Originally published by AxiTrader
Market Summary
There is little doubt that the cut in the corporate tax cut to just 15% is huge but the release of president Trump’s tax plan lacked a lot of legislative detail – given it was a one pager. But there is no point quibbling about that because what the plan does is outline and reaffirm that this president, his administration, and his finance and economic team are still moving forward on their plans – the ones that were a big part of buoying investor sentiment toward US stocks.
But stocks in the US closed marginally lower with the big three indexes off between 0% and 0.1%. But it was very different with 30 minutes to go when the S&P 500 was up a little more than a quarter percent, the Nasdaq 100 was making another record high up 0.25% while the Dow Jones Industrial Average was in the black by about 0.11% to 21,018.
The bulls will be disappointed and even though stocks in Europe were mostly mildly in the black they may see some weakness this afternoon after 6 days of rallies.
On balance, though after yesterday’s 40 points, 0.69%, rally to 5912 SPI traders have pulled back from earlier ebullience and have marked prices up just 4 points.
On forex markets, the Australian dollar remains under intense pressure at 0.7474 down 85 points on where it was yesterday. It’s not alone as the New Zealand dollar is also getting hammered down another 0.88% this morning after the previous days almost 1% fall. Joining the antipodean pair in the carnage is the Mexican peso which has lost 1.83%. No doubt the peso’s fall is about the potential destruction of NAFTA with news overnight the US may withdraw from the agreement. But my sense is the Aussie and Kiwi are getting caught in the protectionist maelstrom as well. And of course the RBA may yet still ease.
Elsewhere in forex market the euro has taken a breather at 1.0898, the pound is largely unchanged at 1.2842 and the yen is a bit stronger with USD/JPY at 111.21 off a high of 111.77 overnight. That’s a failed test of resistance.
On other markets bonds in the US rallied a little which helped gold at the margin but it is still under pressure at $1269 an ounce. Copper and base metals had another positive day yesterday but crude fell even though inventories in the US fell twice as much as the pundits had estimated. WTI is down 0.42% at $49.35 as traders again focus on what’s happening in gasoline. Hint, worries about demand.
Today we get the BoJ decision and then tonight the ECB will announce its decision. Neither is expected to move rates. But that doesn’t mean they are non-events. Language is powerful and there are signs the debate inside each bank has shifted.
What You Need To Know (with a little more detail and a few charts)
- S&P 500 -1 (-0.05%) 2387 (7.17 Sydney - change since previous day)
- Dow Jones Industrial Average -21 (0.1%) 20975
- Nasdaq 100 Flat (0%) 6,025
- SPI 200 -1 (0%) 5,897
- AUD/USD 0.7474 -0.85%
- Gold $1268 +0.42%
- WTI Oil $49.21 -0.7%
International
- So the tax plan dropped last this morning and there is plenty of quibbling about a lack of detail. But I’m not interested in that kind of rhetoric. What’s important for me – and I’m guessing the market, traders, and investors – is that once again the president and his team have shown a commitment to try to get done what they said they would. So while there needs to be more meat on the bones of this proposal the highlights are a massive tax cut for corporations from 35% to 15%, a profit repatriation tax discount, and no border adjustment tax.
- Business Insider has a good summary of what the outline of the tax plan – let’s face it that’s what this is – contained. Worth noting Steve Mnuchin didn’t say when he’ll be getting these plans passed. So while it shows the administration keeps moving forward the market may need to see actually progress.
- Worth noting as another guide that Trump is moving forward is news overnight that it looks like the Freedom Caucus – the Republican subgroup which scuttled the repeal of Obamacare in the House recently – has agreed a plan that they can support the next time the bill is introduced back into Congress.
- In other political news Emmanuel Macron looked like he salvaged a victory from the jaws of defeat overnight. Ambushed by rival candidate Marine Le Pen at a Whirlpool (NYSE:WHR) factory where workers are striking Macron went down to face the picket line after Le Pen had whipped them into a frenzy. He was jeered but didn’t back down. He may not win any votes with the workers but for those who wondered about his credentials to be president it’s a clear sign of strength and one that will help keep a healthy margin over Marine Le Pen.
- Chinese president Xi highlighted again that financial stability remains a key tenet of his plans. Xinhau reports Xi said yesterday that “Financial security is an important part of national security and an important basis for the steady and healthy development of the economy… China's financial development is facing many risks and challenges due to the influence of international and domestic economic factors.”
- Yesterday I noted the Trukish president was being belligerent about Europe and EU membership. Today I note EU negotiators have called for the suspension of discussions over Turkey joining the EU. I highlight this as something to watch for Lira traders and political stability on Europe’s eastern boarder.
Australia
- 5950 remains in the frame for the physical ASX market. It’s both the recent high and also the top of the current uptrend channel. The pullback in US stocks to close in the red which occurred in the last half hour of trade has sapped a lot of potential strength from the market today. The SPI is up just 4 points now after having been up 20 points at 5.30am this morning – just 30 minutes before the close.
- Whether the local market can challenge or get through 5950 without the US jumping higher again is an interesting question. My sense is the answer is no – both technically and psychologically. Anyway, here’s the S&P/ASX 200 chart showing the overhead resistance.
- Inflation wasn't really poor enough yesterday in a headline sense to knock the Aussie off its perch the way it has. But if you break down the data line by line, item by item you get a sense that aggregate demand in the domestic economy is not that strong. I’m a strong believer that inflation comes from pricing power and pricing power comes from either monopolistic style power or solid underlying demand.
- To that end the data showed that there were solid increases in Q1 for education (+3.1%), health (+2.0%), and transport (+1.5) with the latter driven by a 5.7% increase in fuel costs. But these moves were offset by falls in discretionary items such as clothing and footwear (-1.4%), furnishings, household equipment and services (-1.0), and recreation and culture (-0.7%). This combination suggests the domestic economy faces some challenges at a consumer level. So the RBA is not completely off the table even though at 2.1% for headline inflation is back in the 2-3% range.
- Sco Mo, we have a problem. Yesterday I saw a chart of the relative tax rates across the globe via the Wall Street Journal. It’s instructive in highlighting just what a big cut the move the president wants to 15% for corporations is. And it highlights how such a move from the US will impact other nations such as Australia. I’ve added the black 15% line which is where the US is heading to and I’ve coloured Australia as yellow. You can see that for Australia to be competitive as a jurisdiction we’ll need to drop our company tax rate substantially.
- That will have susbstantial knock on effects on things like the government’s tax take and the level of franking attributed to dividend payouts. Anyway there is a lot of conversation to be had and water to flow under the bridge in the US let alone Australia. But if president Trump gets this through it’s a conversation we’ll need to have here in Australia as well.
- Here’s the chart:
Forex
- The US dollar is in a bit of strife at the moment having broken the recent range bottom and the uptrend line from the low last May. At 98.84 this morning the US Dollar Index is not far from what I see as important support at 98.45/55. A break of that would signal a bigger move.
- Elsewhere the euro is down a little as we await the ECB tonight. Rumours are circulating that they may change their rhetoric in June but we have to get through tonight’s meeting first. And with the French election coming fast I would doubt the ECB would signal anything other than the maintenance of current policy. Although it would be reasonable for them to highlight the improved outlook for the EU economy. 1.0850 is the level to watch in the EUR/USD – if it breaks Euro could have a sharp unwind of this week’s rally.
- The yen hit a high of 111.77 last night before reversing sharply. It’s an ugly reversal candle and rejection of the overhead resistance I highlighted in my special USD/JPY piece yesterday. It looks like it could fall back to around 110.50/65 and then we’ll see.
- The Australian dollar is weak, very weak. But it is not on its own. I have two hypothesises on this. The first is that money is moving into other markets with better opportunities now that Europe’s existential threat looks to have receded. Equally though if you look at the impact of the Lumber tariff on the CAD, MXN, and Kiwi (all guilt by association currencies – Kiwi via diary) perhaps the Aussie is getting knocked by worries about a more belligerent approach to trade.
- The jury is still out but price action is price action and the Aussie is increasingly looking like its headed back toward 72 cents.
Commodities
- The EIA reported that crude oil stock piles fell 3.641 million barrels last week. That’s more than double what the pundits thought and the third week in a row of falls. But it didn’t help prices again after the EIA also reported that gasoline stocks rose 3.4 million barrels amid high production and what is reported to be consumption 2.2% below a year ago.
- It’s an ugly long-tailed candle on the daily chart for WTI with a marginally lower low than yesterday at $48.92 suggests prices have yet to find a sustainable bottom. But the current price at $49.29 is above the 200 day moving average for the 3rd day in a row. There is also Fibonacci support at $48.63. So while the chances of a fall to the recent low at $47 is high it’s not certain yet,
- Gold is hanging tough. It fell briefly below $1260 overnight before bouncing back to sit at $1269 as I write. My sense is that it has further downside but that this will open up on a close below $1263.
- Copper had a slightly stronger day in what has been a generalised uplift in base metals over the past few days. It’s hitting the underside of an old uptrend line at $2.60 just as Freeport McMoran is about to export its first shipment from the Grasberg mine in around 15 weeks.
Have a great day's trading.