02 Feb 2018
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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:
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.
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.
USTs were mostly treading water heading into the tax outline, before rallying in the aftermath in tandem with the decline in US stocks.
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.
USD pared gains
The USD was initially trading firmer but pared it's gains post-tax unveil.
As we mentioned yest, if the Trump tax outline were to disappoint, we would look for the market to fade USD strength.
IGM FX and Rates, IGM Credit
By Marcus Dewsnap 20 Nov 2017
Welcome to our newsletter, The Context, from IFI Research, containing thought leadership articles spanning a host of asset classes.