Well, needless to say, investors have been whipped into a veritable frenzy over the past two days as a combination of a likely win for the globalist candidate in France’s presidential elections and Trump’s promises about tax reform conspires to buoy risk.
Of course as we noted on Tuesday, Trump is likely to be characteristically short on details with regard to his tax plan, but as former FX trader Mark Cudmore notes on Wednesday morning, that may not matter in the eyes of the market.
Read below as Cudmore explains why traders looking to find an excuse – any excuse – to establish new longs after two straight days of green screens, “will cast around for something on which to pin their sudden change of heart, even if it’s tenuous.”
And remember: it may be “tenuous” and it may be nebulous, but goddammit it will be “massive” and “bigly.”
Investors are looking for a reason to buy U.S. equities again, which means they’ll probably find one in Donald Trump’s tax plan no matter what he says on Wednesday.
- With multiple geopolitical risks successfully navigated during the past couple of months, investors are long cash and seeing a market rally sharply, backed by strong earnings
- Psychologically, it’s difficult to admit to being underexposed to the global bullishness and to have to enter fresh market longs within 1% of the record high. Traders will cast around for something on which to pin their sudden change of heart, even if it’s tenuous
- Trump’s tax plan is expected to promise great things, but it’ll mean little without approval from Congress. So the consensus is that it’s unlikely to impact too much either way beyond some short-term volatility
- Counterintuitively, it will be a positive surprise if the plan isn’t overly ambitious and doesn’t promise too much. That would make fiscal stimulus suddenly seem more achievable and realistic
- I wouldn’t recommend raising your hopes for that outcome. One of the few inarguable facets of Trump is he knows how to get attention and viewers. Trump’s tax proposal is likely to be dramatic with some bold statements
- A negative surprise would come from Trump straying off script and raising the prospect of trade wars again. Given his threats regarding Canadian dairy products and Wilbur Ross’s comments about further tariff actions on other products, this is a distinct possibility
- So the base case is that Trump will provide little fundamental change. And the odds for a surprise skew negative. Yet markets have a tendency to focus on the news that matches their mood and suits the preferred narrative. Hard facts aren’t always malleable, but a legislative wishlist — through the miracle of selective sampling — can be bent to one’s purpose more easily
- The prevailing sentiment suggests U.S. stocks will achieve record highs within days. It’ll just be a matter of how long it takes to work out which part of Trump’s proposal will justify that move after the fact