Posted by on March 23, 2017 3:58 pm
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“The psychological damage done to U.S. equities and the dollar should not be underestimated,” warns Bloomberg’s Mark Cudmore, adding that “the good times for both won’t be returning soon.”

I originally thought today was all about the fate of the health care bill, but I now think that’s a red herring. It’s helping the market consolidate. Macro investors are right to pause until the outcome is known, but it’s just delaying the inevitable.

As outlined yesterday, I’m neither worried about the long-term global economic outlook nor about a major new bear market in the U.S. However, there’s certainly room for a healthy correction stateside.

The latest news reports suggest the bill will struggle to pass. If it does get through, the short-term relief rally may be powerful as it should mean that Trump can finally focus on real economic stimulus.

But the gloss of the new administration is already fading for investors. It’s clear that, rather than revolutionize the U.S., Trump will in fact need to struggle for every little change.

This isn’t to say he won’t fundamentally change things, but just that it won’t be happening soon enough to be a reason to hold expensive equities that are heavily owned and no longer trading consistently higher.

This means that any relief rally will be used as an opportunity for longs to take profit, not a catalyst to build positions further.

If the bill fails, then this dynamic just kicks in much sooner. Either way, I stand by my column from March 8 that U.S. equities topped out at the start of this month.

The global economy is not in trouble, and the U.S. isn’t at risk of a recession. There will be a time in the future to buy the dip, but a positive political outcome today will only prompt short-term bears to close out their positions – it won’t trigger genuine new topside enthusiasm.

Certainly judging by the dollar and the bond, hope is fading fast…

Somewhat confirming this ‘red herring’ persepctive, Bloomberg’s Mike Regan thinks this is how the myopic fixation on the health-care vote transpired:

  • Markets hit risk-off mode on Tuesday in a big way for the first time in a while.
  • Everyone scrambled through the available headlines to determine the catalyst, saw the news about the health bill being in peril and decided “Eureka! The market obviously views this as a referendum on the prospects for Trump’s entire agenda and his ability to use Congress as a rubber stamp.”

Maybe. But the lack of follow through yesterday and today suggests either most of its potential failure was all priced in on Tuesday, or something else was behind the move.

That day, after all, had the feeling of a big player(s) making some big position changes for reasons we may never find out about.

Could it have been the health care bill’s prospects? Sure.

  • Or it could’ve been the previous day’s acknowledgment by the FBI director of a Trump-Russia probe,
  • the Ally Financial profit warning,
  • Morgan Stanley’s warning on FICC trading exuberance,
  • a delayed response to the drop in bank lending,
  • or all of the above.

Or, there was no news at all and it was simply a giant redemption request from a whale of an investor — as Mohamed A. El-Erian argues.

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