Over the weekend one of the pillars of Trump’s election pledge to “make America great again” finally began the process of becoming law, after being voted for in The Senate. The republicans’ tax reduction programme was finally voted through on Saturday morning, a plan that will ensure that anyone who earns less than circa $75k a year, will be worse off by 2027, that’s approximately 75% of USA workers, or circa 45% of USA households.
Under the tax reforms corporations and qualifying businesses will see their headline tax rate shrink from 35% to 20%. The belief is that a trickle down effect will then take place; corps will employ more, pay better wages, be more competitive. The cynical amongst us would suggest that the cuts will simply; enrich major corps, resulting in increased salaries at the very top, increased shareholder dividends, create a rise in equity prices and the corresponding indices.
The proposed tax cuts in the Trump plan will total $5.8 trillion over 10 years, according to an analysis by the Committee for Responsible Federal Budget. The tax cut will be implemented at a time when the public national debt is circa $14.6 trillion, the debt is expected to balloon by an additional $10 trillion over the next decade, before these tax cuts.
So all eyes will be on Wall Street and the New York opening on Monday, we’ll obviously gauge from the futures market (as Asian markets and then London opens), as to how these tax cuts will effect markets for equites and the USD versus its major peers in particular, but it’ll possibly take a couple of full trading days for the impact to be fully absorbed.
The tax cuts come close to the December FOMC 12-13th meeting, at which the Feds’ chairs are expected to announce an interest rise to 1.5%. The overall joined up plan is that the investors rotating out of equities into other asset classes, as the interest rate rise occurs, will be countered by investors supporting stocks, due to increased profitability as a consequence of the tax cuts. Gold price may come under increased scrutiny and speculation if (for the remainder of December), a risk on investment mood is maintained in the USA and that investor optimism creates contagion amongst other global markets.
Brexit talks will be entering a critical stage over the next week, prime minister May will be in Europe, she’s apparently now taking personal charge of Brexit negotiations as of Monday, as she visits Brussels, hoping to clinch an agreement on the Northern Ireland border issue, which has so far proved insoluble. Both sides want to finalise the U.K. offer on: the border, citizens’ rights and the financial settlement.
Unless these issues are resolved on Monday, then Michel Barnier, the EU’s chief Brexit negotiator, can’t inform European commissioners on Wednesday that the U.K. has made sufficient progress on phase one of the Brexit talks, in order to justify moving to phase two; transition and a trade deal. With this in mind GBP could be tested on Monday, in relation to its main peers, particularly versus EUR and USD. These really are make or break talks for the U.K. as a collapse in talks at this stage would see a sell off in sterling. The most likely outcome is a fudge; the various diplomats will claim the discussions were cordial and that they’re all pleased with the progress.
So it’s political issues, as opposed to economic calendar news, which will dominate investors’ and analysts’ collective thinking during Monday, however, it’s worth noting that on Tuesday morning 03:30 am GMT the Australian central bank the RBA will reveal its latest interest rate decision. Currently at 1.5% there’s no expectation for change. But as always; FX traders who trade the Aussie dollar, need to remain vigilant with regards to this announcement, the accompanying press releases and central government and RBA officials’ opinions.
KEY ECONOMIC CALENDAR EVENTS FOR DECEMBER 4th.
GBP Markit/CIPS UK Construction PMI (NOV).
EUR Euro-Zone Sentix Investor Confidence (DEC).
USD Factory Orders (OCT).
USD Durable Goods Orders (OCT F).
