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The US Records Just Keep Coming As Tax Reform Vote Imminent

Positivity has been the word for the markets in the penultimate trading week of the year, as voting on the US tax reform bill is imminent. The Street of Dreams saw the 3 major US equity indices hit fresh all-time highs once again on Monday, as the tax reform rally (aka this year’s Santa rally) showed no signs of abating. The records just keep on breaking; the Dow hit a new milestone of 24,792, its 70th record close this year, which equates, on average, to a new record close every 4 days. A tough statistic for 2018 to live up to.

 

Republican vote in the bag

Strength continued to stem from optimum on the tax reform bill. The vote on the combined version of the tax reform bill is due to take place either today or tomorrow. The Republicans have finally manged to pull Republican Senator Susan Collins on board. Her vote was so important because Senator John McCain will miss the vote for health reasons, and the Republicans can now feel comfortable that they will achieve the majority needed.

 

Nasdaq hits 7000

The rally isn’t just in stocks which are expected to do well under the new tax reform bill winding its way through Congress. Tech stocks are also soaring. Tech stocks had been identified as possible losers from the new tax reform bill. This group tends to have international operations, with large amounts of cash held off-shore, for which they will need to pay a higher tax next year due to a new levy on cash held abroad.  Yet the Nasdaq soared above 7000 for this first time on Monday, whilst Apple hit a fresh all-time high.

 

Is a switch towards European stocks on the cards?

Whilst the US market are climbing ever higher, investors are starting to question whether these valuations are too high? Given the potential increase to earnings per share for some firms following the tax reform, those valuations look supported. But when compared to other regions such as Germany, US stock looks comparably expensive. As we move towards next year, we could expect to see investors moving more towards European and particularly German equities, in a bid to find stock market value.

 

Dax in line for a quieter start after 1.5% rally on Monday

European markets are pointing towards a marginally positive start. The DAX is notably calmer after its superb session on Monday, which saw it rally 1.5% and close above 13,300. Germany will remain in the spotlight today, as the German IFO business climate survey is set to be the most influential data point, on an otherwise light economic calendar.

 

First German IFO survey since coalition talks collapsed

The German IFO is expected to hit 117.6 in December, ticking up from its record high of 117.5 in November, as optimism among the nation’s business booms. However, this will be the first test of how politics are impacting on business climate, given that it is the first survey since coalition talks broke down. Whilst forecasts are not anticipating the German political vacuum to impact on the survey results, it might be naïve to think that politics don’t matter.

 

EUR/USD failed to push meaningfully through $1.18 in the previous session. A solid reading from the German IFO survey, could help the common currency over the line. That said, any dollar strength from the tax reform could quickly bring a rally back down.

 

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