US reporting season

This year’s reporting season is against a back drop of falling corporate tax rates, one-off tax breaks to repatriate overseas reserves, and stock buybacks expected to total $750b during 2017 - an increase of 20%.

Apple
Source: Bloomberg

We recently wrote about the strength in the USD and its potential impact on US equities.

This time in January last year, the USD index (the measure of the USD against a basket of five currencies) stood at 99.77. This bench mark is now showing 1.03 with strong breakout underway, suggesting a move higher to 1.07.

The US technology companies and the banking space will be the most-watched sectors in this current reporting season, as president-elect Trump changes the corporate taxation obligation from 35% down to 15%. We should remember Obama and the Democrats also mooted legislation to reduce corporate tax back to 19%.

President-elect Trump wants to open the door for US companies to repatriate overseas funds back into the United States at a taxed rate of 10%, this is expected to generate more M&A activity in 2017. It is estimated that the amount of cash held offshore by US companies total more than 2.5 trillion dollars. How much? Apple at $230b, Microsoft at $113b and Cisco at $62b.

With recent Trumponomics entering the market, the US reporting season takes on a very different expectation. December Federal Open Market Committee minutes stated the committee is aware that policy may need to reflect a quickening US economy. As an indication of how closely this is watched, the US interbank funds rate traded over 1% for the first time since 2009.

So how do you trade this?

Currently the US tech companies are some of the largest and strongest corporates in the world.

One of the favourites in this sector is Apple and can be used as a proxy for the technology sector.

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The daily view of Apple shows two major events: The report of a declining revenue and the turning point after the Trump election. A trade idea would be to look at a breakout above the $118 resistance with a stop at $114.

US financials

The US financial sector also stands to benefit from president-elect Trump’s infrastructure plan. Economic activity and inflation will benefit the banking and financial sector with increasing yields on rate hikes - expected to number three in the coming 12 months. US dollar strength is being pushed aside in favour of the reinflation trade looking for earnings growth in companies that have spent years cost cutting and buying back stock.

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The daily chart of Goldman Sachs shows the great run from early November election into this current consolidation. A break of price over resistance would shows the buyers in control. Conversely a break below the support level would see profit taking and a significant short opportunity, with stops in place.

With all of the expectation for 2017, there will be some great trading opportunities, whether they are filled or not.

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