The Senate's failure to replace Obamacare raises new worries for markets that Washington dysfunction will prevent the Trump administration from driving through other aspects of its agenda — most importantly tax reform.
The dollar fell and Treasury yields slid, after two senators signaled late Monday that they could not support the revised bill, and in essence, declaring it dead. The dollar selling continued Tuesday and buyers moved into bonds and out of stocks in a safety play.
The Dow was down more than 100 points at one point, in part because of Washington but also because of Goldman Sachs' earnings issues. The Nasdaq held a tiny gain, as investors continued to seek growth in some tech names.
"The dollar is under pressure, but it's not a wholesale sell-off of U.S. assets. What would be scarier would be if stocks were selling off, and bonds were selling off and the dollar was selling off. Bonds aren't selling off," said Marc Chandler, head of fixed income strategy at Brown Brothers Harriman.
But the move in yields was significant. Wells Fargo director of rate strategy Michael Schumacher pointed out that the 10-year yield had been as high as 2.63 percent on enthusiasm about Trump's program and on Tuesday, it was as low as 2.25 percent.
"I think people are looking at the remnants of the Trump trade and saying, this is a pretty big failure, and therefore they're knocking out a decent portion of it," he said. "This represents a pretty big move back."
The path forward is now unclear. Schumacher said whichever direction Senate Majority Leader Mitch McConnell takes to address the issues of health care, the budget, debt ceiling and tax reform, Wells Fargo continues to expect some sort of tax reform plan this year.
The Senate was to vote on a bill to repeal and replace Obamacare this week, but now the Senate could take a vote on just repealing Obamacare, leaving a two-year time frame to come up with a new replacement. That bill does not seem like it would have much support either.
"It has affected the [stock] market. There's no doubt about it, in that there's a question as to whether or not they can proceed with tax reform," said Quincy Krosby, chief market strategist with Prudential Financial. "There are questions about whether or not there is leadership behind the legislation, and the Republican Party can actually move with its own party. … I think today the market is saying: 'What are you going to do? You have control of both Houses. You talked about this for years, and you had a president who said it would be at the top of his agenda.'"
Krosby said the Trump administration appears to be stressing there will be movement on tax reform, but the market doesn't appear to believe it. "There's very little confidence left and I think you're going to start to see it in some form of the soft surveys" on business and CEO confidence, she said. "There's only so much patience business can maintain if they don't see movement."
But she said the stock market had already given up a lot of hope for a big tax plan, and it's being driven more by earnings and fundamentals currently. "There's always been a question about the summer months, and seasonality into August. In terms of statistics, it tends to be one of the worst months. Could this be a catalyst? I don't think so," she said.
The dollar index fell 0.6 percent, and is down more than 1.2 percent this week. It was trading at about 94.54 Tuesday morning, its lowest since September, just days after strategists began to think it would take off in a prolonged move higher.
But Federal Reserve Chair Janet Yellen last week indicated the e Fed could be more worried about inflation, and that and weak inflation data and retail sales Friday, helped send the dollar and bond yields lower. Yields move opposite bond prices.
The euro strengthened and was at its highs for the year. Chandler said there was a lot of buying in call options, with traders betting on a $1.20 area for the euro, but he said his initial target would be $1.1615. The euro was at $1.1572 in late morning trading.
"If the [dollar index] goes through 94, it's going to be very ugly. It may be would go toward 92. ... If it really reaches that point, we should see bond yields firm," said Chandler. He said the weaker dollar could in fact drive a rotation in the stock market if it continues, since it would be supportive of commodities prices.
As for stocks, "Is it a buying opportunity or is it morphing into a protracted political morass?" said Chandler.
He said the Senate's closed door sessions on health care did not work to achieve a successful vote, and now the Trump administration is working behind closed doors on a tax plan with several members of Congress.
"So the six of them think they're going to put tax reform together and jam it down everyone's throat, and this health care bill shows that strategy is questionable," Chandler said.