Three Charts That Show Markets Aren't Betting on GOP Border Tax

  • House plan would incentivize exports, hurt importers
  • Oil spreads, retail stocks, Irish debt suggest lower odds

As executives of major retail chains voice their displeasure over a Republican proposal to tax U.S. businesses’ domestic income and imports while exempting their exports, financial markets are saying don’t worry about it.

U.S. President Donald Trump’s stance on the plan, known as a border adjustment tax or BAT, is unclear -- first, he deemed it "too complicated," but then reportedly warmed to it as a potential way to help pay for a border wall with Mexico.

He told chief executives who had come to lobby against the border adjustment, including those from Target Corp. , J.C. Penney Co. and Gap Inc. , on Wednesday that a tax overhaul plan was coming soon without mentioning the Republican tax.

If media attention is any indication, interest in the border adjustment tax is starting to roll over as found in Bloomberg’s tool for finding news trends.

But with a dearth of details from D.C., what are financial markets saying about the likelihood of a border adjustment tax?

Here are three charts that suggest traders don’t seem overly confident this part of the plan will be implemented in full.

The BAT, if implemented without a carve-out for the energy industry, would incentivize oil production in the U.S. versus the rest of the world and would be conducive to a narrowing in the spread between same-dated West Texas Intermediate and Brent futures contracts.

But after shrinking significantly in the aftermath of the election, the gap between contracts that expire in December 2017 has been trending wider since Jan. 11, as the above chart shows.

Retailers could be in for big-league damage relative to other sectors in the event of a border tax, because in most cases the majority of their sales are imported goods.

The SPDR Retail exchange-traded fund had been getting crushed since early December, vastly lagging the S&P 500 index. But it’s been outperforming since Feb. 7 -- right about when the Trump’s flare up with Nordstrom Inc. began.

Irish bonds aren’t behaving like there’s an imminent U.S. policy change that could cause a structural shock to its economy and financial markets.

"Border adjusted cash flow tax complex, but seems clearly bad for Ireland - U.S. [intellectual property] companies can come home and face no tax on export profits," tweeted Brad Setser, senior fellow at the Council on Foreign Relations. "Pharma may not produce active ingredients in Ireland, Apple doesn’t need its Irish [subsidiary], etc."

Indeed, the spread between the yield on Irish 10-year debt and its German counterpart has come in over the past two weeks.

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