• Donald Trumps presented a framework for his tax plan yesterday
  • The plan sees a major reduction in the CIT rate, many question marks remain unanswered
  • Time-table for the plan is difficult to identify, a budget bill for the next year must be passed first
  • US stocks could fade this year’s gains if White House fails to deliver on tax cuts, US30 is at a resistance 

Donald Trump is yet to score a legislative success this year. After numerous failed attempts to repeal the Obamacare (health insurance system) he now insists that taxes are his main target. He presented a framework of his plan yesterday in Indiana and the key points are:

  • US corporate tax rate will be slashed from 35 to 20%, less than 15% campaigned by Trump but still a major move
  • A tax for small business (pass-through entities) will be lowered to 25%
  • There will be 3 rates for personal incomes taxes down from 7 but the Congress could add the fourth rate for the top earners
  • There will be a one-off tax for repatriation of foreign profits, details to be presented
  • Some business deductions (like interest) will be eliminated (deductions take the current effective rate below 30%)
  • Elimination of the estate tax but also many changes to deductions in personal income taxes

Trump advertises this plan as a major tax relief that will turbocharge the US economy. However, there are many issues to be resolved:

2018 budget – the Congress needs to pass the 2018 budget in order to use a reconciliation procedure for the tax reform. The procedure allows a simple majority vote in the Senate (51 votes) instead of a standard super majority for similar issues (60 votes) so technically president would not need Democrats to back the bill. However, passing the budget first might not be as easy as it looks – the last US budget passed by Congress was for 2009 (!) and administration had to rely on “continuing resolution” since then. 

Republican backing – there was a general applause for the reform from the Republicans who like to present themselves as tax liberal but devil might be in the detail. One can imagine that forging agreement on different tax loopholes (with so many groups of interest in different states) will be extremely complex. Let us also recall that president forged a 3-month deal with Democrats that helped postpone government shutdown bill until December. Right-wing Republicans will remember this while Democrats will likely hit every solution that would benefit the top-earners. 

Revenue neutrality – the Center For a Responsible Budget quickly hit the plan as being $2-2.5 trillion short in revenues, underscoring that assuming for higher growth to pay for cuts will be a “wishful thinking” and “fiscal fantasy”. Donald Trump might not be concerned with such remarks but many Republicans are serious about deficits and debt and may push hard to scale back the package.

Overall this tax push could be US dollar friendly because in this case markets have long forgotten about any kind of fiscal stimulus. However, traders should be aware that it may take months to forge any kind of feasible deal. While the key Republican figures suggested that the bill ought to be signed by the president this year we should be skeptical if Trump’s track record is any indication. 

For the equity markets this means no major positive impulse in weeks to come. Do notice that unlike the dollar, the US equities (US500, US30, US100 on xStation platform) not only held the gains from the “Trump euphoria” phase but were actually able to extend these to score fresh all time highs. Therefore, with the plan being so vague and so far from becoming a reality it is hard to see how could it provide another boost. 

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We are looking at the longest streak without a correction and the market could be overbought. However, a clear cut selling signal is still missing. Source: xStation5 

Looking at the charts, we can see an interesting situation on US30 (DJIA30 underlying). First of all, do notice that we are looking at the longest winning streak without any meaningful correction ever, at least in terms of points. This alone is not yet a bearish sign obviously but the market is exactly at an upper limit of an upward channel – that could suggest it is overbought. What the bears are lacking, however, is a clear cut selling signal on this (W1) interval which could drive the US30 lower. The first support could be located at 20300 pts. – full 2000 points below the present price.