Just a week ago it appeared the sky was falling on the reflation trade. As if completely forgetting what happened, the market has since firmed, the dollar has strengthened, and there seems to be indifference to economic risks. Can it last?

With the AHCA behind us, the attention now turns to tax reform. How sweeping the proposed changes will be, could determine the volatility it may bring. Mild reform will have a greater chance of success, but markets have baked in more sweeping concepts. On the other hand, sweeping reform will have a harder road to forge, but will meet the markets expectations.

This last week saw the activation of Article 50, starting the formal Brexit process over the next 2 years. In addition, French elections are coming up, China is facing reform risks, and Greece is due to ask for more money in coming months. All signs point to an increase in global volatility, while long-term economic data are firmly pointing towards global growth.

It is great that markets were able to move on and be resilient to the failure of the AHCA, but it seemed as though the markets were merely distracted away with the carrot of tax reform. So, what will derail the current growth cycle and cause a correction? No one can say for sure, but with the ‘pretty lights’ effect last week, it may not take much to change course…

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