Lower taxes closer, but is the dollar in peril from Russia-gate?

Former Trump National Security Advisor, Michael Flynn

Former Trump National Security Advisor, Michael Flynn

I often share my perspectives on various local and offshore events which impact on WA business, including changes in the relative strength of the Aussie dollar (AUD) and the US dollar (USD).

This is because the AUD/USD exchange is important for those of us living in the mineral endowed states of WA and Queensland, plus other mining and/or agribusiness dominated regions. In mining and agribusiness, most domestic producers pay for their costs in AUD and receive revenue in USD, so a weak AUD means more AUD revenue per pound ounce, kilo and tonne, and higher profits.

As the US economy strengthens I continue to think about a stronger USD against a stable to weaker AUD, meaning a USD exporter-friendly exchange, if all goes to plan. That would be a good outcome for our exporters.

I'm going to save a more in-depth analysis on the exchange for the December edition of NextPerspective, due out shortly, so today I'll stick with US tax reform (set to further strengthen the USD) and the potential Russia-gate downside risk that hit Washington yesterday (which may weaken the USD).

This morning (Saturday) at 2.00 am US time, Senate Republicans voted 51-49 to approve the so-called GOP tax reform, aka tax cuts. Effectively, a gift to high effective tax rate corporations and the wealthy and on current numbers, its funding will result in a large increase to an already large US deficit.

The Senate bill now needs to be reconciled with the House bill (passed last month) before being sent for Presidential approval. During the impending process, certain points will no doubt be lost and won across the floor, plus let's not get ahead of ourselves - the President is yet to score on major policy change so things could go pear - but for the moment it sounds positive.

Evidence of the market resigning itself to tax cuts was seen in Thursday's trading session which indicated a rotation out of semiconductors and tech into telecoms, banks and staples. This is because the latter are the most likely beneficiaries of the corporate tax cut.

Below are some of Thursday's losses, mid-session.

Thrsday 30 Nov.JPG

If tax cuts are fuel for a rotation out of tech in the already over-heated US equities market, then this may have carried over to Friday's sell-down, however the other explanation is that it was partially that, partially end of year profit taking, and mostly a reaction to a possible Russia-gate.

That is to say that on Friday, the Press reported that Michael Flynn, President Trump's former national security advisor, admitted that he had lied to the FBI about conversations he had with Russia's ambassador to the US. He also agreed to cooperate with the office of special counsel. 

The Friday sell-off was not as savage as Thursday's, however if special counsel Mueller's inquiry becomes a journey into the Heart of Darkness and if Flynn was under certain instructions, further sell-offs may occur and a range of thought provoking implications for the US, its recovering economy, and a weaker USD (adverse for our US dollar denominated exporters) may move into the frame.

Naturally, the President will be hoping to get a quick consensus between the Senate and the House bills so he can rush through tax cuts before Mueller ventures too far up-river. It is also worth noting that the ongoing tax package work and the Mueller inquiry will run in parallel with debt ceiling negotiations (to fund the Government) which are scheduled to occur next Friday (December 8). Perhaps the White House will need to take a leaf out of the Tesla playbook and distract the market with its version of a shiny red sports car and electric truck..... 

Mike

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