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It was a typical case of buy the rumour, sell the fact as the market was left underwhelmed by President Trump's opening outline of his tax policy which Treasury Sec Mnuchin labelled as the "biggest tax cut" in US history.

Specifically, this was down to how the outline was broad brush-strokes that lacked details as we expected, which makes it nigh on impossible to ascertain the direct economic impact, and the market was also left questioning how the plan would be paid for.

At the margins, the tax reform outline calls for a tax reduction for businesses, the middle class and high-earners.

Specifically, key parts of the outline are as follows:

  • Top individual tax rate to be cut from 39.6% to 35%
  • Remove the 3.8% net investment income tax for individuals earning more than $200,000
  • Eliminate estate duty tax for high net worth individuals and couples
  • Removal of federal income-tax deduction allowed for state/local taxes
  • Corporate tax to be slashed from 35% to 15%
  • 1 time tax for corporate offshore income, whilst moving to a new territorial taxation system that would exempt most US corporates from being taxed on foreign profits

Note that nowhere in the plan is there a clear benefit for the majority of Americans, with most of the proposals seemingly self-serving to the fat cats, upper echelons (of which Trump is one of them, if one has forgotten) and the swamp (which Trump promised to clear in his pre-election pledge if one cares to remember).

Notwithstanding the lack of details, the Democrats are expected to oppose Trump's tax plan on the lopsided nature of it, with Democrat leader Schumer saying as much while Senate majority leader McConnell acknowledged that he doesn't expect the Dems to endorse the plan.

Questions over how the tax plan will be funded also inevitably reared it's head, especially given previous assertions from Treasury Sec Mnuchin that it would "pay for itself" via economic growth, but the lack of details means this is nigh on impossible to ascertain at this point.

Even more important in the l/t is the fact that if the tax plan doesn't exactly pay for itself (revenue neutral in other words), it only has a shelf life of 10yrs before the tax cuts expire.

Can the US govt avert a shutdown?

The focus now turns to whether a US govt shutdown can be averted.

  • Note the continuing spending resolution is due to expire on 28 Apr.
  • While it has been shrugged off by the market for now given safe passage of another continuing spending resolution (to kick the can down the road again) seems simple enough and with the Republican party leadership's insistence that they won't take things to the brink, the failure of the Republicans to push through the Obamacare repeal (and the general lack of ability to govern) means one cannot write off the possibility of another US govt shutdown.

US stocks erased gains in the aftermath

Noteworthy amongst the o/n market moves is the fact that despite the big corporate tax cut being proposed, US stocks erased their gains and fell into the red by the close.

  • Dow -0.10%, S&P500 -0.05%.

USTs rally

USTs were mostly treading water heading into the tax outline, before rallying in the aftermath in tandem with the decline in US stocks.

  • Yields on the 2s ended +0.1bps up at 1.272%, 5s -2.7bps at 1.828%, 10s -2.9bps at 2.303%, 30s -2.8bps at 2.960%.

We highlighted yest that after Tues' move, the previously bullish UST bias had turned neutral.

While this neutral bias still holds, the balance of risk is starting to tilt back towards lower yields.

  • For the 2s, the tech bias suggests yields will toggle around 1.221-300% in the interim. That said, the balance of risk has shifted from a possible breakout towards a downside drift towards the lower bound of the above mentioned range and possibly 1.184%.
  • For the 10yr yield, it has failed to hold the bounce above it's 76.4% Fib retracement 2.328%. If it also can't hold onto the 2.300% level, we would look for a retreat towards 2.200% in the coming days.

USD pared gains

The USD was initially trading firmer but pared it's gains post-tax unveil.

  • The USD Index closed +0.26% higher at 99.04.

As we mentioned yest, if the Trump tax outline were to disappoint, we would look for the market to fade USD strength.

  • The tech bias remains firmly bearish after it closed below it's 200-day MA 99.13 on Mon for the first time since 03 Oct 2016.
  • The balance of risk suggests fading on strength towards 99.13/27, with the door open for a decline towards 98.54/31 and 98.00.
  • Resistance at 99.13, 99.27, 99.81. JH

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