Trump Bump becomes a nasty jolt

Commentators have been worrying for some time that US equities have been unduly calm given the scandals emanating from the Trump White House and the backdrop of geopolitical turmoil. But last week, the market's tranquillity was finally shattered by a "bombshell report on President Donald Trump's interactions with former FBI director James Comey" that sent the Vix the main measure of US market volatility up the most since before the US election, says Bloomberg's Oliver Renick. This so-called "fear gauge", which measures how expensive it is to buy insurance against big market moves, jumped by 50% in a single trading session.

"Wall Street is finally waking up to the reality in Washington," says Jeffrey Goldfarb on BreakingViews. Stockholders have been far too optimistic, clinging to the vague promises of corporate tax cuts and pump-priming investment that sparked the initial Trump Bump, while ignoring the warning signs of "dysfunction" in Washington after the failure of Trump's healthcare reform efforts and the mounting crisis about his administration's links to Russia. "The broader market is still up some 13% since Trump's election victory, translating into a valuation of 25 times earnings, a multiple hard to justify without at least factoring in ancillary benefits such as a tax cut".

It is no surprise that markets have been so complacent about Trump's shortcomings until now, says The Economist's Buttonwood column. Investors are often indifferent to political risk in democracies, preferring to focus on economic fundamentals even if it seems startling that "hard-bitten traders were naive enough to believe" that a man as chaotic and unqualified as Trump could enact a coherent economic plan. That said, this "dash of pessimism" could yet be brief: the Republicans in Congress remain keen to push through tax cuts ("indeed that is why they are still backing Trump") and first-quarter corporate earnings have been very strong. If this mini-selloff is to become a rout, there will need to be more signs of problems in the US than "just another hot-tempered tweet from the president".

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Still, if US investors become twitchy America's loss could be Europe's gain, says Mark Gilbert on Bloomberg Gadfly. The eurozone's woes have long given investors reason to be wary, but there are signs that investors are turning more bullish: they added $6.1bn to European equity funds in the week to 10 May after pulling money out last year. "Given the contrast between the brightening political backdrop in Europe and the worsening infighting in the US, there's a strong argument that on a relative value basis Europe currently offers a haven."