Trump reflation trade under threat - ANZ

Analysts at ANZ explained that the Trump reflation trade, based on optimism that Trump’s spend-up and tax plans will boost the US economy and inflation further, is facing a test today. 

Key Quotes:

"The trade – particularly the equity leg of it, which has seen US equity indexes roar to record highs – has arguably been long on optimism and short on substance for some time now. Today’s vote on the bill to repeal and replace Obamacare seems to be being interpreted by the market as a touchstone for whether the thrust of Trump’s fiscal plans are going to be realised, and hence whether a continuation of the reflation trade is warranted. At the time of writing the fate of the bill is unclear."

"The vote comes at a sensitive time for the market, with the initial post-election exuberance having waned and the market unsure of direction from here as it weighs up political uncertainty, a strong US economy, and an increasingly hawkish Federal Reserve. One thing does seem likelier than not, and that is that financial market volatility is set to rise from the extreme lethargy that has been seen in the past three months. That means potentially more action in equities, interest rates, and currencies, as analysts and market participants attempt to ascertain the real state of play. High correlations in recent times underline that any volatility is likely to be transferred directly into New Zealand assets."