‘Trump trade’ fizzles amid tax doubts

The so-called “Trump trade” did little to drive global stocks higher as investors tried to assess what parts of the giant US economy would benefit from the tax cuts proposed by the president.

Traders said that there was a growing feeling that much of the gains for US stocks since the election of President Donald Trump had already been priced in. There was also growing scepticism about how much of the proposed overhaul of taxes will be accepted by Congress.

“European markets have seen marginal gains today, as the optimism surrounding Trump’s tax plans seems to have run out of steam...it is clear that despite the potential bounty for the US economy, there is a great deal of scepticism over the timing and ability to deliver such reforms,” said Joshua Mahony, market analyst at IG.

“Impressive” figures showing the US economy expanded by a revised 3.1% in the last quarter may fizzle “with a raft of storms knocking whole areas off the grid.”

In the US, the S&P 500 Index inched up to all-time high, keeping its gain over the past three months at around 3.5%. Sterling rose against the dollar, helped by EU chief Brexit negotiator Michel Barnier’s remarks that there had been a “new dynamic” in this week’s negotiations with the UK.

Against sterling, the euro was little changed 87.69 pence.

Mr Barnier’s comments “increase the likelihood of a smoother Brexit outcome,” said Lee Hardman, an analyst at MUFG.

“In particular, we are watching closely to see if the EU allows discussion to progress onto a potential transition agreement soon,” he said.

Any concession on transition, which may make Britain more receptive to discussing its exit payment, could be “a significant bullish trigger for the pound,” said Mr Hardman.

Analysts continued to mull the likely effects of the proposed cut in the US corporate tax to 20% from 35%, and a reduction in the so-called pass-through rate to 25% proposed for small businesses.

However, Mr Trump’s tax plan is expected to be a boon for businesses and the wealthy, with specific cuts aimed at them.

However, it’s difficult to determine precisely what the benefits would amount to since there are few details so far.

This puts investors in a quandary, trying to guess which parts of the package the administration is prioritising. And that’s before the fighting begins in Congress over passing it as a bill.

“US tax policy is key right now but we don’t have a lot of details,” said Mark McCormick, North American head of foreign-exchange strategy at Toronto-Dominion Bank.

“The key is we don’t know the trade-off, we don’t know who wins, and we don’t know who loses,” he said.

High-income Wall St financiers could be unintended winners from a section of Mr Trump’s tax-cut plan that is meant to help mostly small, “mom-and-pop” businesses.

Mr Trump has called for a new pass-through tax rate of 25% that could mean big savings for owners of sole proprietorships and partnerships, who now pay 39.6%.

But it could also mean a windfall for partners in private-equity, venture-capital and hedge funds, unless Congress can figure out a way to block them from taking advantage of the new rate.

Ron Wyden, a top Democrat on the tax-writing Senate Finance Committee, said Democrats supported a pass-through rate for small businesses, such as “a cleaner, a garage, a restaurant.”

He said Mr Trump’s plan, however, would create “a whole new set of wealthy individuals being able to dodge their taxes through this new provision.”

Irish Examiner, Bloomberg, and Reuters