The US Senate approved a tax reform bill over the weekend, but the market’s reaction was not at all what many experts expected. What is wrong with this reform?
The approval of the Senate actually means the general approval of the document, as a matter of fact, formalities remained, so it’s hardly worth saying that the market is waiting for the document to be signed directly. Nevertheless, the dynamics of the markets raises a lot of questions.
Firstly, almost everyone was sure that the adoption of the tax reform should have led to an explosive growth in the dollar, an increase in the yield of US Treasury bonds and an increase in the US stock market.
What we see in fact: in the first two trading sessions of this week, the S&P 500 wide market index lost about 1.5%, and the high-tech Nasdaq even more – 2%.
Theoretically, tax cuts should lead to an increase in the profits of companies, since costs will significantly decrease, which means that stocks should grow, but we see the opposite process. The exact same picture is in the debt market.
A tax cut should trigger higher profits, higher wages and, consequently, higher inflation, and in this case, the Federal Reserve will have to raise rates. In addition, a change in the tax system implies a substantial increase in the budget deficit, which means that the supply of treasuries will increase, and profitability, again, should begin to grow.
In fact, we see a decrease in profitability, although in fairness we note that for some time there have been attempts to grow.
It would seem that such a strong tax cut should give the economy an impetus, and in general this is, in fact, an extreme measure. If the market expects acceleration of economic growth, the yield curve, as a rule, becomes more convex, that is, the yields of long securities are traded much higher than short ones.
But here, in reality, everything turns out differently. The yield curve continues to become flat, predicting if not recession, then at least stagnation.
The situation resembles 2004-2005. – just those that preceded one of the strongest financial crises in history.
The foreign exchange market behaves more or less adequately. The dollar is growing, but, of course, not at the pace that one could imagine, nevertheless, at least the direction of movement is right.
In fact, the dollar index is rather laterally, which did not prevent the gold from collapsing to new local lows. Note that gold usually moves in antiphase to the US currency, but not now.
Against the backdrop of all this confusion, Bitcoin looks the best. The value of the cryptocurrency jumped to new historical highs of $ 11,850, that is, it is trading at about 50% more expensive than at the time when Square made a statement about testing its payment systems for using bitcoin. The capitalization of Square itself lost 20%.