Traders are on edge ahead of tomorrow"s key address by President Trump to Congress, in which as Bloomberg writes "trillions are at stake."
Since Trump’s election, the S&P 500 has risen by 10%, posting 17 record closes in a rally that’s added $2.8 trillion in value to the U.S. equity market, with economists divided on how much of the rally is due to hopes from Trump"s pro-growth promises, how much due to corporate earnings growth (which are expected to rise 12% from last year"s energy-depressed levels), and how much due to the organic growth of the economy.
While it isn’t considered a State of the Union address since it falls within Trump’s first year, the initial speech to Congress has been no less important to presidents in the modern era.
The biggest wildcard, as documented over the past few months, are the details on Trump"s growth plan, with an emphasis on his proposed tax and spending cuts, offsetting the aforementioned $54 billion increase in defense spending, all of which so far have been sorely lacking.
Indeed, as Ryan Littlestone from ForexLive notes, if you want to trade this, look to see if he can highlight those areas for cuts rather than milking other genuine programs. If he does that then we"ve got a trade on, and possibly one that will really take off. "If he fails to give any real details, the dollar and the Trump trade could be in bigly trouble once again."
Many others agree: “It’s possible that if the market hadn’t been rising so dramatically, we could wait,” said Quincy Krosby, a market strategist at Prudential Financial Inc., which oversees about $1.3 trillion. “But this is a market that’s pretty impatient and wants results.”
As Bloomberg adds, adding to the anxiety are differing views on how to proceed on tax reform. House Republicans are considering a border-adjustment tax proposal that shifts the burden from exporters to importers, arguing that it would benefit American manufacturing while providing revenue to make up for losses from reducing corporate-tax rates. Trump has called the plan "too complicated." Meanwhile, as the debate grows, traders have reduced bullish wagers on the dollar, which is expected to soar as much as 15-20% should a BAT be passed. The dolalr has dropped 3.3% since January, after surging 6.5% after the Nov. 8 presidential vote. Hedge funds and other large speculators have cut cut net bullish dollar bets to the least since before the election.
“There is only so long the market will bid the dollar higher on the promise of something,” said Stuart Bennett, head of Group-of-10 currency strategy at Banco Santander SA in London. “They will want detail. And if it’s not forthcoming, then it’s a little bit like the boy who cried wolf.”
Inflation expectations have similarly taken a breather in recent months after jumping to the highest in two years in the weeks following the election.
A major risk should Trump disappoint tomorrow, is a waterfall effect across equities, where VIX has recently tumbled near record lows. As a result, complacency has emerged as the biggest risks, according to John Canally, chief economic strategist at LPL Financial in Boston. As Bloomberg notes, the VIX is headed for the lowest yearly average on record.
“Everyone is wondering why equity market volatility is so low given the uncertainty out there,” said Canally. “The economy is not in dire need of a tax cut, but maybe his speech could be a catalyst” for an uptick in volatility, he said.
David Woo, head of global rates and FX at bofA told Bloomberg that Trump’s desire for a tax plan before the August break means it is likely that the president lays out at least a “skeleton” of the program on Tuesday. If Trump does provide more clarity on his tax and growth plans, that raises the risk that the Federal Reserve will be more willing to increase interest rates, Woo said. Traders currently assign about a 40 percent probability for a hike at the Fed’s March 15 policy meeting.
“There is a lot riding on Tuesday,” said Woo. “The consequences for some kind of plan being unveiled will be massive. You will see volatility really going through the roof if he does so.”
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That said, according to a broad consensus of Wall Street analysts, Trump’s Tuesday address to Congress will likely offer more rhetoric than details on policy. Bank shares may move if Trump shows the economy is high on his priority list, and if he reaches across the aisle, which may signal his administration is capable of meeting its goals. Since Trump’s Nov. 8 election, the KBW bank index (BKX) has gained 28%, with top gainers including SVB Financial, BofA, Regions, Huntington and Zions.
Below is an excerpt of what select Wall Street analysts believe will emerge from Trump"s speech tomorrow:
COWEN (Chris Krueger)
- Speech may feature more optimism than the Inaugural’s pessimism; may be "more Shining City on a Hill than Country = Dumpster Fire"
- Trump’s "America First" rhetoric may be heavy on adjectives, light on policy details; probably won’t mention a border adjustment tax (BAT)
- Language in sync with Friday’s CPAC address is likely
CLSA (Mike Mayo, in email to Bloomberg)
- Investors want to see that the economy ranks high on the to-do list
- The further up Trump talks about the economy, the better it is for banks
- Comments related to deregulation, taxes, oversight and economic growth may all impact bank share trading
KBW (Brian Gardner)
- Doesn’t expect specific policy proposals; sees "broadly thematic" speech similar to inaugural address
- Tax reform discussion probably won’t contain details
- Watch for whether Trump reaches out to political opponents; if Trump strikes the right message, markets may rally on renewed optimism about administration’s ability to achieve pro-growth portions of its agenda
CAPITAL ALPHA (Charles Gabriel)
- D.C., Wall Street have differing expectations
- Capital Alpha expects little clarity on Affordable Care Act or BAT
- Investors "may settle" for less stridency on trade/immigration
BEACON POLICY ADVISORS
- Trump is still "a big picture leader," and is unlikely to dive too deeply into policy details (despite promises from aides his remarks will be more focused than previous speeches)
- Speech will be written by Stephen Miller, who wrote Trump’s "dark, and policy non-specific," inaugural address, and who’s likely more interested in Trump’s base than the media and Congress
- Watching for potential Democratic "outbursts"
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