With markets entering holiday mode, and volumes across the globe sliding, there are few notable developments of note; however JPM, which last week warned that a shift in the political mindset is set to be the biggest market catalyst in the coming weeks, things are starting to change.
Recall that as JPM’s Adam Crisafulli wrote last week, “next very big catalyst for this market will be the Trump/Ryan tax reform plan and how it makes its way through Congress. Elevated political expectations are the single biggest risk for the tape and once the year-end chase rally euphoria wears off this will likely weigh on sentiment.”
Overnight, JPM followed up with a note in which it suggested that the narrative around Trump is indeed beginning to change, and that – aside from geopolitical tensions with China which now appear to be fading away for the time being – is the “most significant development over the last several days.” Here is the full note:
The most significant development over the last several days is the changing narrative around Trump. Whereas initially markets were enthused by the GOP sweep and the ostensibly pro-business implications of the Trump/Ryan fiscal/regulatory agenda, investors are now beginning to filter that platform through the lens of political and mathematical reality. While a lot of the early corporate tax reform enthusiasm was predicated on a cursory examination of the headline rate cuts, markets are now are examining the radical changes being proposed to the intricacies of the code. Thurs and Friday saw notable weakness in apparel/retail-linked stocks and a big factor behind the selling was concern around the border adjustment concept that sits at the heart of the GOP corporate tax reform plan. Republicans (for now) are standing behind the idea despite mounting criticism, but should it wind up being diluted (or eliminated) the Treasury would be robbed of the revenue needed to help pay for a reduction in the overall statutory headline rate.
And then, early this morning, JPM adds the following market color:
Asian stocks fell largely across the board while Eurozone equities and US futures are flattish. In general it was a relatively slow weekend w/most of the major news headlines having only geographic implications (i.e. the broader global narrative remains largely unchanged). In the US the big development over the last few days concerns Trump/Ryan enthusiasm as investors begin focusing on some of the particulars of the corporate reform proposals (specifically the border tax adjustments and the elimination of interest expense deductibility).
That said, looking at futures this morning which are primed for another move higher, JPM’s caution has yet to resonate with risk assets.
via http://ift.tt/2hzzq14 Tyler Durden