Allianz CIO: Once Article 899 is fully implemented, U.S. stocks will plummet by 10%, and the U.S. dollar will drop by 5%

As the market remains immersed in the optimistic expectations of Trump's new policies, Clause 899 hangs over investors like the sword of Damocles. Once it falls, its destructive power may far exceed the current market imagination.

On Wednesday, according to media reports, Allianz Insurance CIO Ludovic Subran stated in an interview,

Once Clause 899 is implemented, the market will face a "significant panic moment," triggering a 10% sell-off in the stock market, a 5% plunge in the dollar, and a half-percentage-point rise in U.S. Treasury yields.

In the legislation passed by the House of Representatives in May, Clause 899 garnered little attention from the market, but Subran believes this is precisely the clause that people have not spent enough time studying. Major Wall Street institutions have warned that this clause will change the tax treatment of foreign capital in the U.S. for the first time in forty years, making it the "nuclear option" of the Trump administration.

This clause will raise tax rates for individuals and businesses from countries deemed "discriminatory" by the U.S., covering digital services tax (DST), diverted profits tax (DPT), and low-tax profit rules under the OECD global minimum tax framework (15%). Analysts believe this essentially constitutes a form of "capital control."

Once implemented, capital outflow will accelerate

At a time when foreign investors' confidence in U.S. Treasuries and other American assets has already been shaken by Trump's erratic trade policies and the deteriorating U.S. fiscal situation, Clause 899 creates yet another reason for divestment.

Wall Street generally believes that this clause will further undermine foreign investors' willingness to invest at a critical moment when their confidence in U.S. assets has already been shaken. Currently, approximately $31 trillion in long-term U.S. securities, including stocks and bonds, held by foreign investors will face unprecedented divestment pressure.

The official forecast from the Joint Committee on Taxation (JCT) further confirms the risk of foreign capital outflow. The committee estimates that this clause will generate $116.3 billion in revenue over the next 10 years but will ultimately reduce U.S. annual tax revenue by $12.9 billion in 2033 and 2034.

Subran sharply pointed out:

I believe the market has not priced in the full implementation of Clause 899, so this could actually scare the market, and this impact could "completely destroy what Trump is trying to achieve on the policy agenda."

Ironically, the large-scale capital outflow contradicts Trump's policies encouraging long-term investment in the U.S., and this inherent contradiction may lead to the eventual withdrawal of the clause, which may explain why the market has been reluctant to price in this risk so far.

Currently, there is uncertainty about whether Clause 899 can pass in the Senate. Senate Majority Leader John Thune stated on Monday that Senate Republicans will review its potential impact before passing the measure. A key House Republican tax negotiator expressed hope that this clause could serve as a deterrent and never be actually deployed. House Ways and Means Committee spokesperson JP Freire indicated that the measure would not cover interest from portfolio investments like U.S. Treasuries, showing that the exact scope of the clause remains uncertain