The Daily Prophet: The Rich Really, Really Like Expensive Stocks

Connecting the dots in global markets.

Maybe it's all the talk about how the Trump administration's planned tax benefits will go mostly to the wealthy. Or maybe it's a reflection of a stable, growing economy with little to no inflation. Whatever the reason, affluent investors in America are really confident at the moment, despite valuations for U.S. stocks holding near record highs.

Spectrem Group's monthly confidence index of investors with at least $1 million to invest soared to 19 for September from 10 in August. The index, which is based on 250 interviews, has only been higher twice since the markets began recovering from the worst financial crisis since the Great Depression in 2009 -- in April of this year and in September 2013. Both times turned out to be good ones to be invested in equities, as U.S. stocks hit a new high Monday. A study by the Tax Policy Center in Washington released Friday estimated that over several years, more than half the benefits provided by the Trump administration's planned tax cuts would go to the top 1 percent of taxpayers. U.S. stocks have gotten an added boost from the White House's proposal, especially small caps and those of companies that pay the highest tax rates.

When it comes to the markets, a key part of the Trump tax plan calls for lowering of the corporate tax rate to 20 percent from 35 percent. Goldman Sachs says that would raise annual aggregate earnings per share in the S&P 500 Index by $15, from the $129 it currently estimates for 2017. That reduction should "lead to a non-trivial repricing in equities if it comes to fruition," Tom Porcelli, the chief U.S. economist at RBC Capital Markets, wrote in a recent research note. "Current EPS estimates for 2018 of around 10-12 (percent) are not building in any tax changes." Another key part of the plan would allow U.S. companies to bring home some $2.6 trillion they've stockpiled offshore, a move analysts say could lead to increased share buybacks and dividends.  

The greenback is finally getting some respect. From the political turmoil in Washington, to the war of nuclear words with North Korea, to the lack of inflation, the dollar has been the currency most traders wanted to avoid this year. But they have had a change of heart, and the Bloomberg Dollar Spot Index rose MOnday to bring its gains to is up 2.64 percent since its low for the year on Sept. 8. Of its 17 major peers, the only currency the dollar hasn't appreciated against in that time is the British pound. There are a number of reasons why the dollar has rebounded, from optimism over the Trump tax plan, to signs of strength in the economy, to the possibility that the Fed will stick to its plan to raise interest rates again in December. To be sure, the dollar's rebound also has a lot to do with sudden weakness in other major currencies. The euro has been under pressure as Spain's Catalonia region threatens to succeed, the yen has dropped as Japan prepares for a general election, and sterling is suffering as Prime Minister Theresa May struggles to bolster her flagging support.


Investors -- mostly the bearish ones -- have bemoaned the lack of volatility in global markets, equating it to complacency. History will determine whether that's an accurate assessment, but in the meantime Spain is doing its best to keep investors on their toes. Spanish markets were quite volatile after a day of violence on Sunday when the central government sent police to Catalonia to disrupt voting in an illegal referendum on independence. Spain’s benchmark IBEX 35 stock index slid 1.8 percent, led by shares of banks. Spanish 10-year government bond yields climbed as much as 11 basis points, widening the spread with German bunds to the most since June. The euro's weakness was attributed to the vote. For the moment, strategists are sanguine. “Spain is potentially facing a constitutional crisis, but it’s not something that threatens the degree of integration for the euro zone,” Vasileios Gkionakis, co-head of strategy research at UniCredit Bank, said on Bloomberg Television. The political risk “is nowhere near as steep or troublesome as it was a couple of years ago,” he said, adding that he remains bullish on the euro.  


The Bank of Russia has more than doubled the pace of gold purchases, bringing the share of bullion in its international reserves to the highest of President Vladimir Putin’s 17 years in power, according to World Gold Council data. In the second quarter alone, it accounted for 38 percent of all gold purchased by central banks, according to Bloomberg News' Yuliya Fedorinova and Olga Tanas. Since starting to accelerate bullion purchases in 2007, Russia’s holdings have more than quadrupled to 1,716 tons at the end of June, just behind China and more than Turkey, India and Mexico combined, according to the World Gold Council. Russia's is one of a handful of central banks to keep the faith as global demand for the precious metal fell to a two-year low in the second quarter. But what may matter most is that gold is as geopolitics-proof an investment as any in the age of sanctions and a deepening rift with the U.S.

The bull market in oil is looking a bit precarious, but that shouldn't be a surprise. Crude looks like it's headed back below $50 barrel sooner rather than later after reaching $52.86 last week. Futures fell as much as 3.1 percent to $50.07 in New York on Monday after OPEC output rose and shale drillers put rigs back to work, according to Bloomberg News' Jessica Summers. The group of crude-exporting nations added 120,000 barrels a day in September, according to a Bloomberg News survey of analysts, oil companies and ship-tracking data. At the same time, U.S. explorers added oil rigs last week for the first time since August. The dollar's strength further weighed on the appeal of commodities. Crude has a hard time holding the $50 a barrel level this year because every time it rises above that mark, it seems as if OPEC and shale drillers ramp up production to take advantage of the higher prices. The extra supply inevitably drives down prices. “There’s a lot of crude oil in storage still and OPEC, who knows what can happen there," said Bob Yawger, director of the futures division at Mizuho Securities USA Inc. "They’ve been pretty good with the compliance levels, but that can slide at any given moment.” 


Don't be surprised if everybody is talking about Australian markets on Tuesday. In a few hours the Reserve Bank of Australia will announce its latest policy decision, and while the consensus is for it to keep interest rates unchanged at 1.50 percent, the focus will be on what the central bank says about the local dollar. Policy makers have tried to jawbone the currency to keep it from appreciating and hurting the recovery. After the last policy meeting on Sept. 5, RBA Governor Philip Lowe said that an “appreciating exchange rate would be expected to result in a slower pickup in economic activity and inflation than currently forecast.” Since then, the Australian dollar has been subdued, which would allow the central bank "to look at a more optimal policy mix via a gradual move to a less accommodative monetary policy setting that would address macro risks posed by an incessant rise in indebtedness directly linked to the housing boom," Bank of America's strategists said in a research note.

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