US Tax Bill Approved

Market Update - January 2018

Donald Trump managed to push through his first legislative win by introducing sweeping tax reforms whilst the UK Government prepared to begin the negotiations for a transition period with the European Union. The Purchasing Managers’ Index (PMI) figures also continued to suggest growth in the most sectors across the majority of Western economies.


After much deliberation and build up, the Republicans have finally passed through their Tax Reform bill. US Corporations are now seeing their tax rate cut to below what many of their competing corporations pay elsewhere under a sweeping plan that is slashing the corporate tax to 21% (down from 35%) and largely ending the taxation of non-US earnings. For companies, the average top corporate tax rate worldwide is 22.5%. The proposed new US rate would come in below France’s 34%, Australia’s 30% and Japan’s 23% corporation tax rate. This new legislation will be good news for businesses, particularly multinational corporations and the commercial property industry.

The Federal Reserve raised short term interest rates for a third time in December 2017 and predicted more increases to follow in this year as Janet Yellen prepares to hand over the chair to Trump’s nomination, Jay Powell. The US central bank’s Federal Open Market Committee increased the target range for the federal funds rate by a quarter point to 1.25-1.5%. Policymakers’ forecast that they could rate hikes to 2% in 2018 and 3% in 2019, even as they acknowledged inflation is continuing to undershoot their target. This is positive news for the US economy and shows how advanced the economy is in terms of monetary policy compared to the rest of the world. The US economy third quarter growth has been uplifted from initial estimates of 3% to 3.3%. The improvement reflected increases in business investment, exports and private inventories – or merchandise yet to be sold – which grew at an 0.8% annualised pace during the quarter. The data also show that a string of hurricanes that battered parts of Texas and Florida in August and September did little to weigh on the economic expansion, which is now in its eighth year, even though they may have briefly disrupted consumer spending. These growth figures are positive news and the tax reforms could help to boost GDP even further.


Since the UK voted to leave the European Union, EU officials have stated that trade discussions could not begin until a settlement had been reached for the commitments the UK made to the European Union budget. Theresa May originally offered approximately €20bn, but the EU stated that this was not sufficient to cover the UK’s budget obligations. The Government succumbed to the EU’s original demands by increasing their offer to approximately €45bn, the figure originally dismissed by frontbenchers such as Boris Johnson. The European Union accepted our offer of a higher settlement bill, security of current EU citizens living in the UK and a soft border between Ireland and Northern Ireland. This agreement should now lead the negotiations to trade talks and a potential transition deal. The future of the UK-EU relationship will have to be agreed by March 2019, the date set by the triggering of Article 50 earlier this year. Now the divorce bill has been agreed, the UK Government are looking to implement a transition deal which would mean that we would essentially remain members of the European Union until 31st December 2020. Michel Barnier, the European Union Chief negotiator, confirmed that during the transition the UK would have to uphold all EU laws, including new laws agreed after 2019, without any UK ministerial input. The negotiations will resume at the end of this month.


The European Central Bank surprised investors and economic analysts by extending its stimulus programme until at least September this year, pushing down the euro as investors digested Mario Draghi’s refusal to call the end to emergency crisis-era measures. Despite the extension, the central bank have halved bond purchases from €60bn to €30bn. The ECB’s slow taper suggests the central bank will keep interest rates at their current record lows until 2019 especially with Draghi stating that although the Eurozone economy is strong it is still reliant on monetary stimulus. This dovish tone is accommodative for European equities as low interest rates mean cheaper loans and lower interest repayments.

Back to political matters and the ongoing coalition discussions in Germany. The elections held last year gave Angela Merkel a reduced mandate with 33% of the vote therefore causing the need for coalition talks. Discussions began soon after the election, but these talks soon dismantled as Merkel’s Christian Democrats could not agree on policy such as immigration and energy with Germany’s smaller parties. This has now led to some political instability with suggestions of a potential snap election so the Christian Democrats can attempt to increase their vote share. However, the second largest party, the Social Democrats have now agreed to begin discussions with Merkel which could lead to a new government. This political uncertainty is not positive for the European Union who wish to portray a position of resilience and strength. The next European election on the horizon will be in Italy on March 4th. Voters in the eurozone’s third-largest economy will head to vote amid reduced support for the presiding pro-EU centre-left Democratic party and increasing momentum behind the Eurosceptic opposition. The potential outcomes after the vote could be a hung parliament, a coalition or a Eurosceptic government with a much more confrontational attitude towards Brussels — including plans to question Italy’s membership of the single currency. Most of the potential outcomes do not herald stability for a country that, from an economic and financial point of view, remains one of the weak links in the 28-member bloc.


Japan has posted its seventh quarter of positive economic performance with annualised growth reaching 1.4%, the best run since 2001. There has been some suggestions that Prime Minister Shinzo Abe’s economic policies are on track to eventually create inflation as the economy runs out of spare capacity. Household incomes have continued to grow at a steady pace and exports have continued to increase. Japan’s trade surplus rose by a seasonally adjusted 21% in October compared with the previous month as a weaker yen and healthy growth in China spurred exports. The risk from North Korea is still active as Kim Jong Un has now suggested he has a nuclear button which he will use if threatened. North Korea has always portrayed a threatening military brashness when interacting with any nation they believe is an enemy of their regime. The additional factor which now adds to the unpredictability of the situation is a US President who is also erratic in nature and is not afraid to use military might to defend national security. Despite these factors it seems suicidal for the North Korean regime to actively instigate a direct attack on the US or any surrounding nations. In the meantime, it is now up to China, North Korea’s most important ally, biggest trading partner and main source of food and energy to apply the necessary pressure on Kim Jong-Un’s regime.


Interest rate rises and the tightening of monetary policy suggests that the global economy is healthy. Trump has now managed to push through his tax reforms and this is likely to be beneficial for US corporations.

It will certainly be interesting to see the outcome of the Italian elections in March as this could affect European markets.

The ongoing Brexit negotiations will continually be at the forefront of investor’s minds until a trade deal has been granted.

Source: Financial Times

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