By Caroline Valetkevitch
NEW YORK (Reuters) - U.S. stocks and the dollar dropped and bond prices rallied on Wednesday as investors fled risky assets amid uncertainty about U.S. President Donald Trump's ability to deliver on tax and regulatory reform.
Reports that Trump asked then-FBI Director James Comey to end a probe into the former national security adviser have raised questions over whether Trump tried to interfere with a federal investigation.
All three major U.S. stock indexes were down more than 1 percent. The S&P 500 was briefly on track for its worst day since Sept. 13, but pared some of those losses to put it on track for its biggest daily fall in about two months. The dollar index (DXY) has erased its post-election gains.
The news comes on the heels of a tumultuous week at the White House when Trump unexpectedly fired Comey and reportedly disclosed classified information to Russia's foreign minister about a planned Islamic State operation.
Optimism over pro-growth policies under Trump drove a sharp rally in U.S. stocks after the Nov. 8 U.S. election.
"We're getting into stall mode because of the early expectations for the Trump presidency. It's all being put well on the back burner and even off the stove. It's kind of worrisome as it could take time to muddle through this," said Joseph Benanti, managing director, senior sales trader at Rosenblatt Securities in New York.
The Dow Jones Industrial Average (DJI) was down 254.56 points, or 1.21 percent, to 20,725.19, the S&P 500 (SPX) had lost 27.87 points, or 1.16 percent, to 2,372.8 and the Nasdaq Composite (IXIC) had dropped 108.10 points, or 1.75 percent, to 6,061.77.
Both the Dow and S&P 500 fell below their 50-day moving averages for the first time since April 21.
Volatility spiked. The CBOE Volatility index (VIX) was up 2.8 points.
Bank stocks, which outperformed in the post-election rally, were the worst hit. The S&P 500 financial sector (SPSY) tumbled more than 2 percent, led by losses in Bank of America (N:BAC) and JPMorgan (N:JPM).
At nearly 18 times forward earnings, the S&P 500 trades at a significant premium to its long-term average valuations of 15 times, according to Thomson Reuters data.
Several money managers said they were not yet likely to make changes in their portfolio as a result of the latest White House news.
"We aren't likely to make major changes. We are already well positioned, but we need to think about a more negative scenario re tax reform versus what we were previously thinking," said Edward Perkin, chief equity investment officer at Eaton Vance.
The dollar index, which tracks the U.S. currency against six peers and had scaled a 14-year peak of 103.82 on Jan. 3, fell 0.4 percent to its lowest level since Nov. 9, surrendering all of its "Trump bump" gains.
U.S. Treasury yields fell, with benchmark 10-year notes (US10YT=RR) up 23/32 in price to yield 2.25 percent, the lowest level since April.
In commodity markets, safe-haven gold
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