Daily Market Color

Risk Assets Halt Rally After Unveiling of Trump Tax Proposal

US financial markets were in a holding pattern for the first half of the trading session in anticipation of the unveiling of a new tax plan by the Trump administration.  From a business perspective, highlights of the initial bid to restructure the existing tax policy included a reduction of the federal income tax rate for corporations, small businesses and partnerships to 15% (currently 35-40%) and a one-time 10% tax imposed on repatriation of the $2.6 trillion of earnings that US companies have sitting abroad.  From a personal tax perspective, the number of tax brackets would be reduced from 7 to 3, while the upper tier tax rate would be trimmed to 35%, and the lower brackets would be placed at 10% and 25%.  Most current individual deductions, except for home-mortgage interest and charitable contributions, would be eliminated, and both the estate tax and alternative minimum tax would be repealed.  The overall details of the plan were described by US Treasury Secretary Steven Mnuchin as “core principles” that serve as a starting point for negotiations with Congress, with the goal to get the bill “done this year.”  A key hurdle remaining for the plan is the fact that any new tax restructuring cannot increase the Treasury budget past a 10-year period, as the funding for the new bill was not specifically explained.  Given the current state of political inaction, and the fact that no significant tax reform has been able to be passed in the US since 1986, this will not be a simple process to get a version of these proposed reforms approved.

A brief selloff in Treasurys following the announcement gave way to a rally which has yields/swap rates currently down 2-4 bps across the curve.  All three major stock indices pared gains from earlier in the session to close just below flat on the day, effectively curtailing the rally that began after the results of the French election.  The US dollar rose 0.3% against major currencies today, while gaining 1.3% vs. the ruble as the Russian government looks into “market-based measures” to support its currency.  Other important foreign market news will come tomorrow via the announcements of the BOJ and ECB policy decisions.  Both central banks are expected to hold their existing programs/policies unchanged, however commentary from officials will be closely monitored to gain any sense of future tightening as their respective economies appear to be generally expanding slowly.            

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