THE SWAMP JUST GOT BIGGER

alligator-1904482_1920

That sums up Double Line Investments Chief Investment Officer Jeffrey Gundlach’s sentiments after the first stage of the GOP’s Tax Bill passed through Congress, adding another $1.4tr to the deficit over the next 10 years.

Gundlach was appalled by the carried-interest scheme for hedge funds remaining. The pass-through benefits a small group of businesses that include private equity, venture capitalists and real estate investors. Gundlach is concerned that the swamp just keeps getting bigger. Gundlach was a big supporter of Trump in his candidacy to gain the Presidential nomination.

Although Gundlach was appalled, the equity market was enthralled. On the day, equities staged one of their biggest rallies for a couple of months. The Bill was passed in Congress 227 to 205 with 13 GOP members voting against the Bill.

All but one of these members was from the high tax paying states which are NJ, NY and CT. The Bill now moves to the Senate and the real fight begins. So, while the equity market cheered, and the Congress cheered the battle is now one step closer and the reality of a massive win for the GOP and a major change in the tax code looms large.

The battle in the Senate will be fought over three or so major issues. The repeal of Obamacare, the Federal deficit which will increase under the Tax Plan and the distribution of tax benefits. The Senate majority is razor thin with only a 2-vote majority. This battle will be hard fought, and the GOP cannot afford any defections. The Senate has already criticised the plan that has been passed by Congress.

The issues for the possible defectors such as John McCain, Susan Collins and Ron Johnson are healthcare and the deficit. The changes to medical insurance will mean some 13 million Americans will lose coverage and many of those are Trump supporters.

The passage of the Bill was the catalyst for the change in sentiment. Paul Ryan remains optimistic the Bill will pass the Senate to be signed off by Trump.

For equities the big changer on the day was Wal-Mart’s surge of 9.1% after announcing sales that beat expectations.

Norway’s sovereign wealth fund is proposing a change to its index by which it measures performance of its fund managers. Norway is proposing to remove oil and gas companies from its index. If the changes were to be made this would require the sale of some $37 billion of assets.

Bonds had not such a pretty day. Two-year bonds are now at a 9 -year high and the yield curve is the flattest it has been for some 10-years.

 

Recap:

Equities: The S&P 500 rose 0.9% and the Dow rose 0.81% while the Stoxx 600 rose 0.8%. The MSCI All Country World Index rose 0.8%.

Currencies: The pound rose 0.1% while the yen fell 0.1%. The euro recorded its biggest drop for 2-weeks, falling 0.2%.

Bonds: the 2-year was steady to close at 1.716 while the U.S. 10-year closed at 2.366 %, a rise of 4 bp in yield. The 30-year closed at 2.814 % out 4 bp and the curve remained flat. The 2/10 closed at 64.9, the 2/30 at 109.7bp and the 10/30 closed at 44.9 bp. In addition, the European 10-year benchmark closes were, gilts closed at 1.305%, bunds at 0.373% and OAT’s 0.561 %.

Commodities: Gold rose about 0.1% and WTI fell 0.4%.  Oil prices remain pressured after the Saudi Oil Minister suggested that the oil surplus will remain until at least March 2018. BHP is considering divesting its shale business over the next two years and is seeking a buyer for its nickel business.

The U.S. is once again looming as a major producer of oil over the next ten years. The U.S. is seen as accounting for 80% of global oil production growth and is expected to produce 30% more gas than the Russians over the next ten years.

 

Aussie Market Today.

U.S. treasuries were weaker on the expectation of the Tax Bill passing Congress. Aussie bonds may sell a little.  However, book squaring ahead of the weekend will come into market considerations. Bonds should be a little weaker on the day.

Geopolitical tensions are still a concern although tensions appear to have been cowed for the moment.
Equities are likely to take the lead from the U.S. and buy. The risk on trade is on again, well at least for the moment it is.

Filed under: