The start of spring greeted stock-market investors with something they haven't seen since fall.
The S&P; 500 Index headed for its first decline of at least 1 per cent since October amid a rout in financial shares that have been the biggest beneficiary of Donald Trump's election. Banks had rallied 22 per cent through Monday, double the S&P; 500's gain and eight percentage points more than the next best group.
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Wall Street sinks on tax cut fears
Investors worry US President Donald Trump will struggle to deliver promised tax cuts.
While blame for the selloff spread from profit-taking to a renewed drop in Treasury yields and a warning from Morgan Stanley on weakness in fixed income, looming above the worst bank rout since June were Trump and concern that his pro-growth agenda may not be the slam-dunk investors had bet on.
"People are realising that Dodd Frank and Volcker aren't just vanishing into thin air," said Michael Block, chief strategist at Rhino Trading Partners LLC in New York. "Even if they do, secular change means commissions, fees and trading profits are not a given. The group is overcrowded and warranted a pullback."
The clearest signal from markets in the aftermath of the election was that Trump and a Republican Congress would roll back regulations such as the Dodd-Frank Act that prohibit proprietary trading and require elevated levels of capital, unshackling banks that would then benefit from faster economic growth and an attendant rising rate environment.
Trump's ability to enact the promised agenda is headed for a major test, as the repeal of Obamacare comes up for vote in the House Thursday (Friday AEDT) - and the outcome is in doubt. Adding to uncertainty was Trump's own ability to influence policy, a day after FBI director James Comey said there was no evidence to support his claim that former President Barack Obama wiretapped him.
"We are growing increasingly concerned that the Trump administration and Republican Congress may not be properly unified or focused," BMO Capital Market's Charles Sebaski wrote in a note to investors. "Even if health-care reform happens, the longer this issue takes to play out, the less likely we believe it is that tax reform makes it on the 2017 agenda."
Bank bulls aren't getting much help from the Federal Reserve either. While the central bank lifted its benchmark rate by a quarter of a per cent last week, officials maintained expectations for two more increases this year - a disappointment to hawks who thought the March tightening would mean an acceleration of future hikes.
Since the Fed's decision last Wednesday, the spread between two- and 10-year Treasuries has narrowed, as has the spread between five- and 30-year bonds.
"The rally in bonds after the Fed meeting hit financials," Mark Kepner, a managing director and equity trader at Themis Trading LLC in Chatham, New Jersey, said by phone. "Investors are also seeing it's not easy to pass legislation. If it's a dogfight to pass health care it may be just as hard to pass taxes, infrastructure and everything else - and maybe we've come too far too fast."