House Oversight — Estate records
HOUSE_OVERSIGHT_014721
Cause and Effect
- Pages
- 10
- Text
- Searchable
Text as released
Machine-read from the scan. Names, dates and numbers can be misread — check anything you rely on against the original page.
Cause and Effect Fade the Trump risk premium – buy USD 13 February 2017 Concerns over stagflation return In our view, the most interesting and important development in the global financial market so far this year has been the divergence between rising US inflation breakevens and falling US real yields. Rightly or wrongly, investors appear to have become concerned about upside risk to inflation and downside risk to growth. The Trump risk premium Informal surveys of our clients suggest that stagflation concerns are being fed by growing pessimism about the new Trump administration. Investors seem to think that potential trade wars and a border adjustment tax (BAT) would boost inflation while repealing Obamacare and the controversy regarding the BAT could delay the highly anticipated tax reform. Perception versus reality In this report, we argue why the Trump risk premium may be too high. The administration’s dealing with both China and Mexico in recent weeks suggests to us that the near-term risk of open trade wars has abated. We are also less concerned that Obamacare will take precedence over tax reform. FX and Rates Global David Woo FX, Rates & EM Strategist MLPF&S +1 646 855 5442 david.woo@baml.com Global Rates & Currencies Research Most crucially, we think the overall tax reform is less dependent on the BAT than usually thought. Our scenario analysis shows that what has been getting priced into the market since January (higher inflation, lower USD) may be actually the least likely path for the BAT. In more plausible scenarios, the USD does quite well and inflation breakevens should be either unchanged or lower. How to trade it? We could get details on the tax reform as early as the new president’s speech to joint session of Congress on February 28, 2017. We think this could validate our view of a stronger USD. Unauthorized redistribution of this report is prohibited. This report is intended for kaasha.saini@baml.com Taking advantage of clean positioning and the de […]