The Daily Prophet: Stock Traders Are Showing Their Impatience

Connecting the dots in global markets.

The thing about stock traders is that they have no patience. They want it all and they want it now. So when the news broke that House tax writers are discussing a gradual phase-in for the corporate tax-rate cut that President Donald Trump and Republican leaders want, there was only one response: sell.

The Goldman Sachs High Tax Rate index of the 50 stocks in the S&P 500 with the highest 10-year median effective tax rates fell the most in more than six weeks. The Russell 2000 Index, which is mostly made up of smaller capitalization companies that would benefit the most from lower taxes, tumbled the most since August. Bloomberg News reported that the phase-in plan under consideration would see the corporate tax rate lowered from the current 35 percent rate by three percentage points a year starting in 2018 to 20 percent in 2022. Until now, the thinking was that the 20 percent rate would go into effect on day one. But the latest developments mean investors must break out their calculators and figure out what the latest proposal would do to earnings estimates.

The potential for a phase-in period for corporate tax cuts has implications beyond the stock market. The Bloomberg Dollar Spot Index fell the most in almost three weeks, while yields on benchmark 10-year Treasuries notes dropped. In both cases, the thinking is that phased-in corporate tax cuts would have less of a positive impact on the economy than if the reductions came all at once, potentially slowing the future pace of interest-rate increases by the Federal Reserve.

The case against fixed-income assets worldwide usually starts with the notion of higher interest rates in the U.S. and Europe and central banks pulling back from their asset purchase programs. Maybe the bears should start to throw China into the mix. China’s benchmark 10-year government bond yield soared eight basis points on Monday to 3.93 percent, the highest since 2014. The yield has risen about a third of a percentage point since late September. Investors in Chinese company bonds have so far avoided the brunt the selloff, but that may be changing, according to Bloomberg News. Now that the Communist Party Congress is over, China’s bond holders may be about to get hit by “daggers falling from the sky,” said Huachuang Securities, referring to aggressive deleveraging policies. Plus, faster inflation and the risk that China’s central bank may follow the Federal Reserve in raising rates costs are casting a shadow over the entire bond market. China's economy has been fueled by easy credit. Total borrowing climbed to about 260 percent of gross domestic product at the end of 2016, up from 162 percent in 2008, and will hit close to 320 percent by 2021, according to Bloomberg Intelligence estimates. As appetite for bonds of any kind dwindles and authorities roll out measures that target higher-risk investments, company securities are in the line of fire.

If you want to know why investors seem inured to geopolitical risks, look no further than Spain. In recent weeks the Catalan government was threatening to secede, with rebels even declaring a breakaway republic on Friday following an illegal referendum on the move on Oct. 1. But over the weekend, the Spanish government had enough, taking control of the Catalan government with little resistance and bringing the restless region back from the edge, Bloomberg News reported. Spanish stocks and bonds jumped on signs that normality is returning to the country’s biggest regional economy. The Ibex 35 Index of equities surged 2.44 percent to close at its highest level since mid-August. Yields on Spanish 10-year government bonds dropped 9 basis points to 1.495 percent, matching their lowest levels since mid-August. All this to say that any geopolitical turmoil in the world these days seems to have a very short shelf life, allowing investors to focus on the fundamentals. Despite the goings on in Catalonia, the Spanish economy extended its strong performance in the third quarter, according to Bloomberg News' Maria Tadeo. Output expanded 0.8 percent in three months ended Sept. 30, the National Statistics Institute said Monday. While the pace is down from 0.9 percent in the second quarter, it’s still above the 0.5 percent average forecast for the euro area.

Industrial metals are enjoying a big rally, having soared since the middle of the year as analysts talk up the strength of global economic growth. Copper is near $7,000 a metric ton, zinc topped a decade high and aluminum has jumped almost 30 percent this year. Macro hedge funds -- once major players on the London Metal Exchange -- are beginning to look again at metals markets, according to Bloomberg News' Jack Farchy and Mark Burton. They report that for the first time in years, optimism is widespread among traders, smelters, miners and brokers gathering in London for LME Week, buoyed by a combination of strong growth across the world’s key demand centers, supply curbs in China and a return of investor interest. "The global economy looks much better than it has done probably since the crisis, maybe before that," said Saad Rahim, chief economist at Trafigura Group, the second-largest metals trader. "I’m pretty bullish." The upbeat mood shows how much has changed in two years, when the commodities collapse brought the titans of mining to their knees. In September 2015, Glencore had to raise money as its stock cratered. Now, it's reaping profits and inking deals worth billions for natural resource assets around the world. On Monday, Glencore raised its profit forecast for its trading division, citing strong third-quarter performance.

The most widely used digital currency's total value just topped the $100 billion mark. That means it makes up more than half of the overall cryptocurrency market, according to Bloomberg News' Lily Katz. Cryptocurrency prices have shrugged off recent regulatory crackdowns across the world and skepticism from Wall Street titans including Warren Buffett and JPMorgan Chief Executive Officer Jamie Dimon. More than $3 billion has poured into initial coin offerings this year despite warnings from the SEC and other government watchdogs. In a recent commentary, Kenneth Rogoff, professor of economics and public policy at Harvard University, wrote that where Bitcoin and other cryptocurrencies go from depends a lot on how governments decide to regulate virtual currencies. “Will they tolerate anonymous payment systems that facilitate tax evasion and crime? Will they create digital currencies of their own? Another key question is how successfully Bitcoin’s numerous 'alt-coin' competitors can penetrate the market,” Rogoff wrote. Even so, Thomas J. Lee, the head of research at Fundstrat Global Advisors, said last week that the lone investment vehicle available to institutional investors is cheap because the market isn’t taking into account the digital coins spawned from splits in the biggest digital currency. Shares of the Bitcoin Investment Trust could be worth $2,360 to $2,600 if Bitcoin climbs to $25,000 by 2022, Lee wrote in a research report. The trust was $712 per share Monday, while Bitcoin was at about $6,100.

It will be a big day for euro-area economic data Tuesday, as investors get bombarded with reports on gross domestic product, inflation and unemployment. Of the three, the GDP report is the one that could have the biggest impact on markets. The consensus is that the region's economy expanded 0.5 percent last quarter, but the odds are that the number could be a bit higher, according to Bloomberg Intelligence. BI's economists say that the chances for a 0.6 percent reading are higher than of a 0.4 percent print because of recent strength in industrial output as well as the economy's stronger-than-expected performance in the first half of the year. After falling back between May and August, the STOXX Europe 600 Index of equities has rejoined the global rally, outgaining the MSCI All-Country World Index 4.72 percent to 3.39 percent. And despite some recent softness the, the euro is the world's best- performing major currency this year, according to Bloomberg-Correlated-Weighted Indexes.

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