How Will Trump’s Tax Reform Affect Markets?

Adrienne Murphy – Chief Market Analyst

The dollar hit a five-week high after Donald Trump announced his tax reform plan on Wednesday. The US president proposed a tax cut for broad base of Americans, but favors the rich and business.

Trump claims the new tax system will help the working class, stimulate job growth and simplify the tax code. However, the agenda has divided Congress with half of Trump’s own party, the Republican’s, against reform. Meanwhile, Democrats remain apprehensive about the changes.

The plan is at odds with one of Trump’s main objectives – to decrease the budget deficit. By enacting the proposals, the US government will have to borrow to pay for the fall in tax haul, increasing the already swollen US government deficit, currently at $20 trillion.

Despite the six months of talks, the plan lacks clarity on how the middle-class would be affected. For instance, the tax plan aims to shrink the number of tax brackets from seven to three. The individual rates would be 12%, 25% and 35%. However, the income levels at which these rates will apply has not been disclosed.

Scattered throughout the agenda are examples of how the reform will benefit the earners who are in the top tier of the income bracket. What Trump has dubbed the ‘’death tax’’ – a tax which applies to estates valued over $5.49 million for singles or $10.9 million for married persons, will be abolished. This tax affects just 0.2% of those who have died. Currently. tax rate stands at 40%.

Ivanka Trump, the daughter and special assistant to the president – focusing mainly on women’s entrepreneurship, the child tax credit – might have put her own stamp on the tax reform agenda; Increased child credit would be issued to all income brackets, while the ‘’marriage penalty” will be limited on those couples who both earn incomes.

Additionally, a $500 elderly and sick tax credit would be issued to those who are claimed as dependents by the taxpayer.

Under the plan, corporation tax would decrease from 30% – one of the highest in the world – to 20%. The president originally promised that the corporation tax would fall to 15%. Investors saw the 20% rate as a disappointment, which capped gains for equities after the tax plan was revealed.

Collectively, the proposals aim to reach the 3% GDP growth Trump promised on his campaign trail. However, the plan is more likely to have inflationary effects which will not necessary translate into stronger GDP growth.

Oil Down, Euro Makes Gains

Overview

The probability of a December rate hike sits about 65%. This, coupled with Donald Trump’s tax plan reveal have helped strengthen the dollar. The greenback is now on track for its best week this year.
The hope is that the radical tax reforms will help to aid the recovery of the US economy. Although, the plan still must pass through Congress and the lack of detail on which income brackets will be affected has put a gap in investor’s analysis.
The dollar has added 0.8% to its value this week, driving investors out of bullish bets on gold and other safe-havens.

Equities

European equities are mostly in the green, with the DAX 30 up 0.26%, shaking off the underwhelming results from last weekend’s German election. France’s CAC 40 is 0.25% stronger as French President Emmanuel Macron unveiled a plan this week to further cement monetary ties in the European Union.
Asian stock markets were broadly higher before China’s national holiday next week. China A50 ended 0.4% higher and Australia’s SPI 200 closed 0.2% higher.
After a mixed session in the US, the S&P 500 closed 0.1% higher yesterday – a fresh record for the index. However, this morning, US indices are mostly trading downwards. The S&P 500 is 0.04% down while the Dow Jones is 0.03% weaker. The tech-heavy Nasdaq is breaking away from the heard, climbing 0.1% this morning.

Currencies

The euro is 0.24% higher against the greenback despite the disappointing inflation data. Core CPI flash estimate came in at 1.1% down from 1.2% in August.
Sterling fell 0.5% against the greenback, trading at its weakest point in two weeks.

Commodities

The international benchmark, Brent oil is 0.23% lower, still holding above the psychological level of $57. Meanwhile, the US benchmark, crude oil, is 0.08% higher, trading at $51.63.
Gold has suffered a 1% decline over this week and plunged closed to its lowest point in a month as uncertainty over North Korea eased and as the dollar strengthened.

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Trump Trade: How Will Trump’s Tax Reform Affect Markets?
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