Overnight: This Could Take A While
The Dow closed down -101 points or -0.4% while the S&P lost -0.4% to 2584 and the Nasdaq fell -0.6%.
Get in or miss out
To recap, the ASX200 surged from 5950 through 6000 on Tuesday in a move that caught many by surprise. From the open on Wednesday it appeared the index would inevitably pull back and have to do some work around the 6000 mark before it could move into post-GFC “blue sky”, but after dropping back to that level, the index grafted back to be slightly higher on the day.
This appears to have been a signal to the market that there is not going to be a pullback. So yesterday, the money flowed in.
It was a market-wide buying session. And when we consider that National Bank ((NAB)) going ex-dividend was worth -10 index points, it was quite an exuberant one. Only energy (-0.2%) missed out among the sectors, with investors clearly hoping for more from Santos’ ((STO)) investor day. That stock fell -3.2%.
Utilities remained steady, which is what we might expect from a “risk on” session. Otherwise, all other sectors posted roughly similar gains to give the ASX200 a 0.5% boost. Fittingly the index closed on 6050.
But there was trouble in Trump Town overnight, with Wall Street suffering a bout of jitters with regard tax reform. This morning the SPI futures are down -28. Mind you, they were also down by that amount on Wednesday morning and we closed higher.
Still, a pullback to 6000, which now becomes support, would not surprise anyone.
Yesterday was a different story nonetheless, and not even weak housing finance numbers could dampen the enthusiasm.
The number of loan approvals for owner-occupiers fell -2.3% in September when a gain of 2.0% was expected. The value of investor loans fell -6.3%. While the numbers were weaker than expected, we recall August’s numbers surprised to the upside.
There is also a bit of noise in the data at present given APRA’s crackdown has forced a lot of borrowers to switch from interest-only loans to principal & interest loans in order to avoid higher rates. Westpac’s economists suggest recent investor finance numbers have been holding up better than other housing market measures of late given the distortion created by refinancing.
Yesterday’s results are nevertheless more in tune with the lower turnover, falling auction clearing rates and easing prices evident in housing more recently.
Please be advised there will be a delay
Step one of Trump’s US tax reform plan was to propose a bill in the House. Step two is for the Senate to propose its own bill. Not sure why the “house of review” gets to propose its own legislation from scratch, but American politics is a funny old world.
When the elements of the bill began being leaked mid-morning, Wall Street saw only one clanger. The corporate tax rate cut to 20% from 35% will be delayed for one year. The Dow duly fell -250 points.
There were many other differences to the House bill to also consider, as well as similarities. The Senate has proposed seven personal income tax brackets instead of five, with the highest rate being 38.5% instead of 39.6%. The Senate will also scrap deduction of state & local taxes, which is one of the major stumbling blocks for Republican members, but retain the mortgage interest deduction cap at US$1m rather than cut it to US$500,000 as the House has proposed.
Around midday the initial panic selling stopped, and thereafter the major indices began to graft back part of their losses. By the afternoon the Senate had confirmed that the leaks were correct, and the debate went into overdrive.
Would the House be prepared to accept a delay? Yes, they had said as much previously. Would Donald Trump be prepared to accept a delay? Not a chance. Can Trump do anything about it? See: healthcare.
The issue for the Senate is that they are forced to work within a budget that caps the net loss of initial income for the government from the tax cuts and offsets at -US$1.5trn. They have to tweak the plan here and squeeze it there to get it to fit. Given this limitation, it may yet be that the Senate gets its way following a reluctant compromise.
Whatever the case, no one disagrees that the Administration’s goal of getting a bill through by Thanksgiving (November 23) is now a pipedream. There is a lot more work to be done.
Which, in reality, is what the cooler heads on Wall Street had suggested right from the word go. It’s going to take time.
And as time progresses, it seems inevitable, given budgetary constraints, that Trump’s ultimate tax reform will not be the panacea many had assumed it would be.
Nickel has been on a euphoric run of late ever since it was suggested there won’t be enough in the world to meet growing EV demand. Last night Morgan Stanley put out a report suggesting the market is ignoring downside risks with regard mining policies in Indonesia and the Philippines.
Nickel fell -3.5% in London. Aluminium fell -1% and copper -0.5%.
Iron ore fell -US60c to US$61.90/t.
The falls came despite the US dollar index dropping -0.4% to 94.47 on the tax news.
But the lower greenback did help gold up US$5.90 to US$1286.40/oz.
Last night Saudi Arabia warned its nationals in Lebanon to get out immediately. Kuwait, UAE and Bahrain have done the same. The assumption is the new Crown Prince is preparing to step up military action against Iranian-backed Hezbollah.
West Texas crude is up US38c at US$57.13/bbl.
The Aussie is flat at US$0.7680.
The SPI Overnight closed down -28 points or -0.5%.
The RBA will issue a quarterly Statement on Monetary Policy today.
Rudi will connect with Sky Business via Skype at around 11.15am to talk broker moves.
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