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Wall St slips as tax promise fails to convince

Thursday 19:20 GMT

Overview

Wall Street struggled for traction and the dollar continued to retreat as participants largely shrugged aside optimistic comments on US tax cuts and economic growth from Steven Mnuchin, the new Treasury secretary.

Even a hefty rally for oil prices — following some bullish data on US crude inventories — could not keep the S&P 500 in the black. The weaker dollar, and another advance for Treasuries, helped gold hit a three-month high.

French government bond prices rose for a second day as worries about the outcome of the nation’s presidential election appeared to ease — although shorter-dated German debt also remained in demand.

Hot topic

The focus for stock markets swung back to the US as Mr Mnuchin said the Trump administration was committed to passing a “very significant” tax reform plan by the Congressional recess in August — but offered little in the way of further detail.

He added that he expected the plan to help boost the annual pace of US gross domestic product growth to at least 3 per cent as early as next year, from 1.6 per cent in 2016.

Donald Trump’s recent promise of “phenomenal” tax reform was a big factor behind the latest leg higher for Wall Street, although participants appeared to be more cautious.

By mid-afternoon in New York, the S&P 500 equity index was a fraction higher at 2,363, after touching an intraday record high of 2,368.26 within the first few minutes of trading. The Nasdaq Composite index was 0.5 per cent lower. Notably, US small-cap stocks underperformed, with the Russell 2000 index down 0.7 per cent.

But the Dow Jones Industrial Average was up 0.2 per cent, putting it on course for a tenth successive record high.

“An overhaul of the US corporate tax code would probably provide a net boost to S&P 500 earnings,” acknowledged John Higgins, chief markets economist at Capital Economics.

“Nonetheless, we suspect that it would be small and that it has now been largely discounted in equity prices.”

Mr Higgins noted that an important element of both Mr Trump’s and the House Republicans’ plans was a cut in the rate of corporate income tax, which should raise earnings and stock prices.

“However, various elements of both parties’ plans for corporate tax reform could have the opposite effect.

“One is a reduction of the tax deductibility of interest expenditure. Another is a repatriation tax on earnings retained overseas.

“And a third is a border-adjustment tax — the US runs a trade deficit, which means that the revenue raised from imports would exceed the revenue foregone from a subsidy on exports.”

Meanwhile, the dollar index — a measure of the US currency against a basket of peers — was down 0.2 per cent.

As well as a perceived lack of progress on US tax reform, dollar bears also latched on to the minutes of the Federal Reserve’s last Open Market Committee meeting, released on Wednesday, which showed uncertainty among policymakers about the impact of fiscal policy.

“The FOMC members think the economy continues to improve but that Trumponomics makes the outlook more uncertain,” said Mikael Olai Milhøj, senior analyst at Danske Bank.

“Although ‘many participants’ expect a [rate] hike ‘fairly soon’, only ‘a few participants’ expect a hike ‘at an upcoming meeting’. This supports our view that a March hike is unlikely.”

The dollar was down 0.5 per cent against the yen at ¥112.70, while the euro was 0.2 per cent firmer at $1.0571. Analysts noted that the single currency was trading at $1.0680 just a week ago.

Fixed income

Rather than increased political concerns, Petr Krpata, forex strategist at ING, said the primary driver of the euro’s recent fall against the dollar was a drop in the two-year German government bond yield, which widened the spread with its US counterpart.

“The primary driver of lower Schatz yields is not safe-haven demand, but rather the European Central Bank via, firstly, recently started sub-deposit rate purchases by the Bundesbank; and secondly, an ongoing increase in excess liquidity in the eurozone banking system,” Mr Krpata said.

Germany’s two-year yield — which moves inversely to its price — fell another 1 basis point yesterday to a record minus 0.90 per cent. France’s 10-year bond yield, meanwhile, fell 5bp to a two-week low of 0.99 per cent.

US Treasuries also rose, with the 10-year yield falling 3bp to 2.39 per cent.

Equities

Wall Street’s hesitant showing soured the mood across the Atlantic, with the pan-European Stoxx 600 index reversing an early rise to end 0.1 per cent lower.

Earlier in Asia, Japan’s Topix fell less than 0.1 per cent as bulls were cowed by the firmer yen, while Australia’s S&P/ASX 200 dipped 0.35 per cent on profit-taking in materials.

Hong Kong’s Hang Seng retreated 0.4 per cent and mainland China’s Shanghai Composite dropped 0.3 per cent as new asset management rules and property taxes damped sentiment, according to Reuters.

Commodities

Brent oil was up 1 per cent at $56.42 a barrel after a report from the American Petroleum Institute showed an unexpected drop in crude inventories last week.

Gold, meanwhile, was up $12 at $1,249, the highest since November 11.

Additional reporting by Peter Wells in Hong Kong

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