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Trump setback casts doubt on US 'reflation' play

This article is more than 12 months old

The Trump administration's failure on Friday (US time) to convince lawmakers to repeal Obamacare and pass new healthcare legislation will undoubtedly cast doubt on the administration's ability to deliver on its campaign promises.

A central pillar of those promises was a "phenomenal" fiscal plan that would involve generous tax cuts and massive infrastructure spending to boost the US economy.

Based on those promises, Wall Street had risen to several all-time highs after the November elections as traders bought into a "reflation" play.

Now that the healthcare initiative has folded, one has to wonder - will the same fate await the Trump budget, and if so, whither US stocks?

BBC News said the healthcare vote collapse was not just bad, it was a disaster, especially since Republicans control the House.

"(Trump) guaranteed a vote on Thursday that didn't happen. Then he guaranteed a vote on Friday, and that didn't happen either. He warned his party of the dire consequences of a failure to act, and they ignored him," said BBC's North America reporter Anthony Zurcher.

"Just over two months into his presidency, and Mr Trump's poll numbers are sagging, his agenda is on the ropes and his power is greatly diminished."

Reuters, in the meantime, said "the House failure to pass the measure called into question Trump's ability to get other key parts of his agenda, including tax cuts and a boost in infrastructure spending, through Congress".

The Independent called the defeat a "major embarrassment for the US President during his first attempt at passing legislation through the House".

How the US administration reacts to Friday's devastating setback and how markets take it will be known only in the weeks ahead, but with Wall Street's confidence clearly rattled, it could make for a volatile period.

It is worth mentioning at this juncture that US stocks were probably overdue for a correction in any event.

Bank of America Merrill Lynch, in its latest fund manager survey, found that a record number of investors (net 34 per cent) find equities to be overvalued, the most in 17 years, and that the US is identified as the most overvalued region (net 81 per cent).

It is also worth pointing out that the Atlanta Federal Reserve's GDPNow model forecast for real US gross domestic product growth (seasonally adjusted annual rate) in the first quarter of this year is one per cent on March 24, up from 0.9 per cent on March 16.

Although this is not an official Fed forecast, it does give a good idea of what the actual figure will be, and one has to ask - does one per cent growth really justify lofty valuations and all-time highs in the stock market?

For the week ahead though, there is the end of the first quarter on Friday to look forward to, and traders would know what this means - the possibility of quarter-ending "window-dressing" of certain stocks.

These would typically be the major blue chips such as the banks, those in the Jardine stable, Singtel and Keppel Corp, though underperformers such as Genting Singapore could also feature.

All sorts of permutations are possible - for instance, traders might buy in the early part of the week so as to sell into the expected strength that many think will surface on Friday.

Alternatively, because a March 31 push is widely anticipated, it might actually occur earlier, possibly Thursday.

For traders who wish to partake in the play that could eventuate, our advice would be to stick to the stocks named above, or not to stray too far from the liquid, index components.

This article appears in The Business Times today. For full listings of SGX prices, go to