Risk-off mode prevails following the setback of the health care reform
The success of the US administration’s ambitious fiscal agenda came into question, following the failure to replace the Affordable Care Act (ACA or “Obamacare”), with a less generous legislation.
The Speaker of the House of Representatives, Paul Ryan, pulled the Republicans proposal on Friday due to a lack of votes. The bill had even less chance of being passed in the Senate, as the Republicans in the upper house were uncomfortable with the fact that the AHCA would reduce insurance coverage for 24 mn people by 2026 (Congressional Budget Office estimate).
In view of the inability to pass a new health insurance bill, despite holding majorities in both houses, investors are concerned about the administration’s ability to deliver on their tax promises. Without the new health insurance legislation, which would have reduced US Federal deficits by $337bn over ten years, according to the CBO, “revenue-neutral” tax reform will, by necessity, be less ambitious.
US GDP appears weak in Q1, reflecting inventory destocking, and weather-related softness in consumption of energy (see graph below).
Euro area growth momentum remains robust, according to business surveys, with the composite PMI increasing to a six year high of 56.7 in February (consensus: 55.8). At this level, activity remains consistent with GDP growth of c. 2.2% qoq saar in Q1:17, compared with 1.6% in Q4:16.
Better-than-expected euro area growth prospects and diminishing deflation risks could result in a less dovish stance by the ECB, in the absence of political turmoil. Recall that the ECB (at its March meeting) elected to not extend its TLTRO II operations -- the first sign that monetary policy will gradually become less accommodative.
As a result, the last Targeted Longer-Term Refinancing Operation (TLTRO II) on March 23 saw a large take-up of €233bn (vs consensus expectations of €110bn), as euro area banks rushed to lock in cheap 4-year funding (0% to - 0.4%) ahead of rate increases, likely to occur during the course of 2018.
Global equities were down on a weekly basis, with investor focus on US politics and the fact that the S&P500 underperformed its peers (-1.4%). Equities performed better, in relative terms, in emerging markets (following a dovish Fed) and the euro area (due to declining political risk premia).
Core Government bond yields lost ground, with 10-Year US Treasuries reverting to their early March levels (2.41%), while US High Yield corporate bond spreads widened by 16 bps wow and are up by 50 bps MtD due to significant downward pressures on oil prices and their impact on bonds issued by energy companies (15% of the index). The WTI oil price had lost -12% MtD and now trades at $47/bl, its lowest level since November 2016.