Trump’s trip to Asia begins, the pound slumps as the Bank of England hikes, and U.S. tax plan greeted with a yawn by traders. Here are some of the things people in markets are talking about.
U.S. President Donald Trump is jetting off to Asia for his longest foreign trip yet. He’s due to visit Japan, South Korea, China, Vietnam, and the Philippines, with geopolitical and economic issues dominating the agenda. In China, Trump is poised to press President Xi Jinping on the massive trade surplus China runs with the U.S., as well as the country’s support of North Korea. Ahead of the visit, Chinese President Xi Jinping sent a note to Kim Jong Un calling for stable ties between the two nations. Trump won’t meet with the North Korean dictator — he’s said the time for talking is over.
The Bank of England increased its policy rate for the first time in more than a decade Thursday in a move widely expected by traders. Governor Mark Carney emphasized that the central bank had no inclination to embark upon a series of swift hikes, with the central bank suggesting the top speed at which the economy could sustainably grow without generating excessive inflationary pressures was just 1.5 percent. In light of the dovish tone, the pound was the worst-performing G10 currency on the day. Ironically, five-year U.K. bond yields fell by more than 10 basis points — the biggest daily drop since the central bank’s rate cut in Aug. 2016. Two monetary policymakers dissented from Thursday’s decision.
We Have a Plan
The U.S. tax reform bill is finally out. House Republicans unveiled plans to cut the nation’s corporate tax rate to 20 percent, phase out the estate tax, halve the home mortgage interest deduction for new purchases, reduce the number of individual brackets, and impose a levy of up to 12 percent on multinational firms’ overseas earnings. A credit given to electric vehicle buyers was scrapped, while the carried interest loophole was preserved. Opposition to some of the proposed tweaks is already mounting — not only from Democrats, but also Republicans who are upset the bill will increase the deficit as well as some industries that are on the losing end of reform. But at least retail lobbyists are happy.
Roof Caves on Homebuilders
The S&P 500 Index was virtually unchanged amid the release of the tax overhaul plan. On the whole, markets either didn’t think the proposal outlined by Republicans stands much of a chance of becoming law or weren’t convinced it would substantially buoy the outlook for growth. Small caps, the primary beneficiary of lower U.S. corporate taxes, outperformed. But there were also pockets of weakness tied to some of the tax changes floated by Republicans. Homebuilders were crushed thanks to the potential halving of the mortgage interest deduction for new buyers, with Toll Brothers Inc. suffering its worst loss since December 2015. The fossil-fuel friendly plan added to Tesla Inc.’s pain on the heels of its underwhelming earnings report, sending shares nearly 7 percent lower. West Texas Intermediate futures settled at their highest level since July 2015 as two major OPEC producers publicly backed an extension of output curbs. Bitcoin, for its part, broke above the $7,000 mark on Thursday to continue its meteoric rise — which has started to make even some of the cryptocurrency’s most fervent advocates on Wall Street nervous. Trump officially nominated current Fed Governor Jay Powell to succeed Janet Yellen as the head of the U.S. central bank, well-telegraphed news that markets took in stride.
Corporate behemoths Alibaba Group Holding Ltd. and Apple Inc. made waves on Thursday with their respective earnings releases. The Chinese e-commerce giant opened higher but finished in the red despite boosting its full-year revenue forecast and reporting better-than anticipated earnings. There were a few flies in the ointment — primarily, slowing mobile user growth and shrinking gross margins. Meanwhile, Apple Inc. posted a top and bottom line beat that sent shares up as much as 3 percent in the after-hours session. The company’s holiday sales forecast also came in ahead of analysts’ estimates. Long lines have started to form outside Apple stores in Singapore, Japan, and Australia as customers eagerly await the iPhone X. Supply remains the major question mark: CEO Tim Cook said he “can’t predict” when it will match demand.
And finally, here’s what David’s interested in this morning
Since we’re all fairly attuned to the Fed conversation, it’s an opportune time to revisit one of my favorite, all-encompassing charts. The graphic below reflects a consistent talking point among our big guests this year on why the bull market rages on. The top panel tracks U.S. financial conditions. Bottom is the MSCI All-Country Stocks Index. The circles represent each of the four rate hikes from the Fed. That’s obviously not a correlation of one, but clearly, as that song in that pivotal snowball-flinging scene in Beauty and the Beast goes, “There’s something there…”
Just to echo some of those expert voices, a lot of the inexplicable realities and out-of-whack correlations out there are rooted in one simple reality — financial conditions remain loose. In fact, conditions are at the most accommodative levels since the early 90s using this measure. That’s even after four increases. The European and Japanese central banks are still printing money. And globally rates are still well below pre-GFC levels. So is it even surprising then why stocks are at records? It explains why stocks remain well bid despite valuations looking stretched on a historical basis. For all of us monetary policy geeks, this explains why despite low inflation, rate hike expectations remain well-anchored. And perhaps it’s a kind reminder that the Fed continuing to tilt hawkish should be welcome, healthy and even required. And for the paranoid and suspicious, this might be one of those so-called canaries in the coalmine if that helps you sleep at night.