Week 45 In Review – Tax Plans In Flux

Congress reworking tax proposals
Trump inks China trade deals
Saudi corruption probe, regional tensions boost oil
NY Fed chief announces retirement
China central bank head voices qualms over high leverage

Global equities reached all-time highs at midweek before backing off slightly ahead of the weekend. Yields on US 10-year Treasury notes rose modestly, trading at 2.38% Friday morning versus 2.34% a week ago. Oil gained ground amid uncertainty surrounding Saudi Arabia and Venezuela, climbing to $57.20 per barrel from $54.60 last week. Volatility, as measured by the Chicago Board Options Exchange Volatility Index (VIX), rose to 11.11 from 9.5 last week.

MACRO NEWS

US House and Senate offer differing tax plans
The US House Ways and Means Committee, the tax-writing arm of the lower house, amended the tax reform proposal it put forth last week. The Senate Finance Committee unveiled its plan for the first time on Thursday. Among the key differences the two bodies will need to iron out is the effective date of the proposed corporate tax cut from 35% to 20%. In the House bill, the cut would go into effect next year, while the Senate’s plan calls for the cut to become effective in 2019. GOP leaders are under intense pressure to pass a tax bill before the end of the year after failing to enact any major initiatives during the Trump administration’s first year in office.

Trade deals unveiled during Trump China visit
According to the White House, $250 billion in trade deals were agreed during US president Donald Trump’s visit to Beijing. Skeptics noted many of the announced deals were not contractual obligations and some may have been agreed previously. Despite the skepticism, some Chinese trade barriers appear to have been lowered, notably on the importation of US beef, which was halted in 2003 as a result of a BSE (mad-cow disease) scare in 2003.

Oil prices rise to two-and-a-half-year highs
Saudi Arabia’s crackdown on corruption, growing tensions between Iran and Saudi Arabia and the potential for a Venezuelan debt default all helped push oil prices higher this week. While short-term factors could push prices up in the near term, spare US production capacity could come back on line quite quickly, analysts say, limiting the market’s upside over the medium term.

NY Fed seeks new leader amid central bank turnover
The US Federal Reserve will have all-new leadership before long as Janet Yellen’s term as chair expires in February. Vice Chair Stanley Fischer resigned last month, and now New York Fed president William Dudley has announced that he too will step down in 2018. So far, markets seem unconcerned by the turnover at the top of the central bank now that President Trump has nominated Fed governor Jerome Powell to succeed Yellen as chair. This week, newly appointed vice-chair for bank supervision Randal Quarles spoke publicly for the first time, indicating that he believes the Fed should take a fresh look at post–financial crisis banking regulations.

China’s PBOC warns of high leverage
People’s Bank of China governor Zhou Xiaochuan warned again this week that his country’s financial system is becoming significantly more vulnerable because of high leverage. Risks are accumulating, the central banker bluntly warned, that are “hidden, complex, sudden, contagious and hazardous.” Zhou said China should open up markets, relax capital controls and reduce restrictions on non-Chinese financial institutions to counter the rise in leverage.

UK’s May weakened further by Westminster scandals
Already politically vulnerable owing to the Conservative Party’s poor showing in snap elections earlier this year and a lack of progress toward a controlled Brexit, British prime minister Theresa May found herself further weakened this week by a growing sexual harassment scandal that forced her defense minister Michael Fallon from office. Secretary of State for International Development Priti Patel was also forced to resign, for having undisclosed meetings with Israeli officials. With just weeks to go for the United Kingdom to come to a financial settlement with the European Union over Brexit, the sackings are seen as a major distraction.

Investor sentiment remains elevated
Bullish sentiment has been running strong of late, and by one measure it is at its most elevated level in three decades. According to Investors Intelligence, 64% of newsletter writers were bullish this week, versus just 14% who were bearish. The spread between bulls and bears has been at an elevated level for six straight weeks. Another sign of market confidence is a record level of margin debt, according to the Wall Street Journal. Margin loans grew 14% from the end of 2016 through the end of Q3, the Journal noted.

EARNINGS NEWS

With 90% of the members of the S&P 500 Index having reported for the third quarter, blended earnings grew 6% versus the same quarter a year ago. Stripping out insurance companies, which were hit by hurricane claims, earnings rose 8.3%. Revenues rose 5.8% year over year.