In early Asia trade on Friday, Republican Senator Marco Rubio had given us reason to turn somewhat more sceptical that US tax reform would actually pass this week and perhaps the negotiations would be pushed into 2018, where of course the Republican’s Senate advantage is reduced to just one seat. Subsequently passing anything becomes more problematic in this scenario.
However, it seems all is well that ends well and after the Republicans released their final version of their tax text on Friday, we have seen not only Marco Rubio warm to a change in the amount of the child tax credit and giving his blessing, but more surprisingly so has Bob Corker. So the tax vote has turned from being a ‘probably’, to now looking like a ‘certainty’ and in theory, Donald Trump should sign off on tax reform by Wednesday. The corporate tax rate is set at 21% and this has widely been speculated on for some time, while the international earnings repatriation tax rate will be lowered to 15.5% for cash and 8% for more illiquid assets. There has been a strong focus on the State and Local Tax (SALT) deductions and property tax, which will be capped at $10,000, so this may weigh on property prices in certain districts (such as Manhattan). However, by and large, the fact tax reform should be signed off, shows Congress can function and the market finds relief here.
The platform then has been set for a positive open for Asia, with US markets reacting to the news mentioned above. Naturally, the Russell 2000 saw the strongest upside move, with a gain of 1.6%, but we also saw stellar moves in the S&P 500 (0.9%) and Nasdaq 100 (+1.2%), with volumes in the S&P 500 some 80% above the 30-day average, although this was more a function of “Quadruple Witching” day and the quarterly expiry of futures and options markets and rebalancing of the S&P 500. Breadth was strong with some 86% of stocks closing higher. All sectors, bar the energy sector (which closed -0.03%) finished higher, driven by tech once again.
It wasn’t just tax reform in focus, but on the data side, we also saw November US industrial production growing at 0.2%, while the New York Empire Manufacturing survey came out at 18.0 and capacity utilization at 77.1%. All were a touch under market expectations, but it mattered little for the USD, which reacted more on the tax sentiment. On the session the USD gained 0.5%, rallying on the day against all G10 currencies except the NZD, which closed up 0.1%. The more pronounced moves were seen against the NOK and GBP, with AUD/USD finding sellers from $0.7695 all through European and US trade, trading into a session low of $0.7638. There could be some focus on today’s Aussie government release of the Mid-Year Economic and Fiscal Outlook (MYEFO) at 12:15 aedt, with economists expecting upgrades to nominal GDP for 2017/18 (to 4.5%), with a smaller budget deficit. Whether the AUD reacts too greatly is yet to be seen, but as always it’s a supply issue, with a view on the funding task the Treasury department have in the debt markets going forward.
Two concerns that have resurfaced have been on the USD ‘basis’, and the fact we are seeing liquidity issues here and higher USD funding costs for European and Japanese institutions with high USD liabilities. This has strong implications for FX markets and is certainly a factor in keeping EUR/USD from rallying to a great extent. The other focal point is back on the US Treasury yield curve, with further flattening taking hold and the 5’s vs 30’s curve now the flattest since 2007. This is more ammunition for the bears, many of whom almost sounds like they want to see a recession and the resulting economic hardships that come with this. However, regardless of what you see on social media, for me, the current slope of the curve should not concern too greatly at this juncture and the lack of any anxiety in the equity, credit or VIX futures is fair. Although one can say the market does see the current economic cycle as mature.
All up, we can see the ASX 200 ready to fire up on open, with Aussie SPI futures sitting up at 6037, up 29 points in the Friday night session and this takes our ASX 200 opening call into 6035. BHP and CBA ADRs closed up 1.7% and 0.5% respectively by way of guides for these two key heavyweights.
Recall, the ASX 200 has found seller easy to come by into 6035 to 6050, so will today’s open provide traders with an opportunity to sell into? We shall see, but seasonally this week is one where the bulls usually have an upper hand and we can look back at the week leading into Christmas in 2016 and see the ASX 200 closing up 1.7%. We should also keep in mind that not only do we have strong technical resistance to contend with, but we are also coming off the back of a run of four consecutive weeks of gains for the ASX 200, and we have to go back to May 2016 to see five straight weeks of gains. The backdrop is positive though and while moves in US equities should support, we can look at US crude closing +0.5%, while copper closed up 2% (higher for an 8th straight day) and while we have seen spot iron ore -0.9%, the moves in the Dalian Exchange have been punchy and should be the greater influence on equities, with iron ore, steel and coking coal closing up 6.2%, 2.1% and 5.3% respectively.
The fact we can see limited moves in G10 FX early this morning suggests S&P 500 futures should find support too, although there will again be a focus on the crypto space, with the open of CME futures at 10:00 aedt. In theory, it shouldn’t upset the Bitcoin bulls, many of whom will be anticipating a move through 20,000 early this week.
Originally published by Chris Weston, Chief Market Strategist, IG