Hope for Tax Cuts Drive up Global Stocks

By Joyce Yu

Philadelphia, PA–Following the finalization of the tax bill last week, the House is expected to vote on Tuesday, and the Senate will follow soon after. The bill, which is expected to pass on party lines, could be ready for the President before Christmas.

Bolstered by hopes for the biggest tax bill in 30 years, Wall Street rose on Monday.  The Dow Jones industrial average added 0.6%, the S&P 500 gained 0.5% and the Nasdaq advanced 0.8%. Driven by strong economic growth and hopes that Trump would roll back regulations and overhaul the tax code, the Dow is up more than 25% in 2017, now approaching 25,000 points. Blue chips including Boeing, Caterpillar, Apple, Visa, McDonald’s and Walmart have soared at least 40%. And the Nasdaq, home to hot tech firms has jumped 30% this year.

The biggest boost for Corporate America would be the slashing of the corporate tax rate from 35% to 21%, according to a report from Goldman Sachs which expects that could boost profits significantly for big banks. Other measures of the bill include repeal of the corporate alternative minimum tax and restructure of the way pass-through businesses are taxed.

Financial stocks were among the biggest gainers Monday. JPMorgan Chase, Citigroup, Bank of America and Wells Fargo rose more than 1% shortly after the opening bell.

“The rising trend in broader equities led by the U.S. markets looks to continue for a while,” said Masahiro Ichikawa, senior strategist at Sumitomo Mitsui Asset Management in Tokyo.

“It will help sustain a very strong year of earnings growth for U.S. and for global equities,” said Timothy Graf, State Street Bank & Trust head of macro strategy EMEA., speaking on Bloomberg TV. “It will keep sentiment robust.”

Some analysts, on the other hand, also flag out concerns about the impact of the tax bill. “Investor focus will be firmly on the ramifications of the US tax bill,” Alex Dryden, global market strategist at JPMorgan Asset Management said to the Financial Times.

“The nature of the bill has changed over the last couple of weeks, shifting away from corporate tax reform and instead focusing on individual tax cuts. This small change in focus has substantial ramifications for growth – putting more money in the pocket of consumers, boosting US economic growth but adding inflationary pressure to a tight economy. In short, investors should keep a wary eye on inflation going into the new year.”

European markets were mostly higher in morning sessions on Tuesday, while Asian markets ended mixed. Stocks in South Korea and Japan were lower, while China’s markets posted gains.

The World Bank on Tuesday raised its forecast for China’s economic growth in 2017 to 6.8 percent from 6.7 percent it projected in October for continued growth support from personal consumption and foreign trade. Forecasts for China’s 2018 and 2019 GDP growth, however, remain unchanged at 6.4 percent and 6.3 percent, respectively, due to less accommodative monetary policy and the government’s effort to rein in credit and control leverage.

The bank noted the key downside risks to the forecast are the still rising leverage of the non-financial sector and uncertainty around housing prices. While External risks include the potential for more restrictive trade policies in advanced economies, and geopolitical tensions.

Despite strong growth of faster-than-expected 6.9% over the first nine months of the year, the Chinese government has pushed up borrowing costs in an effort to reduce risks in the financial sector, raising concerns GDP growth could take a hit next year.

The World Bank report said accelerate deleveraging is “likely to come at the cost of slower GDP growth in the near term but will improve China’s long-term economic prospects.”

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