Economist's Insights

Today’s Trading – Full-Fledged Flight to Quality as Washington’s Woes Weigh

May 17, 2017

Tuesday’s early morning negativity tightened its grip on U.S. markets as stocks dropped the most since September, Treasurys rallied sharply, and the Dollar sank. Reports of an alleged dossier of conversations between Former FBI Director Comey and President Trump seemed to be the breaking point for markets. The alleged memos are the latest in a string of distractions for the administration that have raised concerns the pro-growth, economic portions of the administration’s mandate may be delayed indefinitely. House Oversight Committee Chairman Chaffetz has invited the former FBI director to a hearing next Wednesday. Politico reports Comey wants to testify as soon as possible. Investors responded by flooding out of riskier assets and into safe havens such as gold, the yen, and Treasurys. Financials bore the brunt of the equity selling while defensive sectors buoyed the major indices. The Dow shed 373 points with the S&P off 44; both representing 1.8% declines. The Dollar closed at its lowest level since November 4th. On a percentage basis, the 2- and 5-year Treasury yields fell the most since the Fed’s March hike while the 10-year yield dropped the most since last July. With the 2-year yield 5.3 bps lower at 1.246% and the 10-year yield 10.1 bps lower at 2.224%, the extra post-election premium for holding 10-year debt in lieu of 2-year debt has completely evaporated. The 97 basis points spread between 2s and 10s is the lowest since October.