Today’s word is “bigly.”
No wait, “phenomenal.”
No wait, “massive.” Yeah, that’s it. “Massive.”
All eyes are on Donald Trump’s tax plan on Wednesday even though common sense tells you that what he does or doesn’t say is largely meaningless. “Is this an opening, somewhat unrealistic gambit to a negotiation?” Credit Suisse’s James Sweeney, asked earlier this week. “And the broader economics — what are the other components to tax reform? We’d be silly to pencil in the 15 percent rate and adjust our expectations accordingly.”
Right. And you’d “be silly” to call whatever Trump says today anything other than what it is: a publicity stunt designed solely to make good on last Friday’s promise to deliver something “massive.” That’s how this administration works: Trump uses a superlative then everyone scrambles around to figure out how to make it not a lie.
And so in the true spirit of that, we’ll get something today and whatever that something is could very well give investors another excuse to keep buying. Or at least that’s how one trader sees it. Basically we’re going to get a proposal for a cut to the top income tax rate on pass-through businesses to 15% (from 39.6 percent), a 15 percent tax rate for corporations, no border-adjusted tax proposal, and a 10% repatriation tax. Surprised? No? That’s because it’s the same shit he’s been saying forever.
Anyway, the dollar rose to a two-week high versus the yen overnight as risk-on sentiment dominates. “For the dollar to stage a further climb, markets need to see Congress passing Trump’s plans as well as economic data,” Koji Fukaya, Tokyo-based chief executive office at FPG Securities said, stating the obvious. “110 yen is firming as support given the general retreat in risk aversion, with French concerns abating and U.S. Treasury yields rebounding,” Fukaya adds.
Speaking of Treasurys, 10Y yields were little changed, holding onto a five-day gain at 2.33%. “Dollar bulls were also concerned over the probability of a government shutdown, which weighed on sentiment and kept investors from adding longs in size,” traders told Bloomberg, who adds that “volumes were the lowest seen this week given Thursday’s European Central Bank meeting capped interest in fresh positions.”
Despite generally bullish sentiment (see here), the euro put the brakes on a four-day rally against the greenback as leveraged investors took profits on longs. Still, the big picture there is pretty damn clear:
Based on order books, EURUSD is a BTFD candidate with interest all the way down to 1.0750; stop entries lie above 1.1000. Here’s SocGen’s morning take:
The yen is down, the euro is up, and equities are higher. Bond yields are only slightly higher and commodities are meandering, which bothers some people but still seems to me utterly, and faintly depressingly, risk-friendly.
The way the US equity market is behaving, not to mention the new home sales data yesterday, the FOMC members are going to have to get ready to prep the market for a June rate hike before long. Only client pointed out to me yesterday that everyone expects a soft US Q1 GDP release on Friday, but no one is even slightly bothered. If that’s not a reason to hold back from tightening, neither is the dollar, or global risk sentiment. But would a slightly more hawkish Fed make any difference? The key isn’t what the Fed does this year (two hikes or three?) but where they pitch terminal rates and for now, they are looking at 3% or lower, doing absolutely nothing to make us worry about a higher peak. Investors are even doubting if 3% will be reached. If the US inflation data flow doesn’t change that perception, investors will continue to seek yield and carry, and won’t be too bothered about what the Fed does in June.
In that world, the euro goes on re-pricing higher, CEEMEA EM currencies thrive above all else as a high-beta euro, and the only ‘losers’ are the yen, the NAFTA-vulnerable MXN and CAD and perhaps, if geopolitical concerns really raise their heads, KRW and TWD. But for AUD, NZD, and for MXN as for EMFX in general, if the Fed Funds peak is indeed 3% or less, contagion from country-specific problems is likely to be very limited and sell-offs may just represent dips to buy.
Asian equities were higher, with the Nikkei helped by the weaker yen. European stocks are mixed.
- Nikkei up 1.1% to 19,289.43
- Topix up 1.2% to 1,537.41
- Hang Seng Index up 0.5% to 24,578.43
- Shanghai Composite up 0.2% to 3,140.85
- Sensex up 0.7% to 30,149.50
- Australia S&P/ASX 200 up 0.7% to 5,912.04
- Kospi up 0.5% to 2,207.84
- FTSE 7267.48 -8.16 -0.11%
- DAX 12446.86 -20.18 -0.16%
- CAC 5275.41 -2.47 -0.05%
- IBEX 35 10717.50 -65.60 -0.61%