Trump Presidency to face serious litmus test - Swissquote

Peter Rosenstreich, head of market strategy at Swissquote Bank, argues that markets were too swept up in the hype of fiscal spending and tax reform to really examine the probability of success.

Key quotes 

"The central theme expressed in our 2017 Market Outlook was that US President Trump would underperform expectations, unable to deliver the pro-growth, market driving policies he so fervently promised on the campaign trail. Yet, markets were too swept up in the hype of fiscal spending and tax reform to really examine the probability of success. Tomorrow's vote on the Obamacare repeal bill should be viewed as a defining moment for the inexperienced Trump presidency. With Republicans currently holding 237 to 193 majority in the House and 52 to 48 majority in the Senate, the inability to pass his hallmark legislation will be a massive political blow (especially following the debacle of his executive order travel ban). Polling indicates a tight vote, forcing Trump himself to make the round to drum up support for the bill.

"Trump has stated healthcare as a first priority followed by his proposed tax reform, so a defeat will only push strong pro-growth policy further from the market's reach. US cyclical and financial stocks have already come under significant pressure as optimism evaporates, pushing the global equity market broadly lower. Commodities (metals and energy) with the exception of precision metals are falling as the pace of US economic acceleration is being brought into question. A rejected bill will further zap risk-taking sentiment from investors, sending US yields and stocks lower. However, we doubt the current pullback will spiral into a full-blown correction."

"Why? First, US economic data remains healthy, led by consumer and business optimism (however not accelerating to the point where the Fed needs to slam on the brakes). Second, should faith in Trump's ability to swiftly move forward on tax reform and other pro-growth policy, expectations for Fed hikes will reduce, likely triggering a resumption of risk-taking behavior. Interestingly, the market's reaction to hawkish comments by George and Mester was to largely ignore. In the current environment with rising global demand, accommodating monetary policy and low volatility we continue to advocate selling USD and rotating in higher yielding EM currencies. In the US, existing homes sales will provide a clear area where US optimism is translating into hard data (followed by Friday’s durable goods orders)."