The Trump disappointment trade swings into action

The market is still adjusting to the news late on Friday that Trump had been unable to get the House to agree to his amendments to Obamacare, unsurprisingly this has weighed heavily on the dollar, which is the weakest performer in the G10 so far today, global stocks have also had a torrid start to the week. The markets are having their own ‘Trump Tantrum’, as investors seriously doubt whether the President’s abrasive style will work in Washington.

Why the healthcare bill matters

We mentioned late last week that the healthcare bill, although it ultimately won’t have a big impact on the economy, was a major litmus test for the President, who has an aggressive policy agenda. Not only does the failed healthcare bill highlight the challenges Trump may face trying to get his other policies passed, but the Congressional Budget Office also highlighted that the savings expected from Trump’s healthcare bill would be much less than expected, which could limit the size and scope of his infrastructure spending plan. This is significant for the markets, as the “Trumpflation“ trade was based on fiscal spending, if there is less money in the pot, then stocks might have to unwind some of their gains since Trump won the election last November.

The Trump disappointment trade hits banks, healthcare firms

The Trump “disappointment trade” is now in full swing. The biggest losers on the Dow Jones last week were Goldman Sachs, Du Pont, Pfizer and Boeing, all companies that were reliant on Trump’s policy agenda. We expect losses from banking stocks, materials and construction firms, and healthcare companies in the next few days as the markets adjust to this set back for Trump. How he reacts will be crucial, so we will watch his Twitter account with a close eye. A spat with Congress is likely to keep the markets on edge, weigh on stock markets globally and push up volatility.

The Vix points to further losses for stocks

The Vix rose significantly at the end of last week, and it is now at its highest level since November. A break above 15 could trigger another leg lower in stock markets. The S&P 500 is worth watching closely on Monday as it is approaching a key level of support – 2,330 is the 50-day sma – a break through this level could add to the downward momentum, and trigger a deeper pullback in risky assets. Treasuries and the JPY are key beneficiaries of this bout of risk aversion. USDJPY is close to a key support level, 109.80 – 110.00, which is the 50% retracement of the September low to December high. The resurgence of the yen has weighed heavily on the Nikkei, which fell 1.5% on Monday, and tends to move inversely to the JPY.

Does Article 50 actually matter for markets?

Article 50 is barely having any impact on the markets ahead of the triggering of Article 50 on Wednesday. The pound is the third best performer in the G10 FX space this morning, and UK Gilt yields are lower across the curve, as the market takes its cue from the other side of the Atlantic. CFTC positioning data showed a slight increase in the number of speculative short GBP positions last week. Although this should be concerning for pound bulls and suggests that the market may still have the capacity to short the pound, we expect positioning data for sterling to improve next week as the dollar takes a battering post Trump’s healthcare fail. Overall, we don’t think that Article 50 itself will be a risk event for UK asset prices this week. The next big Brexit risk event will be the EU summit at the end of April, until then we expect the market to focus on Trump and the fallout of his healthcare bill.