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The healthcare bill rejected, but what next?

Paul Ryan looked humbled by the sheer breadth of the rejection from House Republicans. It seems that even if you’re the king of deal making, and if you inherit and bring forward a bill to the table that is not workable, it just won’t pass.

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Source: Bloomberg

A bill that seemingly so few liked is never a good starting point, with the discussions moving progressively more to the right of the House, in turn, losing even the more moderate conservatives. It makes Trump’s job very difficult and even shows an immaturity at a political level.

As one would expect there are a few headlines this morning quoting a number of outspoken individuals calling for the House Speaker Paul Ryan to step down. I am sure former Speaker John Boehner would be relishing his far quieter life he currently lives.

One then hears that Republican Chief Strategist Steve Bannon walked into the Freedom Caucus meeting and gave them little choice but to vote for the bill. You’re left with a party that is looking absolutely fractured and unlikely to show the sort of unity needed to pass tax reform.

The tax reform is now the big ticket item, and as we have heard, perhaps optimistically, from both Trump and Treasury Secretary Steven Mnuchin the wheels are in motion to focus on the budget, debt ceiling and redesigning the tax code. Not much is going to happen though in the short-term with spring congressional recess starting at the end of next week, but this leads to two key questions market participants are asking.

Firstly, will we get a second vote on the healthcare reform during Trump’s first term in office? Keep in mind that Paul Ryan had seven years to craft this one and tactically they had to pull the vote from even happening. Secondly, while we have seen a defiant and united front from the Trump administrations top brass on passing tax reform, has this clear rejection of such an unpopular bill signalled a very high hurdle for passing future tax measures?

Judging by the slight bid in risk assets when we saw the news that the administration was switching focus to tax reform, with the Dow and USD/JPY gaining 120 and 70 points respectively, we can deduce that the rejection of the healthcare bill was largely in the price.

However, there are presumably some who likely still believe Trump can succeed. The USD is now missing a key catalyst though as some $350 billion in potential savings over the decade are now effectively lost, so can we now believe that the prospect of corporate tax of 15-20% is not achievable and we should actually talk about 28-30%? This seems to be the case and essentially this issue could weigh on the S&P 500 as well, with the analysts’ consensus Earnings Per Share (EPS) of 129c largely incorporating much deeper tax cuts.

The open on Asian markets will be interesting, with the FX open focusing on moves in USD/JPY, while the futures open (at 9.00am AEDT) should focus on S&P 500 and US crude. SPI futures closed up one point and if we adjust this for our fair value weighting, we see the ASX 200 opening at 5762 +9 points. I wouldn’t be surprised to see traders selling into this opening print though and building on last week’s 0.8% loss for the index. This is especially poignant given spot iron ore closed down 1.5%, with Dalian iron ore and steel futures closing down 2.3% and 1.1% respectively. BHP’s American Depository Receipt (ADR) closed down 1.3%.

Healthcare and Aussie energy are in focus, although the US healthcare sectors finished flat on the session and the real upside was seen in US hospitals and Medicaid managed-care organisations. The weekend ‘technical committee’ in Kuwait may cause some support to the oil price, given five Organisation of Petroleum Exporting Countries (OPEC) and Oman are now publically backing an extension of the 30 November output cuts. This should please the market and I am sure the US shale gas players, who coincidently increased the rig count by a further 21 rigs. 

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