by Pinchas Cohen
Key Events
The path to US tax reform became a little more concrete yesterday, after the Senate Budget Committee narrowly approved the Republican tax bill, along party lines, after Republicans Bob Corker of Tennessee and Ron Johnson of Wisconsin retracted their opposition just before the vote. The prospect of changes to the tax code is the appetizer for what might arguably be called the Trump agenda entree: the potential easing of financial regulations.
That was also signaled yesterday by Fed Chair-nominee Jerome Powell during his confirmation hearing when he said he believed current regulations were tough enough and that perhaps it was time to consider whether the rules could be made more efficient and less burdensome. Powell also indicated that he would hew to Janet Yellen's current monetary policy course which markets believe includes another rate hike in December.
Global Financial Affairs
With two such promising events fueling investor hopes, North Korea's launch of a ballistic missile that Pyongyang said was capable of reaching any point in the US mainland made little impression on markets.
All four major US indices hit new record highs and closes. As well, the S&P 500 and Dow Jones Industrial Average nearly completely cleared any prior price action. The NASDAQ Composite gained 0.49 percent; the S&P 500 advanced 0.98 percent; the Dow climbed 1.09 percent, and the Russell 2000 leaped 1.6 percent; small caps are considered the biggest beneficiary of tax cuts.
Since the prospect of easier financial regulations would be most beneficial to banks, Financials outperformed. Financial sector shares on the S&P 500 surged, gaining 2.6 percent, more than a full percent ahead of the runner-up, Industrials, which showed a 1.52 percent gain. The sole laggard was the Real Estate sector which saw a 0.24 percent setback.
While the tax bill looks to be on its way, it must still survive a prolonged debate this week when it comes before the entire Senate for an official vote. That could work both for and against investors. While stocks are likely to give back gains if there's no progress, tax cuts are not necessarily priced in, leaving stocks room to rise.
This morning, perhaps taking a cue from US equities, most Asian markets resumed their rallies, though in South Korea shares closed lower, as investors considered the threat across their northern border.
Still, the bullish torch was passed to Europe. The Stoxx Europe 600 Index is eyeing a three-week high, supported by wide participation, with all sectors rising.
After a two day advance, and despite yesterday ignoring North Korea's latest aggression, the US dollar today gave back most of yesterday’s gains.
As well, core European bonds and Treasuries, including the US 10-year, fell. It was an apparent belated-reaction to the threat, even after shrugging off the geopolitical risk yesterday.
Kim Jong Un, North Korea's Chairman and self-designated supreme leader, said his nuclear program, with its upgraded ICBM capability supposedly on display yesterday, is now complete. Though yesterday's launch ends a two-month, self-imposed “cease fire” by the rogue nation, global investors—who have been shrugging off geopolitics since the mid-2016 Brexit vote—probably view the North Korean leader as something of a caricature within the market landscape.
An outline for the UK's 'bill' for the Brexit divorce deal sent the pound to its highest point since September 29. The financial settlement—what the UK will pay the EU when it leaves the block—brings the negotiation process one small step forward. However the more complicated, Irish border issue remains the final obstacle to advancing the negotiations.
While gilts dropped on the lower risk, the FTSE 100 also fell, even with the European rebound. The stronger pound hurts multinational British companies whose profits are denominated in dollars, making exports more costly and local equities more expensive for international investors.
Bitcoin smashed through the $10,000 barrier yesterday, increasing more than 10-fold in value over the past year. Though cryptocurrency investors have primarily been focused on Bitcoin's continued surge, Dash—currently the seventh most popular digital currency—has recently been setting some records of its own.
Up Ahead
- Late today in the US, China's official and Caixin manufacturing PMI releases are expected to show mostly steady momentum.
- Japan's industrial production is forecast to have rebounded in October, but national CPI may show a sharp divergence between headline and core inflation, according to Bloomberg Intelligence. The metrics will be released this evening US time.
- The second print of third-quarter U.S. GDP, also released today, may be revised upward thanks to consumer spending and inventory accumulation, Bloomberg Intelligence said. The Fed's preferred inflation gauge, the core PCE deflator, is due Thursday.
- OPEC meets in Vienna on Thursday.
Market Moves
Stocks
- The Stoxx Europe 600 Index climbed 0.7 percent as of 8:13 London time (3:13 EDT), the highest in almost three weeks.
- The U.K.’s FTSE Index sank 0.5 percent, the largest dip in two weeks.
- Germany’s DAX increased 0.7 percent.
- S&P 500 Futures gained less than 0.05 percent.
- Japan's TOPIX gained 0.8 percent at the close while the Nikkei 225 rose 0.5 percent.
- Hong Kong’s Hang Seng Index was down less than 0.1 percent; the Shanghai Composite Index rose 0.1 percent.
- Australia’s S&P/ASX 200 Index rose 0.5 percent.
- The KOSPI was flat.
- The MSCI Asia Pacific Index rose 0.3 percent.
Currencies
- The Dollar Index fell 0.15 percent to 93.08, paring its two-day bounce to 0.38.
- The euro climbed 0.2 percent to $1.1868.
- The British pound advanced 0.6 percent to $1.3419, the strongest in two months and the biggest gain in a week.
- The Japanese yen gained less than 0.05 percent to 111.45 per dollar.
Bonds
- The yield on 10-year Treasuries advanced one basis point to 2.34 percent.
- Germany’s 10-year yield climbed two basis points to 0.34 percent, the highest in almost two weeks.
- Britain’s 10-year yield climbed seven basis points to 1.253 percent.
Commodities
- WTI crude oil dipped 0.4 percent to $57.75 a barrel, its lowest in more than a week on a third consecutive day of declines.
- Gold advanced 0.2 percent to $1,296.18 an ounce, the highest in almost seven weeks.
- Copper declined 0.1 percent to $3.10 a pound, the lowest in more than a week.