Stocks going "phenomenally" higher
Upped expectations for corporate tax cuts in the US and economic progress in China ushered in some Friday optimism.
A big uptick in trade data for January, a country-wide infrastructure plan dubbed “One belt, one road” alongside President Trump’s commitment to the one-China policy saw Chinese share posts the biggest weekly gain in 2 ½ months. As long as the Chinse government chooses to support the economy rather than take the necessary step of deleveraging, a “hard landing” should be off the table.
Most of the week has been digesting fourth quarter earnings and the possible outcome in European elections. All the while we’re awaiting the next policy moves in Donald Trump’s pro-growth agenda.
The FTSE 100 clocked in a three-week high as the British pound sunk for a second day. The index was led by mining companies while bank stocks were the biggest drag. Miners stand to benefit from higher raw material demand in China should there be more spending on infrastructure. The FTSE 350 Mining Index rose over 2% on Friday to come a few points shy of a fresh two-year high.
The upswing in US earnings
With about two-thirds of S&P 500 companies having reported, fourth-quarter earnings are on track to rise around 8%. It could be the best quarterly US earnings performance since the third quarter of 2014.
Investors have a lot to thank OPEC for. The turnaround in energy sector earnings thanks to higher oil prices has been the difference-maker. The record highs for the Dow and Nasdaq this week suggest the market has been pricing in the bounce back in earnings. The question is whether gains will be sustainable once it’s officially in the bag.
Trump on taxes
Details are a little scarce but Donald Trump has promised “phenomenal” tax cuts. The best way to conduct tax policy over the long haul is a obviously a big subject of debate. From a short term perspective, there’s no debate; cutting taxes is good for corporate America. Our assumption is a good proportion of any money diverted out of government coffers via corporate tax cuts will end up as dividends or stock buybacks.
Income tax is a thorny issue for Congress so Donald Trump is likely to tackle US corporate taxes first. US corporate tax rates are recognised on both sides of the aisle as uncompetitive on the global scene. Tax cuts should be one of the more deliverable (and less contentious) campaign promises for Trump. With looser fiscal policy now on the horizon, we see no reason to change our bullish bias on US equities.
The agenda for next week
We will be watching Fed Chair Janet Yellen testifying before Congress, inflation from China, the UK and the US as well as UK unemployment and retail sales.
After hiking rates in December, the Fed’s lack of urgency to go again has helped the “lower rates for longer” mantra behind the rise in markets. Ms Yellen is normally pretty tight-lipped on these occasions so unlikely to give much away. The best popcorn-eating potential could come from any US politician asking her opinion of The Donald.
The inflation stats will be a test of the ‘reflation’ trade which has played its part in the latest push higher in equities. With the UK on track to start the process of leaving the EU in March, we are watching for any indication the uncertainty has slowed economic activity.
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