- Wave of selling hits stock markets after recycled capital gains tax story
- Euro pulls back after ECB downplays tapering, rebounds after PMIs
- Pound snoozes after British PMIs, American ones also on the agenda today
Algos go haywire or investors sleeping on the wheel?
It was a surreal session in financial markets. Wall Street took a hit to close almost 1% lower, following reports that the White House will seek to double the capital gains tax that wealthy investors pay when they cash out of profitable trades. Specifically, Biden plans to tax capital gains in a progressive manner like regular income, with the rate scaling higher as the amount itself increases, up to a maximum rate of around 39% on large investments from 20% currently.
The problem is that this is old news. Not only did Biden campaign on this issue, but there have also been countless reports in recent months covering this very proposal, with the exact same numbers. What’s really striking is that this was reported by the New York Times yesterday but the market didn’t bat an eyelid, yet the same report from Bloomberg a few hours later sparked a quick selloff.
What’s really going on here? Was it some trading algorithm going haywire after absorbing the recycled reports or were some market participants asleep at the wheel and caught off guard by old news? Either way, it seems like an overreaction to something that anyone familiar with Biden’s infrastructure proposal would already know.
The real questions are how much this tax proposal will be watered down to ultimately gain the approval of the divided Senate, and when it would come into force. If it goes into effect in 2022, there could be trouble ahead as investors sell before the year ends to take advantage of the current lower rates. On the bright side, they would probably reload on whatever they sold very quickly, as there isn’t any alternative to stocks right now offering a real return, so this could simply end up being one giant volatility episode.
Euro goes for a rollercoaster ride
In the currency arena, the euro has been trading like a pinball machine. The ECB meeting revealed nothing new, yet the euro retreated after the meeting concluded following a report that the ECB ‘hawks’ did not push for a reduction in bond purchases. That likely dashed hopes that the QE program might be dialed back in June already.
But the euro has risen from the ashes early on Friday after the latest PMI surveys out of the Eurozone painted a brighter picture. The services sector remained resilient despite the stricter containment measures in April, as businesses increasingly learn to live with the restrictions, while the manufacturing sector is enjoying a boom.
Alas, it is still difficult to get excited about the euro’s fortunes. The situation is not as desperate as it seemed is not a very inspiring message, especially when compared to America, which has done a far better job in rolling out vaccines and has an overflow of spending in the pipeline.
Pound snoozes despite blockbuster data
Elsewhere, British retail sales for March showed that consumer spending returned to levels higher than before the pandemic, which is very encouraging considering that the economy was still frozen in a lockdown during that month.
With non-essential shops opening up in April and most people having received at least one vaccination shot, it will probably be a stellar British summer in economic data. Indeed, the preliminary PMI surveys for April were terrific, pointing to a powerful spell of economic growth ahead.
However, the pound was not very excited, which suggests that much of the good news was already baked into the cake.
More PMIs on the horizon
As for the rest of today’s highlights, preliminary PMI surveys for April will also be released in America. Meanwhile, ECB President Lagarde will deliver more remarks at 14:30 GMT.
The earnings season will wind down today, before re-accelerating next week with the likes of Tesla, Google, Apple, Microsoft, Amazon, Facebook, and many others releasing their quarterly results. 
