House Republicans passed tax overhaul
Stock market moves lower as optimism was already baked in
Aggressive Fed rate hike would have the potential to bring panic in the market
European markets are trading lower and we have more stocks trading lower than the stocks trading higher. We had a more upbeat reading for the French dec business confidence (112 vs 11) but investors have clearly paid no attention to it.
Back in the US, Mr Trump finally has something that he can put his name on, and it took him more than 10 months to get it across the tax line. House passed the US tax overhaul yesterday and Mr Trump celebrated his victory. However, markets have not shown any enthusiasm for this development. Wall Street closed mostly lower yesterday and all three major indices were red.
The US tax overall, under which corporation tax is cut substantially, certainly has the element to boost the US GDP, but in terms of stock market, a lot of this optimism was already basked in. Investors have been pushing the markets higher mainly on the back of this hope that the US tax overhaul will encourage firms to spend more and that will have a more positive impact on their balance sheet. Given the returns we have seen for all the major US indices for this year, you can surely make an argument that investors are exhausted and more interested in taking the profit off the table.
The pullback in the US stock market could present an opportunity for those who have been sitting on the sidelines. After all, Mr Trump also promised that he is going to spend big to upgrade the infrastructure of the US. In 2018, that would be one of his biggest goal and markets would remain focus on that simple element.
Aggressive Fed rate hike would have the potential to bring panic in the market, but the Fed has been very calm throughout this year and their approach was immensely measured. Thus, the chances of the Fed spooking the markets are still slim. This argument would hold a lot of ground only if we have had the same Fed chairperson. Unfortunately, that is not the reality, a new Fed chairperson, who currently seems like would adopt the same strategy as Janet Yellen, would have a different approach in dealing with various matters. Therefore, the threat would be serious that the Fed may derail the recovery by tightening the monetary policy aggressively.
We think that the pullback in the equity market could bring some shine for the yellow metal. Trump’s threat to withdraw aid for the countries which have voted against his Jerusalem decision also clearly states that geopolitical tensions aren’t going away anytime soon and they could support the metal price in the long term.
The current weakness in the gold price is mainly due to the strength of the dollar.
