The Daily Prophet: Trump's 'Phenomenal' Tax Plan Excites Markets

Robert Burgess is editor of Bloomberg Prophets.
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That’s more like it. All it took to spark some animal spirits and send stocks to new highs was a fairly innocuous comment by President Donald Trump during a White House meeting Thursday. He told representatives of the nation’s largest airlines, air freight companies and airports that he will be announcing something on taxes in the next few weeks “that will be phenomenal.’’

Investors had expressed frustration that in the early days of his administration Trump seemed to be focusing more on building a wall along the border with Mexico, tightening immigration, repealing Obamacare, and reworking trade deals than on what really matters to markets: cutting taxes, reducing regulations and coming up with an infrastructure spending plan. Nothing comes free, and investors may soon ask how Trump proposes to pay for any cuts and whether certain tax benefits enjoyed by companies, such as those tied to the depreciation of assets, may get eliminated.


Markets have priced in 11 percent to 12 percent earnings growth for U.S. companies this year, but none of that reflects fiscal policy reform, including lower taxes, said Andrew Slimmon, a senior portfolio manager at Morgan Stanley Investment Management. “That’s the big upside for the market,” he said.

RECKONING DAY
The euro looks like it’s in jeopardy of rolling over. An index tracking the shared currency’s performance against its developed-market peers has fallen for four straight days, the longest slump since November. It’s weakened this month against 14 of the 16 major currencies tracked by Bloomberg. Although the euro zone’s economy is stable, political risk is high. The prospective French presidential candidate Marine Le Pen just unveiled a manifesto that includes a pledge to take her country out of the euro bloc should she win. Italy is reeling from a near-crisis in its banking industry and bracing for its own potential elections. Greece is fighting with its creditors -- again. Tomorrow is potentially a big day, as Moody’s Investors Service is due to weigh in on the creditworthiness of France and Italy.


BUYERS STRIKE

Political uncertainty in Europe is starting to cause problems for the region’s safest borrowers. France’s government-linked development agency postponed a $1 billion bond sale this week, citing market volatility, even though a junk-rated shipping company managed to increase the size of its sale.

Agence Francaise de Developpement received insufficient orders because of investor concern that the notes would suffer in line with French government bonds amid the country’s presidential election, according to head of treasury Bokar Cherif.


WINNING WAYS

Mexico’s peso has been on an impressive winning streak after getting clobbered in the wake of Trump’s election victory. Over the past month only South Korea’s won has appreciated more against the dollar among the 16 major currencies tracked by Bloomberg. Today, it got an extra boost as Mexico’s central bank raised borrowing costs for a fourth straight meeting to further bolster the currency and temper inflation. To be sure, it’s not all blue skies. Mexico is facing the prospect of low growth and high inflation caused in part by Trump’s threats to renegotiate free trade in North America and slap a tax on companies that send jobs south of the border. Despite the recent strength, the peso was still down 11 percent since the Nov. 8 election through yesterday and the end of government fuel subsidies combined to send the inflation rate up by the most in 21 years in January.


CHINA CRACKDOWN
About the only market in the world that can rival the Mexico peso in terms of trader fascination is the one for bitcoin. The digital currency took a tumble today when news broke that Chinese bitcoin exchanges have suspended withdrawals for up to a month after meeting with the central bank, pushing prices in the U.S. down as much as 11 percent. The Huobi and OKCoin exchanges announced the transaction halt Thursday after the People’s Bank of China on Wednesday vowed to close domestic platforms that violate rules on foreign exchange and money laundering. It will be fascinating to see how traders and Asia react to the news. Strap in, it’s going to be a wild ride.


TEA LEAVES

The focus of markets Friday will be the meeting between Trump and Japan Prime Minister Shinzo Abe. Trump’s accusations of currency manipulation against Japan aren’t a priority for him in the talks, an administration official said. Instead, the automobile industry will be an important topic, said the official, who briefed reporters on the U.S. agenda for the meeting on condition of anonymity. Trump said Jan. 31 that China and Japan “play the money market, they play the devaluation market, and we sit there like a bunch of dummies.” On the campaign trail in 2015, Trump accused Japan of currency manipulation. Abe, his main lieutenant in the cabinet and Japan’s top foreign exchange official all pushed back Feb. 1 against Trump’s assertion that Japan is keeping its currency devalued.

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To contact the author of this story:
Robert Burgess at bburgess@bloomberg.net

To contact the editor responsible for this story:
Max Berley at mberley@bloomberg.net