`Bad Joke' Aside, Wall Street May Be Baking in Trump Nafta Exit

(Bloomberg) -- Even before two of the biggest North American railroads report earnings this week, the outlook around them is darkening.

The din around the North American Free Trade Agreement’s future has heightened over the past few weeks and economists at Goldman Sachs believe the U.S. is now “more likely than not” to give notice to withdraw from the trade deal, according to a note by analysts at the bank.

U.S. President Donald Trump has long been threatening to pull out from the agreement, and reiterated his stance earlier today when he called Nafta a “bad joke” in a tweet. U.S., Mexico and Canada are due to meet in Montreal later this month to continue negotiating on the deal.

“Given a potential withdrawal process requires a minimum six-month notice period, we would expect near-term stock price movement largely driven by uncertainty over the outcome of negotiations," Goldman Sachs analysts led by Matt Reustle wrote.

Kansas City Southern, seen as the most vulnerable railroad to a possible U.S. withdrawal from Nafta, is set to report fourth-quarter results pre-market tomorrow. Ruestle notes that cross-border trade accounts for 40 percent of the company’s revenue, while for Canadian Pacific Railway Ltd, reporting after the market close today, that figure is about 31 percent.

“Our option strategists believe option investors have priced in higher concerns for the rails; however, potentially not enough for Kansas City,” the analysts added.

If a U.S. exit from Nafta triggered a 41 percent decline in cross-border trade with Mexico - Goldman’s mid-case assumption - Kansas City Southern could see a 16.5 percent hit to its 2018 profit, according to the analysts.

To contact the reporter on this story: Esha Dey in New York at edey@bloomberg.net.

To contact the editors responsible for this story: Arie Shapira at ashapira3@bloomberg.net, Morwenna Coniam, Jeremy R. Cooke

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