Are investors right to be questioning Trump tax reforms? Maybe not Following a failed last-ditch attempt to secure backing, House Leaders opted to save face by pulling the vote on the GOP healthcare bill late on Friday. While the failure to repeal Obamacare has limited fiscal implications, investors are viewing this setback as a more broader loss of faith in the Trump administration’s ability to deliver on other campaign pledges – namely tax and spending policies which have underpinned risky asset prices since the US elections. Initial noise from the White House suggests that pushing through tax reforms will be the next order of business and in principle, this speculation alone could provide a backstop to the waning US reflation trade. But passing a tax bill will not be easy by any stretch of the imagination; GOP conservatives will want to ensure the package is close to revenue neutral, while any bipartisan deal would surely have to see the Trump team concede on concepts such as a border tax. Either way, a deflated $ will be looking for any glimpses of fiscal support this week and we would expect interest from $ bulls to increase as excessive negative expectations surrounding Trump tax reforms begin to tail off. One thing’s for sure, we don’t expect this EM “sweet spot” to last under the status quo; diminishing US growth expectations will weigh on global risk appetite and this spells bad news for EM assets in general. Watch for turning points in EM FX – in particular recent outperformers KRW and ZAR.
EZ focus will be on the flash Mar CPI estimate (Fri); our economists are looking for above consensus headline and core readings (the latter picking up to 1.0%), which could fuel the current hawkish ECB sentiment in markets. Investors might also be wise to keep an eye on the number of ECB speakers on show this week. Look for any EUR/USD clear out to be limited to the 1.0930-1.0940 for now.
Prime Minister Theresa May is set to trigger Article 50 this week (Wed); while we prefer to view this as more of a symbolic event – with nothing fundamentally changing in the UK’s economic outlook – markets will be looking for any clues to determine whether we’re on course for a soft or hard Brexit. For this, we place a greater focus on the initial response from Brussels – to be delivered by Donald Tusk within 48 hours – which could shed further light on the EU’s negotiating stance and priorities. Current GBP levels are not in our view pricing in the tail risk of a ‘cliff-edge’ Brexit – an automatic default to WTO rules – especially given talk from both sides in recent months over the need for a transition deal. Should EU leaders place greater weight on factors like the Divorce Bill – and demote the need for a smooth transition – then we would expect GBP to react negatively. We do see greater two-way GBP risk around this week’s Article 50 proceedings given the recent BoE-fuelled short squeeze and cleaner GBP positioning. With the two-year clock to strike a deal officially ticking, any initial political stalemate – or anything that pushes us closer towards a cliff-edge Brexit – may tip GBP/USD under the 1.20 level in the near-term and cautious real money investors may view this week’s events as a prompt to hedge for such an eventuality.