Taxes Trump Market

Taxes Trump Market.

After a meeting with senior airline staff, Trump announced that he would be making an announcement on taxation which was vague at best. Trump announced that he would be announcing shortly a phenomenal tax plan, one could muse whatever that means.  Accordingly equity markets rallied hard and bonds retreated paring back earlier gains. Equities surged to an all-time high.

The equity market is rallying on the presumption that significant tax cuts will bolster the economy leading to higher profits, inflation and solid if not spectacular growth. This announcement is expected to be made shortly.

This is a somewhat dangerous development for the equity market. If Trump’s plan don’t excite the equity market then there is a significant chance of a significant recoil in valuations. The problem that Trump will have if the Republicans are true to their words will be how to handle the ballooning deficit. A tax cut will bring in dollars for corporates but will reduce the amount of taxation received, exacerbating an already large problem. If the workforce remains somewhat stable and wages are held steady then taxation on wages won’t correct the imbalance. The budget deficit will only worsen. What has to be accounted for is a rapidly aging population that will require more medicaid, infrastructure to be built, an increase in military spending and money for education. All these factors are competing and it remains to be seen how Trump will juggle the various competing factors.  A strong economy would mean a strong currency and that would hurt exports. The Fed would also be raising rates so to balance the needs of the economy will require a significant amount of balancing.

On the day 10 year bonds moved to 2.39% up about 5 bp. Italian bonds rallied 7 bp, 10 year bunds weakened 2 bp. The fallout from Greece continues with the 2 year bond now trading around 10%. The Dollar Index and was up 0.3%. Oil was up 1.5%.

As always the devil is in the detail. Markets may be harsh if Trump’s phenomenal taxation policy does not live up to expectations.

Aussie Market Today.

The US 10 year weakened 5 pts on the day and I fully expect Australian 10 years to weaken. Equities were strong on an announcement and the bullish statement will allow the Aussie Equities to continue their rally. Commodities were stronger on the day and that will assist the equity market.