Trump Trades Still Show Life, But the Signs Are Fading Fast (1)

(Bloomberg) -- Maybe the bet on "unified government" wasn’t such a great one after all.

Investors on Monday further unwound trades initiated in November resting on the idea that the election of Donald Trump and a Republican Congress meant smooth passage of an agenda that featured business-friendly tax cuts and regulatory changes. The idea now looks flawed after the president and Republican legislators failed to proceed with health-care reform Friday.

"Although tax reform appears to have broader support and may be easier to pass, the AHCA experience sends investors a cautionary message about opposing factions within the GOP caucus," Citigroup Inc. analysts wrote, using the abbreviations for the health-care bill and the Republicans.

It’s been hard for analysts to disentangle Trump trades from those stemming from reflation, and solid global economic indicators suggest some basis for bond yields and stock values above the lows of 2016. All the same, alarm bells can be heard across markets, as the following charts illustrate:

The dollar, sometimes a bellwether for U.S. economic confidence, has slumped almost 2 percent in March and is close to erasing a more than 6 percent rally since Trump’s election in November. The Bloomberg Dollar Spot Index, a gauge of the American currency against a basket of global peers, is down 4.9 percent since peaking at a record Jan. 3.

The U.S. benchmark S&P 500 is nearing its average price for the year, when measured using mean prices paid by investors. Falling below that level suggests a drop into losing territory.

Investors are also boosting short positions on the U.S. benchmark, in anticipation of further losses. Short interest as a percentage of shares outstanding in the SPDR S&P 500 ETF has more than doubled this month, to 2.5 percent, according to data compiled by Markit.

After an extended leave of absence, the so-called fear gauge is back. The Chicago Board Options Exchange Volatility Index jumped 15 percent last week, the biggest such gain this year, as it became apparent the health-care bill was not going to survive a vote in the House. In Europe, the VStoxx Index rallied 11 percent Monday to the highest level in a month. Even so, overall levels for the VIX remain relatively low compared with the spikes seen last year.

And while the yield on 10-year U.S. Treasuries has dipped since touching 2.63 percent earlier this month, levels remain in the elevated range seen since the November election.

(Adds European volatility index in penultimate paragraph.)

To contact the reporters on this story: Eric Lam in Hong Kong at elam87@bloomberg.net, Adam Haigh in Sydney at ahaigh1@bloomberg.net.

To contact the editors responsible for this story: Christopher Anstey at canstey@bloomberg.net, Jeff Sutherland

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