obamacare. Many Wall Street bulls are placing great faith in the potential boost to company earnings that tax reform could bring.
Ian Williams, strategist at Peel Hunt, said: “US equities suffered an unnerving late-session slide after the release of FOMC minutes that referred to the potential reduction of the Fed’s balance sheet later this year. Comments from House Speaker Ryan implying that proposed tax cuts may take longer than hoped to implement did not help, and the Dow suffered its worst intraday reversal for 14 months.”
What to watch
Also keeping traders in a cautious mood is the summit in Florida on Thursday and Friday between President Donald Trump and his Chinese counterpart Xi Jinping.
Relations between the world’s two biggest economies are somewhat tense as the White House argues that Beijing adopts unfair trade practices and is not doing enough to contain North Korea.
Investors are wary that a trade spat could hamper global growth and hit corporate profitability.
Back in Europe, the eurozone’s central bank is set to publish the minutes of its March meeting at 12:30 BST, and here too traders will be keen to see the tone of any discussion regarding the ECB’s quantitative easing policy. Furthermore, ECB president Mario Draghi is due to give a speech at a conference in Frankfurt at 08:00 BST.