Trump’s economic agenda may be over before it starts

The political importance of Donald Trump’s high-profile flop on healthcare reform cannot be overstated. Indeed, the whispers around Washington and Wall Street are that his entire policy agenda may now be compromised.

That’s because Trump appears to be taking a hard line against right-wing “Freedom Caucus” members of the House of Representatives, whose intransigence Trump blamed – after pointing the finger at Democrats – for the failure of his push to repeal and replace Barack Obama’s health legislation.

Now, Trump and his team are saying they are going to turn to Democrats to work on legislation to reform the tax code. But given that there are far deeper disagreements on taxes between the two parties than there are within even the fractious Republican congressional majority, the chances of that happening are truly bleak.

“During his campaign, President Trump laid out an ambitious agenda for economic policy,” writes Mark Doms, senior economist at Nomura, in a research note. Trumpcare’s unraveling “calls into question those optimistic assumptions about the capacity of Trump and the Republican-led Congress’s ability to pass complex, impactful legislation.”

And those assumptions being questioned could have an effect on financial markets. Stocks briefly sank following the Trumpcare debacle and have since stabilized. But investors turned nervous on fears that the recent run-up in stocks, which had been predicated on a rosy scenario where all of Trump’s pro-growth policies would be implemented, may be close to done.

“It’s becoming more apparent that tax reforms and fiscal stimulus won’t be any easier especially that many Republicans don’t support massive deficits,” argues FXTM chief market strategist Hussein Sayed.

Given that investors have been pricing in the expected changes in fiscal policies for almost five months, I find it somehow difficult to see how this market can keep going up based only on promises.

How far will markets fall from here? “If you believe that Trump’s honeymoon is over and last week’s experience is just a guide on what to expect next, I believe markets will sell off sharply, probably up to a 10% correction,” says Sayed.