U.S. Political Unease Reverberates Across Global Markets -- 2nd Update

By Riva Gold and Kenan Machado Features Dow Jones Newswires

Stoxx Europe 600 sheds 1%, Nikkei off 1.3%

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-- Yields on 10-year Treasurys fall to 2.193%

-- British pound climbs to $1.3044

Global stocks extended losses Thursday as growing nervousness about the Trump administration's ability to push through its political agenda continued to ripple through financial markets and punish shares of banks.

Futures pointed to a 0.4% opening loss for the S&P 500 and a 0.5% loss for the Dow Jones Industrial Average after Wall Street's biggest selloff since September interrupted a period of unusual calm in markets.

Markets in Asia ended lower for a second session, while the Stoxx Europe 600 fell another 1% amid declines in banks, miners and auto companies. London's export-heavy FTSE 100 index shed 1.5% as the British pound climbed above $1.30 for the first time this year.

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Recent political developments have put U.S. President Donald Trump's administration on the defensive and investors world-wide have been more worried about his ability to push through proposals on tax cuts, deregulation and infrastructure spending.

"Everything happening in Washington is likely to if not derail, at least delay what the market expectation has been about significant tax reform and tax reduction," said David Lafferty, chief market strategist at Natixis Global Asset Management.

News that former FBI Director Robert Mueller will serve as special counsel to oversee a federal investigation into alleged Russian interference in the 2016 presidential election did little to calm investors.

"Two weeks ago, we were talking about policy, and now we're talking about all of the political firestorm swirling around the White House," said Brett Wander, CIO for fixed income at Charles Schwab Investment Management.

Brent crude oil fell 1.8% to $51.27 a barrel on Thursday, while Asian equity markets were broadly lower, echoing the selloff in the U.S. on Wednesday. Japan's Nikkei Stock Average fell 1.3% as a global flight to haven assets boosted the value of the yen, weighing on the country's exporters, particularly in the auto sector. Japanese life insurers, which are large holders of U.S. government bonds, were hit by declines in Treasury yields.

Yields on 10-year U.S. Treasurys fell to around 2.193% Thursday from 2.216%, following their biggest daily decline since the week of the U.K. referendum in June.

The spread between the two-year and 10-year Treasury yields closed at less than 1 percentage point for the first time since the November election on Wednesday while the S&P 500 Financials sector wiped out its gains for the year.

Declines in Japanese shares came despite economic data released Thursday that showed first-quarter gross domestic product expanded 2.2% from a year earlier.

Many investors said longer term, the jitters in Washington were unlikely to detail a buoyant economy and solid corporate earnings that had recently lifted stocks to record highs.

"We've been suggesting clients should be looking for setbacks like this as an opportunity to deploy funds in growth-related assets rather than see it as the harbinger of another massive setback," said Kevin Gardiner, global investment strategist at Rothschild Wealth Management.

"The U.S. consumer has plenty of gas in the tank even without tax cuts," he said.

The first-quarter earnings season was the best in six or seven years, with double-digit growth seen in all the main regions, according to Emmanuel Cau, global equity strategist at J.P. Morgan. Japan recorded the highest earnings-per-share growth, followed by Europe and the U.S., the bank said.

"From a fundamental investor perspective, I'm not seeing anything that shakes my view that the U.S. economy is ticking along just fine," said James Athey, a manager at Aberdeen Asset Management, which manages $385.2 billion in assets.

In currencies, the dollar showed signs of recovering Thursday from its worst session since March. The WSJ Dollar Index was up 0.1%, with investors still pricing a roughly 65% chance of a rate rise in June, according to CME Group data.

The dollar remained down 0.4% against the yen while the British pound was up 0.6% at $1.3044 after data showed U.K. retail sales rebounded in April from a steep quarterly decline in the first three months of the year.

Wiktor Szary contributed to this article.

Write to Riva Gold at riva.gold@wsj.com and Kenan Machado at kenan.machado@wsj.com

(END) Dow Jones Newswires

May 18, 2017 07:22 ET (11:22 GMT)