The realities of politics

It’s possible that the markets have again breathed a sigh of relief last night, as President Trump pushed forward the campaign tax cuts, with some, but not all of the details known. Central to the policy is the business tax reduction to 15%, but it remains to be seen if this will pass through congress.

Market data
Source: Bloomberg

The first detractors stating this would most benefit the top earners in the US economy. However, this was enough information for the market to do some quick back of the envelope calculations and put simply, it would equate to an average 12% earnings growth.

Consider this on top of current earnings per share coming in north of 9% and it’s not hard to see why the US markets are flying, with the Dow nudging back to 21,000 and the NASDAQ making a new high at 6050 points.

Tonight’s upcoming US session looks key, with another vote on healthcare reform potentially shaping up. One should not be surprised that it’s unclear if Trump gets the needed 216 votes to pass the bill.

It’s worth bearing in mind for the equity bears, and yes there still are few that the Dow and the S&P 500 have not closed over the highs, achieved on the first of March this year. This would also be starting to interest the momentum traders who are compelled to remain long in this very bullish market.

Within the same announcement came the news that US companies would be encouraged to repatriate overseas cash reserves back into the US taxed at a rate of 10%. This was tried in 2004 and what followed resulted in companies entering into sizeable stock buy backs and a reduction of employees.

After the close this morning, Alphabet reported 22% revenue at US$24,750 million along with Amazon reporting revenue of US$35,700 million. Both companies smashing the top line and seeing strong gains in aftermarket trading.

With 47% of the NASDAQ listed companies having reported 87.7% have beaten analyst’s earnings estimates (by an average of 5%) with 65.3% beating this on sales alone. Earnings have grown by a sizeable 20%, so it’s not hard to see why the NASDAQ remains the index of choice for the equity bulls.

The European region still dealing with quantitative easing and a largely dormant economy outside of Germany, the European Central Bank president Mario Draghi did indicate he was seeing signs of an improved economy, while leaving interest rates at zero. Importantly, he stated the outlook risks are becoming more balanced. The result saw the EUR/USD remain steady at 1.09, holding post-French election gains.

All of this excitement may not follow through to the Aussie markets today with the SPI futures down 7 points. The American Depository Receipts, (ADR’s) for BHP show a 1.8% lower open for the stock, with the CBA ADR only offering a slightly higher open matching at $87.87 from yesterday’s close of $87.66.

The market will be keenly watching the first half bank earnings being reported next week with revenue growth expected to be between 1%, 6% and 3%. Also keenly watched as a window to the Australian mortgage market and consumer debt stress will be the bad and doubtful debts, and the provisioning going forward into 2017.

Crude oil has remained under pressure overnight closing at $49.26, along with a relatively flat commodities market, will not offer a lead to the Aussie 200 index. It’s still shy of the key 6000 point level the bulls desperately want to see in the coming weeks.

One bright spot remains the technical recovery in Iron ore, with the futures higher by 1.8%.

All of this equates to a potential mixed open for the market in this shortened week of trading, our best performing sectors for 2017 remain healthcare and financials.

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