3/27 This Week's Outlook: Will Trump's Slump Begin? — Shima Rikio's Real-World Trading

This week's outlook release date: 2017/03/27 05:20

Last Friday, the AHCA (the so-called healthcare bill) was withdrawn. It was rejected, and further risk-off developments were anticipated, but with this, since the most important issue is tax reform, there is a positive interpretation, and the USD/JPY closed with a large short-cover. There may also have been an aspect of "sell on the rumor, buy on the fact."

A little while ago I wrote that the impact of the healthcare bill should gradually fade, but since passing the healthcare bill has become almost impossible, rather than delving into that, I reflected Wall Street's general view that moving quickly to tax reform would incur less political damage.

However, upon calm consideration, the political impact of not even achieving the healthcare bill is large. Many market participants and investors had an optimistic view that "the president is Republican, and Congress is Republican, so policy implementation should be easy." The healthcare bill was initially brought up partly to secure funding before budget measures, but since the entire Republican Party was united against Obamacare, there was also an expectation that passing the healthcare bill would be relatively easy.

However, the "Freedom Caucus" was hardline. They seem less like the Republican Party and more like a separate party. Like Japanese political parties, they bind votes—i.e., vote in lockstep—so persuasion is difficult. Yet if you present a healthcare bill that compromises with them, the mainstream moderates who constitute much of the Republican Party will oppose it. If you appease one side, you upset the other. In fact, there may never have been a healthcare bill that satisfied the entire Republican Party from the start.

Moreover, it was the Trump administration that poured gasoline on the fire. Investors wanted to see his Art of the Deal, but even on Twitter he does not speak in a way that persuades people. It reads something like, "Thanks to them Obamacare survived—what a disaster." According to Huffington Post, Steve Bannon, in front of them, said, "Okay, gentlemen. This is not a negotiation. This is not a debate. Your only option is to vote in favor of this bill," and apparently offended them.

Tax reform should be even more challenging than the healthcare bill. Within the Republican Party there are stubborn fiscal conservatives. They would oppose Trump's economic policy of spending money without funding. The idea of a border tax was proposed to meet both fiscal balance and corporate tax cuts. However, the border tax has not gained broad support; Speaker Ryan and others are very enthusiastic, but it cannot be said that it has broad support. It also seems the Freedom Caucus opposes it. (Trump opposes it too, but then where would the funding come from? Since there is nothing, it is assumed that some funding-like source will be arranged by implementing the border tax in a milder form.)

From this situation, it becomes clear that Mnuchin's statement that tax reform would occur by August is overly optimistic. The prevailing view is that if it happens, it will be in the fourth quarter of 2017 at the earliest, or possibly next year.

But that may also be too optimistic. House Speaker Paul Ryan said, The health bill's failure "does make tax reform more difficult," he said, "but it doesn't in any way make it impossible." It is a nuanced phrasing, but like healthcare, tax reform may also fail to pass through Congress, and to be blunt, President Trump may already be in a lame-duck state.

In the recent "Morning Satellite," Horiko-san mentioned that the market had expected tax cuts to be brought forward and enacted from January 2017, and I was frankly surprised. Do investors seriously think that? If that had been priced in, a correction would be unavoidable.

The key point is that you should pay attention to the moves in U.S. stocks and U.S. long-term interest rates. If long-term rates fall further from here, it would mean the start of a Trump slump, the opposite of a Trump rally.

Last Friday, the USD/JPY closed with short-covering up to around 111.330, which was clearly an incorrect reaction. This morning trading has already started around 110.80. Once trading becomes possible, I plan to attempt selling USD/JPY. Stop around 111.70.

EUR/USD has also risen to around 1.0855 this morning. I also plan to buy around 1.0820/30. Stops around 1.0740.

Rikio Shima's Real-World Trading

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