Why Wednesday? That’s because on Wednesday we are to see the full extent of the Trump tax policy. Details so far suggest a corporate tax rate of about 20-25% and with a possible 4 tax levels reduced from 7. Mnuchin appears to have backed away from some of his earlier rhetoric in that earlier he suggested that the wealthy would not be advantaged when it seems this may be the case. To ensure at least hopefully a better passage than the repeal of Obama Care, Trump is meeting with Democrats to garner support for his tax bill. Given the repeal of Obama Care has now been effectively killed, Trump needs all the support he can get.
At issue will be how the tax repeal will work. It is estimated that the cost over a ten -year period for the U.S. is $10 trillion which is a lot of cash to lose. At issue will be how businesses will be taxed and for many business owners who use a pass-through mechanism this new tax bill could be a bonanza. Trump is hoping for the bill to be passed by year end, which also coincides with the debt ceiling issues.
Mueller is continuing his probe and is now probing White House officials and this probably explains why Trump is stirring the pot over the flag, patriotism and elite professional sportsmen.
Yellen commented today that the Fed needed to be pre-emptive with inflation. Whilst conceding that inflation is below 2% , Yellen is of the firm view that rates need to be raised soon. The equity market rallied a little and bonds sold a little on her comments. It looks likely that the Fed will hike rates in December unless there are some disappointing economic data points. The probability of a hike in December is 61.2%, which is double what the probability was just over a week ago.
North Korea continues to be the focus of markets. Risk on risk off trades are currently on hold as traders try to determine which way the pendulum is swinging. Military information is somewhat confusing with the U.S. Army not noting any significant changes whereas South Korea has noticed changes. Gold declined on the day 1.1% on no news.
And Saudi Arabia lifts its ban on women driving cars. And the sabre rattling between Trump and North Korea continues.
Yellen’s comments were the catalyst for market movements today. The Dow slipped 0.05% and the S&P barely moved the dial to close up 0.01%. The MSCI All Country Index fell 0.3%.
Currencies; The Bloomberg Dollar Spot Index rose 0.3% and the euro fell 0.5%. The pound fell 0.1%
Bonds; Bonds slipped marginally.. The U.S. treasuries widened about 1 bp. The closes were U.S. treasuries 2-year 1.424%, 10 -year 2.236%, 30-year 2.774%. The European 10-year benchmarks closed, gilts 1.329, bunds 0.407% and OAT’s 0.703%. The U.S. curve was steady. The closes are 2/10 to close 79.6bp, between 2/30 to close 133.4bp and 10/30 to close at 53.7bp. The probability of a rate hike by December is 61.2% and in June 2018 is 82.1%.
Commodities; WTI fell 0.5% however could rise as Turkey is seeking to prevent the Kurds exporting oil. Gold fell 1.1%. Zinc rose 2.16%.
Aussie Market Today.
Expect equities to be slightly stronger on the day. Bonds to soften a little although any hint of geopolitical risk will see bonds trade better.