The Overnight Report: Tax Troubles

This story features COMMONWEALTH BANK OF AUSTRALIA, and other companies. For more info SHARE ANALYSIS: CBA

By Greg Peel

The Dow closed up 8 points while the S&P lost half a point to 2590 and the Nasdaq fell -0.3%.

Early Champagne

The scene was set for a good session yesterday, largely due to big jumps in commodity prices overnight, and the ASX200 did not disappoint. All along it had seemed that the market had simply wanted the index to regain 6000, and that it did, at midday.

An inevitable pullback then followed through lunchtime, but that was likely because everyone was at some lunch or other, and from 2pm the market kicked on once more. No doubt because by then everyone was pissed.

And because few in the market were there to sell, being otherwise distracted.

Let’s put something into perspective, however. Media headlines this morning are all about how the Australian stock market has now “put the GFC behind it,” or words to that effect, in reclaiming 6000. Sure, yesterday’s close was the highest since the GFC, but on 15 October 2007, the ASX200 traded at 6800 (intraday).

The index also traded at 6000 in January 2015. So I don’t see how we can make such claims. For the record, the 2007 record was hit on a day the S&P500 reached 1550, give or take. It closed at 2590 last night. So Wall Street has surpassed its pre-GFC high by 67% and the Australian market remains -13% below, ten years later.

Not including dividends, nonetheless.

Yesterday the materials sector gained 2.3% and energy 2.7%. The banks supported in rising 0.6%. There’s your 60 points right there. All other sectors made contributions to various degrees, except for telcos, which fell -0.3%. Buy BHP, and sell Telstra to fund it.

Well it was all a great party, but like most parties, all that’s left the next day is a hangover. Copper, nickel, zinc and aluminium are all down -1.5-2% overnight. Iron ore is lower, oil is lower and gold is lower. The Aussie shot up on Monday night due to commodity price jumps and has shot back down again last night.

The futures closed down -22 points.

There’ll be a lot more work to do to realistically conquer 6000.

Meanwhile, “Inflation remains low, with both CPI and underlying inflation running a little below 2 per cent. In underlying terms, inflation is likely to remain low for some time, reflecting the slow growth in labour costs and increased competitive pressures, especially in retailing,” so sayeth the RBA.

So no rate hike.

Be careful what you wish for

No one ever expected a tax reform package would sail through Congress uncompromised, except maybe Donald Trump back in January. But as the details of the plan put forward to date sink in, the concern is this is not going to be the package that will result in an US economic boom, as hoped.

Sure, a cut in the corporate tax rate to 20% from 35% is significant. But critics suggest this “reform” package is not about reform at all, nor simplification, but merely a case of shuffling around taxes and deductions. It is the “pay fors” that are the issue, and the suggestion is they are going to hurt US households and small businesses.

The two biggest points of conjecture are a capping of the mortgage interest deduction (imagine, for the sake of Australian comparison, a cap on negative gearing) and the scrapping of state and local tax deductions (imagine having your income taxed twice, and bear in mind there is no dividend franking in the US).

The US Senate is about to put forward its own plan. If the healthcare bill debacle is anything to go by, we’re in for a long haul. As commentators often remind us, it took Reagan six years to get his tax reform package through.

The focus of attention on Wall Street last night, aside from all the merger mania going on at present, was a -1.3% fall for the Russel small cap index. The Russell is a barometer for tax reform impact, given it is smaller companies that will most benefit from the corporate tax cut as they tend to pay the full amount, unlike big multinationals.

The Russell ran up 11% from mid-August, when the tax package was declared to be nigh, to last month, when it was revealed. It has since been pulling back on increasing doubts.

In the broader market, the financials were the biggest loser on the day. Why? Because a cap on mortgage interest deduction will undermine mortgage demand.

With US earnings season now past the 75% reported mark, the score is an 8% gain on earnings in the quarter, which is better than was expected. Earnings are providing the justification for ongoing new highs. But nervousness is starting to build. What if the tax package does not deliver?

Last week the CME announced it was going to list a futures contract on bitcoin. Last night the Intercontinental Exchange (ICE) announced it was going to list a futures contract on FANG, or more specifically, ten Big Tech stocks that these days come loosely under a FANG banner. So along with Facebook, Amazon, Netflix and Google you get Apple and the likes of chipmaker Nvidia, electric vehicle/battery pioneer Tesla and others. A strange mix, with the only real connection being one of New World players.

When exchanges start looking to cash in this late in the party, be very afraid.

Commodities

The US dollar index is up 0.1% at 94.88. It’s not much, but enough to trigger profit-taking on the LME after a solid run. Last night aluminium and copper fell -2%, nickel and zinc -1.5% and lead -0.5%.

Iron ore fell -US40c to US$62.30/t.

Gold is down -US$4.30 at US$1276.30/oz.

West Texas crude is down -US13c to US$57.25/bbl.

The Aussie is down -0.5% at US$0.76.50.

Today

The SPI Overnight closed down -22 points or -0.4%.

China will report October trade data today.

BT Investment Management ((BTT)) will report earnings and Commonwealth Bank ((CBA)) will provide a quarterly update.

Among today’s AGMs we find Fortescue Metals ((FMG)), Domino’s Pizza ((DMP)), and one of the most shorted stocks on the market, Aconex ((ACX)).

Rudi will host Your Money, Your Call tonight on Sky Business, 7-8pm.
 

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The Australian share market over the past thirty days…

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