At the start of the last full trading week before the holiday season, it's easy to see what topic is getting the most attention this morning ..... the US tax plan, of course. Word has it that the difficulties in finding a suitable compromise between the Senate and House versions of the bill have been ironed out, enabling Republicans in Congress to present the new legislation to the president for his signature within days. As the first successful piece of legislation achieved by this administration, we can expect the White House to make a great deal out of its passing.
*** NOTE : One of the "fudges" required to find a mutually acceptable draft to both houses of Congress was a measure that benefits real estate developers ..... and of course as real estate developers go, they don't come much bigger than President Trump. Now we don't suggest for one moment that Mr Trump engineered things that way, but since he's been making such a big deal of how the new tax regime will cost him an awful lot of money personally (and benefit the middle class, obviously), politically-speaking the President's multi-million dollar windfall is unfortunate, to say the least. Should we expect some kind of mitigating gesture from Mr Trump ?
No doubt the White House will contend that the successful passing of tax reform legislation will put the seal on what's been a great year for the administration, a year in which Mr Trump and his policies have been responsible not only for solid growth but also for soaring stock market valuations. Not everyone will agree with that interpretation -- indeed some might disagree quite vehemently -- but for sure this legislation (assuming there are no last minute hitches) is significant. For one thing, even Mr Trump's most vocal critics would find it hard to argue that changes to the tax set-up weren't desperately needed even if those finally settled upon are very different to the ones that they might have desired.
The White House needed this ..... the die-hard Trump supporters may still be in thrall to the President but moderate Republicans, dismayed as much by his manner of doing things as by the issues, have been turning away -- hence Mr Trump's terrible approval ratings overall. Those issues -- healthcare, Russian investigations, Mexican walls, abandoning or undermining trade pacts (TPP, NAFTA) and the Paris Agreement on climate change, and so on and so on -- will not go away, but the hope will be that tax reform will restore some credibility to the administration in the eyes of its many detractors.
We'll see about that, but in the short-term at least the developments will be seen as market-friendly. And whisper it quietly ..... any restoration of credibility will play into a growing perception that, whether you love or loathe the man and his methods, Mr Trump does have a point on other key issues, ones that the less confrontational approaches of his predecessors have failed to alleviate in any material fashion.
We're talking trade here, and in particular trade with China although it's not exclusively a Sino - US problem. It's a very big topic -- too big to go into in detail here but you should try to get a look at Irwin Seltzer's American Account in yesterday's Sunday Times for the wider picture. Suffice to say, and as Mr Seltzer points out, China was admitted to the World Trade Organisation (WTO) in late 2001 after promising to become a free-trading market economy. That is something that it has failed to do and under the presidency of the autocratic XI Jingping is seemingly intent on making the playing field even less level by using subsidies and protection to take control of areas of commerce in which it is not already the world leader.
China stands accused of "stealing" technical knowledge and intellectual property that they can't get hold of by legal though patently unfair methods. Consider that every foreign company wanting to do business in China MUST find a Chinese partner, who will of course have automatic access to that knowledge and property in a way that a Chinese company would never have to offer in return. Tempers are fraying, and not just Mr Trump's. The EU and Japan have joined the US in lobbying the WTO to deny China the benefits of being a member if they don't immediately start to play the game fairly.
If the WTO's toothless record is anything to go by, there's a good chance that the US will opt out of the WTO and start putting in place numerous bilateral trade agreements that it views as more equitable -- cue the end the multi-lateral trading system effectively in place since WW2. Of course, by his own standards Mr Trump has been relatively restrained in his criticism of China of late but that's because he needs China's support in dealing with N. Korea. Whether he will be so patient if China take aim at the US car industry, as seems likely, is another matter.
Anyway, the point is that any perceived increase in the standing or legitimacy of this administration's policies resulting from getting the tax legislation on to the statute book is unlikely to improve the chances of Mr Trump holding back when it comes to other issues . Then again, it's hard to imagine what would.
And congratulations to Portugal .....
On Friday Fitch became the second of the big three ratings agencies to restore investment-grade status to Portugal's sovereign debt. Moody's is expected to join Fitch and Standard and Poors early in the New Year. This morning Portugal's 10yr debt is trading with a yield 5 basis points LOWER than that of Italy. That suggests one of two things .... or most likely a combination of both :
that Portugal is doing a decent job of the long and painful process of redeeming itself from basket-case status
and / or
Italy's financial woes are still a long way from being sorted, particularly with regard to its banking sector ..... and more importantly, investors are very wary about the Italian general election to be held sometime after March 15th. Contrary to what some would have us believe , Political Risk is still a factor in the Eurozone.