D-Day is Here: US Dollar and Stocks Face Significant Downside Risks if Repeal of Affordable Care Act Fails

The US Government's difficulty in repealing the Affordable Care Act has shown investors that President Trump might not be able to deliver those promised tax cuts and spending increases they have been expecting.

The US Dollar, stocks and commodity prices have all enjoyed strong gains since Trump's victory in November as investors went on a spending spree in anticipation of stronger US economic growth resulting from campaign promises to slash taxes and boost spending.

Now it is time for the details to be delivered or the whole move risks unwinding.

The big issue that has arisen for markets over recent days is whether or not the US administration will be able to pass key healthcare reforms in Congress on Thursday.

“It is seen as a potential gauge of the Government's ability to implement pro-growth policies further down the road,” says a note from Lloyds Bank to their commercial banking clients.

Divisions within the Republican party are threatening Trump’s progress not just on healthcare but also in other areas, including tax reform - and this is incredibly important for the Dollar.

Media reports have suggested that Republicans are making a series of last-ditch changes to their plans for healthcare in order to unite the party behind them.

“Markets have come under significant selling pressure as investors are beginning to doubt the potential pace of US economic fiscal policy reform. The outcome of tomorrow’s vote on the Obamacare repeal bill is seen by some commentators as an important data point allowing markets to make a judgement on the ability of the US government to deliver on other reform projects, particularly on taxes and banking sector reform,” says Hans Redeker at Morgan Stanley.

Republicans currently hold a 237-to-193 majority in the House with six vacant seats and they hold a 52-to-48 majority in the Senate.

All Democrats are expected to oppose the House health bill and leader Paul Ryan can afford only 21 Republican defections in passing the bill.

News channels are publishing ongoing whip tallies; NBC News was reporting there are 26 Republicans who are opposed or strongly leaning towards not letting the bill pass.

CBS counts 29 Republican representatives against while CNN counts 24 and another 4 maybes.

"Even if the vote gets through the House it then faces the Senate where up to three Republican Senators have come out against it (enough for it to fail). The path to eventual tax reform still looks long and tortuous," says Elsa Lignos at RBC Capital Markets.

Late on Wednesday, House Speaker Ryan held a long meeting with moderate Republicans but during the meeting, Charlie Dent, leader of the Tuesday Group, issued a statement against the bill.

Big Risks for the Dollar and Global Stocks

“Should the bill be rejected, the current high valuations in equity markets, particularly on US cyclicals and financials, may be at risk,” says Redeker.

Over the past 24 hours US bank stocks declined by 4%, while the overall US stock market experienced its biggest setback since the Presidential election day.

Financials and inflation expectations tend to correlate and with financials declining, US inflation expectations should scale back too and it were these very inflation expectations that lead the Dollar to rally in the first place.

US nominal yields coming off will only act as a risk stabiliser once nominal rates fall faster compared to inflation expectations, pushing US real yields lower.

“Should the bill be rejected, this may have the potential to tighten US financial conditions. In particular we watch to see if the decline in the USD and yields are sufficient to compensate for declines in oil and equities,” says Redeker.

In a sign of how serious President Trump is taking the issue, he on Wednesday attended a closed-door meeting of House Republicans at the Capitol in order to try and ensure the repeal of the Affordable Care Act succeeds.

According to reports, Trump told House members that after promising voters for years that they would repeal the Affordable Care Act, they have little choice but to vote for the bill before them.

If Trump fails to convince disenting Republicans to vote his way markets will likely experience a rough end to the week.

"We have seen the fears re-emerge of a potential unwinding of the recent Trump gains, where the possibility of a pushback on his healthcare bill raises the likeliness that we could see the president row back on the fiscal bounty promised to the American people," says Joshua Mahony at IG in London.

"Ultimately, whether this current downturn blows over or snowballs into something more significant will come down to Friday’s decision in Washington over Trump’s healthcare plan and its passage through Congress. As previously mentioned, Trump requires this healthcare bill to be passed to understand how much money he will have to put towards the tax cuts promised some time ago," says Mahony.