The US House has approved a bill to cut spending by $9 billion, with support from President Trump. This follows a vote in the Senate just a day earlier. These cuts are the first successful rescission request from a US president in a long time. The administration indicates that more requests may come in the current term. Most of these cuts will affect public broadcasting and foreign aid.

Next Steps for the Bill

The next step is for President Trump to sign the bill into law. We view this new legislation as more symbolic than economically important. The proposed cuts are a small part of the federal budget, which the Congressional Budget Office estimates will exceed $6.5 trillion this year. Therefore, the market’s reaction will likely focus more on the message this sends rather than the exact dollar amount. Traders should note the possibility of future rescission requests from the administration. This introduces uncertainty about fiscal policy, which could lead to increased market volatility, currently at low levels. We are observing the VIX, which has remained between 12 and 15 for months, for changes in sentiment.

Impact on Markets

We think that ongoing efforts to cut government borrowing could lead to lower long-term bond yields. A historical example is the post-2010 European austerity period, where countries that showed fiscal responsibility saw their borrowing costs decrease. Traders may want to consider positions that would benefit from lower yields if this trend continues. A perception of greater fiscal discipline in the US could also boost the value of the dollar. The U.S. Dollar Index (DXY) has already performed well this year, and this policy change would likely enhance its strength against other currencies. This could create opportunities in currency futures and options. Derivative traders should shift their focus from broad indexes to specific sectors that rely heavily on federal funding. Options on ETFs in sectors like defense and infrastructure will be crucial to watch. We will be monitoring these areas for increased implied volatility as a safeguard against major announcements in the future. Create your live VT Markets account and start trading now.

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