Up until Thursday’s “phenomenal” tax reform tape bomb, we were all fading the Trump trade.
The reflation narrative was dying on the vine.
With all of his energy seemingly diverted towards more “pressing” concerns – like signing unconstitutional Executive Orders and then berating the judiciary when said orders were frozen – markets began to question whether this President is actually committed to the growth friendly policies that got him elected or whether (secret) President Steve Bannon’s social agenda would continue to dominate the headlines.
Well in case you needed a more poignant reminder than the following chart that the reflation meme can reassert itself at a moment’s notice…
… here’s some truly epic color from BofAML who reminds you that you probably “shouldn’t ignore President Trump.”
We believe that markets are underpricing President Trump after the correction in recent weeks. A weaker USD, lower yields, strong equities, low vol and strong EM suggest that markets do not expect US fiscal stimulus this year, but also do not expect trade protection. It is therefore business as usual, with strong US data without price pressures keeping the Fed on hold and supporting risk assets.
We strongly disagree. We were expecting a correction of the Trump trades early this year, given how fast and by how far the market had moved after the US elections, but we are now concerned that markets may have become complacent and could be surprised soon. Nothing about President Trump is business as usual.
We have been arguing that the balance between US fiscal stimulus and trade protection will determine the outlook for the Trump trades this year. We remain on the positive camp, but we could be wrong. After all, we are in uncharted territory with President Trump. However, we strongly believe that the market’s scenario that Trump will fail to deliver on both fronts is wrong. President Trump will deliver; the question is what.