Stocks, the US Dollar and Treasury yields all rose in afternoon NY trade Friday, seemingly in anticipation of Congressional tax writers announcing a reconciled tax plan capable of being voted on by both Houses this week. The unified plan was duly announced at 5:30pm NY time, post market close, but it is fair to say it was pretty much priced in before then. Notable was that the relatively highly taxed equity sectors (e.g. materials, energy, real estate) heavily underperformed those containing the big multinationals (IT, healthcare) that already pay the least tax. Stock investors have surmised – rightly it seems – that none of these latter firms are going to be paying a penny more tax beyond the one-off tax payments on accumulated offshore earnings. In fact many may be paying less given agreement to repeal the Alternative Minimum Tax so hated by large multinationals.
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As for the economy, by agreeing to a 2018 not 2019 start date for the corporate tax cut (now to be set at 21%) this diminishes the prospects for a surge in business capex in 2018 to take advantage of full expensing against the prevailing 35% tax rate (in the earlier Senate version, recall, the corporation tax cut did not kick in until 2019).
We will wait to see what the big independent economic modellers such as Penn-Wharton come up with, but I would doubt they’ll be suggesting the plan will produce more than one or two tenths of a percent of extra US GDP growth in the next year or so – as a result of somewhat stronger capex and the (small) net tax cut that much of middle America will receive next year (assuming the GOP tax writers’ claim stands up). Remember though the personal tax cuts are slated to expire (sunset) in 2025, unlike the cut to the corporation tax rate which is intended to be permanent.
The tax document released Friday runs to 503 pages. Significant, as far as prospects for passage through the Senate go, is that it has the support of Senators Rubio and Bob Corker (Corker refused to support the earlier Senate version, while Rubio won concessions he was demanding on child tax credits). Key feature are:
- The corporation tax rate is to be cut – permanently – to 21% from 35% effective January 1 2018.
- Full expensing of capex in the year it occurs for 5 years, with 100% expensing to be phased out over the subsequent three years.
- One-off tax on profits held overseas to be 15.5% for profits held in cash and other liquid assets, 8% for illiquid assets. The direct FX impact is likely to be minimal given much of the tax to be paid is likely to be in US Dollars already, and will in any event be spread out over several years.
- Repeal of the (20%) Alternative Minimum Tax (AMT).
- Seven income tax brackets with the top rate reduced to 37% from 39.5% and which kick in at a higher ($500,000) income level). The GOP tax writers claim that someone on average income of $73,000 will be just over $2,000 a year better off under the plan.
- Deductibility for mortgage interest is to be limited to $750,000 of mortgage debt, from $1 million now.
- Repeal of the individual mandate from 2019 (a key feature of Obamacare, requiring all individuals to purchase health insurance or suffer a tax penalty). Estimates suggest some 13 million Americans currently insured are likely to go without after 2019.
In FX, the DXY gained almost 0.5% on the day, with gains against all G10 currencies bar the NZD. On the week the USD is about flat with NZD (+2.12%) and AUD (1.82%) the clear outperformers, while Sterling was the second biggest loser Friday, on reports the UK government could lose a Brexit-related vote that would have set a firm (March 2019) Brexit date (excluding any transitional arrangement). BBC sources on Friday night were reporting that the government was going to agree to an amendment that would get the bill passed (and mean that the final form of the Brexit deal would remain subject to parliamentary scrutiny and approval. Second referendum anyone?)
US Treasuries experienced more curve flattening Friday (2s +2.5bps and 10s +0.4bp) and on the week, the 2-10s curve is 6.4bps flatter. The S&P added 0.9% to a new record high, the Dow 0.58% and the NASDAQ +1.17%. On the week outperformance of US stocks versus Europe and Asia is stark. In commodities gold was flat, oil narrowly mixed, but exchange traded metals, iron ore and coal were all slightly higher; copper being the big winner on the week (5%+).
This morning on the Economic Front we have Euro-Zone CPI at 10.00 am and this is followed at 11.00 am by UK CBI Trends Total Orders/Selling Prices. Finally we have the NAHB Housing Market Index from the US at 3.00 pm.
March S&P 500
Friday’s market action again proved how difficult it is to be short the US Stock market with more new all-time highs registered on Friday. We are getting closer and closer to the S&P’s 3rd Standard Deviation at 2792. After the S&P traded higher to my 2681 sell level we had a brief sell-off near the close to a 2675 low print before rallying strongly on the re-open last night. As my sell level hit late in the Chicago session I did not go short the S&P myself, instead raising my sell range for an expected higher opening last night. With the S&P trading in my 2680/2700 target range to go short I have now sold the S&P in small size at 2688. I will only add to this position on any further move higher to 2698 with a higher 2705 stop. If I am stopped out of this position I will be a more aggressive seller from 2706/2713 with a 2718 stop. Given how overbought we are trading I do not want to be long the S&P at this time.
EUR/USD
Late on Friday the Euro traded lower to my 1.1755 buy level before rallying small. As I did not want to have an ‘’Open’’ position over the weekend I covered this position at my revised 1.1760 T/P level and I am now flat. Today I will again look to buy the Euro on any dip lower to 1.1685/1.1725 with a 1.1655 stop.
March Dollar Index
I am still flat the Dollar and today I will raise my buy level slightly to 92.45/92.80 with a 92.15 stop. Remember a break and close below 92.50 is bearish and would well see an acceleration lower in the Dollar to the next key support at 90.00/90.50.
March DAX
Unfortunately the DAX again missed my buy level before opening firm this morning on the back of the US Tax Bill proposal. The market is now testing the key 13200 resistance level and a break and close above here is bullish for the 13330. Thankfully we had no sell levels on Friday in the market and today I will be a small seller on any further rally to 13310/13370 with a 13410 stop. I still do not trust this market and will only raise my buy level to 12960/13020 with a 12910 stop.
March FTSE
My FTSE plan worked well with the market rallying to my 7395 T/P level on my latest long 7380 position and I am now flat. The FTSE continues to trade sideways as it has done for most of the year as the market is struggling to follow the US markets higher all year. Despite the negative price action I still do not want to be short as there is still time for a santa rally in the FTSE ahead of year-end. With this in mind I will now look to buy the FTSE on any dip lower to 7400/7430 with a 7370 stop.
Dow Rolling Contract
There is no end to this Dow rally with the market now trading nearly 300 points higher from Thursday’s low print. Incredibly, despite the three main US Indices at new all-time highs the McClellan Oscillator closed barley in positive territory with just +11 print from -44 on Thursday evening. The Dow has major resistance from 24895/25040 and today I will be a staggered seller in this area with a 25140 stop. Given how overbought the Dow is trading I do not want to be long the market at this time.
March NASDAQ
I am still flat the NASDAQ which is opening 0.75% higher this morning on the proposed US Tax Bill. The market has strong resistance from 6570/6610 and today I will be a seller in this area with a 6645 stop. Given how overbought the NASDAQ is trading I do not want to be long the market at this time as I want to see how the US traders handle the huge ‘’Open Gap’’ across all the Indices when Chicago opens at 2.30 pm.
March BUND
No change as I am still a seller on any further rally to 163.95/164.35 with the same 164.60 stop.
Gold Rolling Contract
I am still flat Gold which is this morning trying to test the key 1260/1270 resistance level. Today I will now raise my buy level slightly to 1236/1244 with a 1229 stop.
Silver Rolling Contract
My Silver plan worked well with the market trading higher on Friday to my 16.10 T/P level on my latest long 15.90 position and I am now flat. The outlook for Silver is positive as long as we can hold the recent low at 15.62 with the market again closing over the key 15.80/15.90 trendline support level. Today I will again look to buy the market from 15.65/16.00 with a 15.30 stop.
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