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Trader: "The Next Market Phase May Be Dominated By Genuine Disappointment"

By Mark Cudmore, a former FX trader who writes for Bloomberg

Mnuchin’s Dose of Reality Yet to Bite

Steven Mnuchin’s dose of reality for investors in relation to the fiscal stimulus has triggered a disinflationary theme to markets that will impact many assets classes.

Yesterday, I wrote that Trump’s speech to congress on Tuesday may mark a capitulation point for reflation trades. It appears that Mnuchin has tried to pre-empt him.

Amid comments on a wide array of financially relevant topics, markets should really be focusing on his admission that the stimulus won’t help the economy much this year and the confirmation that passage of tax reform is unlikely to be imminent.

He reiterated that the administration is committed to an overhaul of the tax system by August. That’s still farther away than many investors had hoped for, and even that “highly aggressive” timeline is unachievable according to Beacon Policy Advisors.

The start of 2017 has seen steam come out of some of the Trump reflation trades - long dollar and short Treasuries in particular. But once investors accept that the new administration won’t be able to work as many economic miracles as once hoped, there’ll be much more repricing required to get back to where we were before the election.

The yield level of 2.3% is the key pivot in 10-year Treasuries. The dollar trade has already been broken, but there’s more downside to come. Perhaps more interesting now is the assets that have seen little pullback yet.

I highlighted the topping price-action of commodities at the start of last week. The anticipated U.S. infrastructure plan was always going to be marginal in terms of real demand for industrial metals, but the sentiment boost was fundamental to price gains in the past three months. That support has just been removed.

U.S. equities make records weekly but the next stage is surely going to be de-risking and deleveraging, meaning a correction is likely. When it comes to financial markets trading the promises of the then-incoming U.S. administration, the end of 2016 was dominated by unrealistic hopes. This year started with glimmers of reality replacing those dreams. The next phase may be dominated by genuine disappointment upon realizing the future is at the pessimistic extreme of the potential spectrum.