Tax tantrums | Calamatta Cuschieri

Market expectations of fiscal stimulus were brought back to the fore after Donald Trump promised 'phenomenal' tax news

Donald Trump has promised to unveil a comprehensive tax reform plan in the coming weeks
Donald Trump has promised to unveil a comprehensive tax reform plan in the coming weeks

"Lowering the overall tax burden on American business is big league ... that's coming along very well. We're way ahead of schedule, I believe. And we're going to announce something I would say over the next two or three weeks that will be phenomenal in terms of tax."

Market expectations of fiscal stimulus were brought back to the fore after the above announcement – of sorts – by US President Donald Trump. Press secretary Sean Spicer later explained the plan will include both business and personal rates.

That was enough to send stock flying and bonds sinking, while we were all enjoying a day off (thanks Paul!). The question now is whether the actual plan – when and if it is unveiled – will match, disappoint or exceed current expectations.

Even if the tax reform is well received, its impact on rates may be a bit difficult to quantify. While fiscal expansion tends to be a one-way train (up) for stocks for the most part, bond yields are a bit trickier to forecast.

Conventional wisdom tells us yields will rise and prices will fall, as ‘reflation’ takes hold. But yields can only rise so much without explicit support by the Federal Reserve. And with the US Central Bank not particularly keen on raising rates at this juncture it’s hard to imagine runaway yields on US Treasuries.

Another thing to keep in mind is America’s creditors, who won’t be too happy to see the value of their Treasury holdings decrease dramatically. Any large scale depreciation might force them to dump their holdings, putting the US in a tight spot when it comes to financing itself.

This article was issued by Andrew Martinelli, Trader at Calamatta Cuschieri. For more information visit, www.cc.com.mt. The information, view and opinions provided in this article is being provided solely for educational and informational purposes and should not be construed as investment advice, advice concerning particular investments or investment decisions, or tax or legal advice. Calamatta Cuschieri Investment Services Ltd has not verified and consequently neither warrants the accuracy nor the veracity of any information, views or opinions appearing on this website.

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