In much of the same way that equities, the dollar and US yields rallied after Donald Trump’s election victory on the promise of bold growth friendly policies, the opposite is being seen this morning after the President failed to convince Congress to get behind what should have been a more straight forward attempt to repeal and replace Obamacare.
USD, yields and equities decline as Trump fails first major test
While Trump may have pledged to move on to market friendly tax reforms if the bill failed late last week in an attempt to put further pressure on officials and avoid disappointing markets too much, investors are still a little concerned. Since the election, people seem to have assumed that Trump would deliver on his election promises and that Congress would put up little opposition, particularly in the early stages of his tenure. Instead Trump has been given a wake-up call on how politics really works and to an extent, markets have as well.
While the prospect of moving on to tax reform rather than spend more time on the healthcare bill has softened the blow – given that this, infrastructure spending and deregulation is what triggered the rally in the first place – it doesn’t guarantee that he’ll be any more successful on this front and if he is, will the changes be as “phenomenal” as he promised or will he be forced to negotiate?
I think it’s important that Trump delivers something of substance very soon or the doubts will only grow. How deep a correction we’ll see may well depend on how quick he is to bounce back from this defeat. The Fed may offer some reprieve for the dollar and yields if it raises rates again this summer but the equity market rally may need proof of Trump’s ability to deliver.
GBP highest since early February against the dollar as May prepares to trigger Article 50
Still, the dollar is losing ground again today, with the euro trading at its highest level against the greenback since December. Also, in the week that Theresa May is planning to trigger article 50, the pound is at its highest levels against the dollar since early February, supported also by the more hawkish and unexpected turn by the Bank of England. The economic calendar is looking a little light again today but we will hear from a couple of Fed policy makers who may be able to offer some support for the struggling dollar.