Many were caught by surprise by yesterday’s sharp selloff in the last 90 minutes of trading, which saw the Dow Jones slide over 200 points on the double whammy of the Fed’s unexpected “bubble” warning and Paul Ryan’s admission that tax reform is going nowhere fast.
Below is BofA’s take on this particular event, together with what it believes is the biggest near-term risk.
The vacuum between monetary and fiscal policy easing
A rally in risk assets prompted by better than expected ADP employment data for March was reversed sharply and turned into losses as the FOMC minutes highlighted a desire to begin winding down the Fed’s balance sheet later this year and House Speaker Ryan commented basically that tax reform is not likely anytime soon (Figure 1).
This makes sense as tax reform creates many powerful winners and losers and therefore is difficult to pull off. This year we have seen a notable gap between positive equity market performance and a more skeptical bond market where yields have not gone up (Figure 2).
We continue to think that the biggest near term risk to our bullish outlook for credit spreads is a correction in equities, should the Trump administration disappoint on tax reform.
via http://ift.tt/2ngpQV6 Tyler Durden