US tax puts ‘trade re­fla­tion’ plan back on in­vestors’ radar

The Gulf Today - Business - - 6viewpoint -

NEW YORK: It’s back - at least for one day. The re­fla­tion or Trumpfla­tion, trade that drove fi­nan­cial mar­kets af­ter Don­ald Trump’s sur­prise US pres­i­den­tial elec­tion vic­tory last Novem­ber made a come­back as the un­veil­ing of Trump’s long-promised tax over­haul re­vived bets that mar­kets would ben­e­fit from both faster eco­nomic growth and in­fla­tion.

The tax plan an­nounced by Trump and fel­low Repub­li­can lead­ers would cut the top tax rate for in­di­vid­u­als and cut the cor­po­rate rate, but it of­fered scant de­tails on how to pay for the cuts with­out dra­mat­i­cally driv­ing up the fed­eral deficit.

Stocks and the dol­lar gained on hopes that the lower tax rates would spur faster eco­nomic growth, while bond yields soared on con­cerns tied to in­fla­tion­ary pres­sures stem­ming from more fed­eral bor­row­ing to fi­nance a big­ger gov­ern­ment deficit.

The dol­lar in­dex hit a onemonth high. Wall Street share prices moved closer to their all­time peaks, and the bench­mark 10-year Trea­sury yield rose to its high­est level since early Au­gust. “You are see­ing some op­ti­mism com­ing back into play” in the wake of the tax pro­posal, said Julien Schol­nick, port­fo­lio man­ager at West­ern As­set Man­age­ment Co in Pasadena, Cal­i­for­nia.

And Em­manuel Cau, ex­ec­u­tive di­rec­tor of global eq­uity strat­egy at JP Mor­gan & Co in Lon­don, said the re­fla­tion trade was back.

“Clearly thereís a sen­sa­tion that the re­fla­tion trade is com­ing back on the agenda,” Cau said. “Most of our po­si­tion­ing is based on a re­fla­tion trade hap­pen­ing again.”

But the un­cer­tainty cloud­ing the tax pro­posal’s prospects could re­sult in the re­fla­tion trade fad­ing al­most as quickly as it reap­peared. Democrats, who were not con­sulted in draft­ing the pro­posal, are hos­tile to it and Repub­li­cans are di­vided over it.

“It’s a very long wish list,” said Kristina Hooper, global mar­ket strate­gist at In­vesco in New York. “This will likely be pared down a lot be­fore it comes to fruition.”

Wall Street’s ma­jor in­dexes pared ini­tial gains on Wed­nes­day when traders saw few specifics on the tax pro­posal af­ter it was an­nounced. (Full Story)

“We’re not hold­ing our breath on to­day’s tax plan...prompt­ing mar­kets to se­ri­ously reprice US re­fla­tion prospects,” said Vi­raj Pa­tel, ING cur­rency strate­gist in Lon­don.

In ad­di­tion, there were sug­ges­tions that Wed­nes­day’s mar­ket trends were as much a re­sult of other fac­tors.

Some in­vestors said hints by Fed­eral Re­serve Chair Janet Yellen on Tues­day of fur­ther in­ter­est rate in­creases - even as in­fla­tion has been stuck below the Fed’s 2 per­cent goal - were at least as re­spon­si­ble as the tax pro­posal for driv­ing up the dol­lar and US bond yields.

“Yellen gave a speech that was more hawk­ish than they had ex­pected. They didn’t want to get be­hind the curve,” said Schol­nick of West­ern As­set Man­age­ment.

While the dol­lar, bond yields and stock prices may press higher in the short run, that trend may end up sim­ply be­ing a re­ver­sal of po­si­tions tied to ex­cess pes­simism about the econ­omy, an­a­lysts said.

That said, in­fra­struc­ture spend­ing and the loos­en­ing of reg­u­la­tions, par­tic­u­larly on bank­ing, were the two other driv­ers of the re­fla­tion trade, Schol­nick said, not­ing: “They have been pushed much fur­ther out into the fu­ture.”

Mean­while, the dol­lar pulled back on Thurs­day, hav­ing risen along with bond yields af­ter Pres­i­dent Don­ald Trump pro­posed the big­gest shake-up of the U.S. tax sys­tem in three decades and data bol­stered calls for another Fed rate hike this year.

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