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Futures

Midday Market Minute


Futures trading involves substantial risk of loss and may not be suitable for all investors. Trading advice is based on information taken from trade and statistical services and other sources Blue Line Futures, LLC believes are reliable. We do not guarantee that such information is accurate or complete and it should not be relied upon as such. Trading advice reflects our good faith judgment at a specific time and is subject to change without notice. There is no guarantee that the advice we give will result in profitable trades. All trading decisions will be made by the account holder. Past performance is not necessarily indicative of future results.

Visit our website at www.bluelinefutures.com to open an account and stay up to date with our research.

Bill Baruch is President and founder of Blue Line Futures. Bill has more than a decade of trading experience. Working with clients he focuses on developing trading strategies that present a clear objective for both long and short-term trading approaches. He believes that in order to properly execute a trading strategy, there must be a well-balanced approach to risk and reward.

Prior to Blue Line, Bill was the Chief Market Strategist at iiTRADER which followed running a trade desk at Lind Waldock and MF Global.

Bill is a featured expert on CNBC, Bloomberg and the Wall Street Journal as well as other top tier publications. 

Blue Line Futures is a leading futures and commodities brokerage firm located at the Chicago Board of Trade. We work with clients that range from institutional to professional to novice and from self-directed to broker-assisted. No matter what type of trader you are, our mission is simple; to put the client first. This means bringing YOU strong customer service, consistent and reliable research and state of the art technology. 

This article is from Blue Line Futures and is being posted with iBlue Line Futures’ permission. The views expressed in this article are solely those of the author and/or Blue Line Futures and IB is not endorsing or recommending any investment or trading discussed in the article. This material is for information only and is not and should not be construed as an offer to sell or the solicitation of an offer to buy any security. To the extent that this material discusses general market activity, industry or sector trends or other broad-based economic or political conditions, it should not be construed as research or investment advice. To the extent that it includes references to specific securities, commodities, currencies, or other instruments, those references do not constitute a recommendation by IB to buy, sell or hold such security. This material does not and is not intended to take into account the particular financial conditions, investment objectives or requirements of individual customers. Before acting on this material, you should consider whether it is suitable for your particular circumstances and, as necessary, seek professional advice.


16064




Macro

Broadway... Momentum... and MLPs


Portfolio Briefs
Bullseye Longs/Shorts making news... AbbVie Inc. (ABBV) hits another new high on an expanded Humira application for children and a key orphan drug designation from the FDA... AECOM Inc. (ACM) nearly touches my $40 target as Fortune ranks it #1 for innovation among its annual list of World's Most Admired Companies... Ford Motor Co. (F) drops 12% on lowered guidance and I am annoyed with myself for not writing calls against the stock to provide a cushion after its 30% advance since August...  PacWest Bancorp (PACW) rises to a 10-month high as organic loan growth jumps 17% and several analysts raise targets significantly... Square (SQ) pops several points after Nomura analyst Dan Dolev comments the company looks like Amazon and Google in the early days. (I post three new picks every other Sunday morning, and subscribers can access all previous picks on the Past Issues tab.)

MLPs Look Great
Did you buy the dip? Energy Transfer Partners LP (ETP) is my favorite publicly traded Master Limited Partnership (MLP), and it's now back above $20... having recovered from the swoon to $15.25 last fall on uncertainty around tax reform. Turns out the news is better than I'd hoped. A recent opinion from international law firm Baker Botts notes, "The combination of reduced individual tax rates and the 20% deduction on MLP income lowers the effective tax rate on MLPs to 29.6%."  I don't understand why people always assume the worst and sell into the hole... but that's a different conversation. ETP still yields 11.3% and the dividend goes ex on February 7, so you have plenty of time to buy.

Trader Talk
Embracing Momentum - I want to share an observation from my friend Chris Verrone of Strategas Research Partners: When more than one-third of stocks are making new highs (41% currently), the S&P 500 has traded 15% higher on average over the next 12 months since 1990... and returns have been positive 91% of the time." For months I have highlighted the Two Es of Earnings and Employment as a powerful tonic for equities, and now we have additional stimulus from tax reform... eventually we'll get a Federal budget too (we always do). I like seeing Chris's technical analysis align with my fundamental view. It gives me added confidence. True, a number of my stocks have hit targets recently so I'm selling them, but I'm also finding new names to buy. 

Monday  

  • NO-PEC - Oil ministers meet in Oman to discuss whether to further reduce 1.8Mb/d in cutbacks... note U.S. shale now rivals Saudi output.
  • Road Trip - Vice-President Pence visits President El-Sisi in Egypt, PM Netanyahu in Israel and King Abdullah in Jordan.
  • Brexit - They're still debating... this time in the House of Lords. Do monarchies not understand democracy? The People Have Spoken.
  • Earnings HAL, NFLX, ZION

Tuesday

  • Let's Talk - The World Economic Forum begins in Davos, where everyone has something to say but nothing really happens. Sorry, that's my take.
  • Hold Phone - The Bank of Japan may announce plans to unwind monetary stimulus... the last major central bank to do so.
  • Round VI - NAFTA talks resume for the 6th time. Similar to Government Shutdowns this feels like avoidable drama.
  • Earnings FITB, JNJ, NAVI, PG, TXN, UAL, VZ

Wednesday

  • Inside Job - A Brazilian court decides whether to uphold corruption charges against former President Lula... who's also the 2018 front-runner.
  • Humming - Manufacturing expected near a 2-yr high for a second month.
  • For Sale - Existing Home Sales expected to decline from a 10-yr high.
  • Earnings CCI, F, GD, GE, ITW, NTRS, URI

Thursday

  • Wassup - ECB President Mario Draghi could announce details of the inevitable stimulus unwind... he's been floating proposals for months.
  • Fly Boys - The Int'l Trade Commission makes its final ruling on whether Bombardier unfairly undercut Boeing on narrow body jets in the U.S.
  • He's Back - Tiger Woods has recovered from surgery and plans to play in the Farmers Insurance Open at La Jolla.
  • Earnings AAL, BIIB, CAT, CELG, INTC, JBLU, LLL, MMM, NOC, SBUX

Friday

  • Strength - Personal Consumption expected 3.3% in 4Q vs 2.2% in 3Q.
  • Strength - Capital Goods Orders expected 0.6% in 4Q vs -0.2% in 3Q.
  • Yeah, but - Durable Good Orders expected 0.9% in 4Q vs 1.3% in 3Q.
  • Yeah, but - GDP expected 3.0% in 4Q vs 3.2% in 3Q.
  • Earnings ABBV, CL, HON

Upcoming Bullseye

  1. General Electric (GE) is my priority... I'm down 12%. The surprise $6.2B charge last week for an insurance business shuttered ten years ago has sent shares to a six year low, but my updated sum-of-the-parts model implies 40% upside. I'm a buyer and will explain in detail, incorporating what will be a VERY interesting earnings call Wednesday morning.
  2. Two biotechs have caught my attention, and I want to do some work this week to quantify the potential opportunities. I like finding great stories in this sector because they're uncorrelated and stock-specific.
  3. European industrials are playing catch-up. New recommendation ThyssenKrupp (TKA GY) is already on the move, and I may have another one for us.

Wednesday's Podcast

Broadway Bound. I've always heard "Never invest in restaurants and musicals..." but Kinky Boots producer Ken Davenport has grossed over $100M in sales, and I want to know how he does it. His new hit Once On This Island is playing at Circle in the Square Theater, and we're meeting in the lobby Tuesday night just before showtime. I can't wait to hear his perspective, and I'm excited to share our conversation. You'll get the link Wednesday about noon.

 

Bullseye publishes three new, actionable stock ideas every two weeks. On the off-weeks there’s a Sunday night Roadmap for the Week Ahead and Wednesday podcast.

Founder & Author Adam Johnson traded equities and oil for 20 years at Merrill Lynch, Louis Dreyfus and ING. He also anchored two shows daily at Bloomberg Television during the financial crisis.

This article is from Bullseye Brief and is being posted with Bullseye Brief’s permission. The views expressed in this article are solely those of the author and/or Bullseye Brief and IB is not endorsing or recommending any investment or trading discussed in the article. This material is for information only and is not and should not be construed as an offer to sell or the solicitation of an offer to buy any security. To the extent that this material discusses general market activity, industry or sector trends or other broad-based economic or political conditions, it should not be construed as research or investment advice. To the extent that it includes references to specific securities, commodities, currencies, or other instruments, those references do not constitute a recommendation by IB to buy, sell or hold such security. This material does not and is not intended to take into account the particular financial conditions, investment objectives or requirements of individual customers. Before acting on this material, you should consider whether it is suitable for your particular circumstances and, as necessary, seek professional advice.


16062




Stocks

The Hammerstone Report - Early Look


Monday January 22nd

Economic Calendar: 

  • Chicago Fed Nat Activity Index for December

Earnings Calendar:

  • Earnings Before the Open: BOH, CBU, HAL, RMD, UBS
  • Earnings After the Close: BRO, NFLX, STLD, ZION

Other Key Events:

  • Morgan Stanley 2-day Winter MLP Bus Tour in Houston

Tuesday January 23rd

Economic Calendar: 

  • 7:45 AM EST               ICSC Weekly Retail Sales
  • 8:55 AM EST               Johnson/Redbook Weekly Sales
  • 10:00 AM EST             Richmond Fed Manufacturing Index for January
  • 4:30 PM EST               API Weekly Inventory Data
  • 6:30 PM EST               Fed’s Evans speaks

Earnings Calendar:

  • Earnings Before the Open: AMTD, ATI, BKU, CREE, FITB, HBAN, JNJ, KMB, PG, PLD, SNV, STT, TRV, UAL, VZ, WAT
  • Earnings After the Close: CNI, COF, FUL, NAVI, TRMK, TSS, TXN, UMPQ

Other Key Events:

  • Bank of Japan policy decision (Monday night)
  • Morgan Stanley 2-day Winter MLP Bus Tour in Houston

Wednesday January 24th

Economic Calendar: 

  • 7:00 AM EST               MBA Mortgage Applications Data
  • 9:00 AM EST               FHFA House Price Index MoM for November
  • 9:45 AM EST               Markit US Composite PMI, Jan-p
  • 9:45 AM EST               Markit US Services PMI, Jan-P
  • 10:00 AM EST             Existing Home Sales MoM for December
  • 10:30 AM EST             Weekly DOE Inventory Data

Earnings Calendar:

  • Earnings Before the Open: ABT, APH, BHGE, CMCSA, CVLT, GE, GWW, ITW, NSC, NTRS, ROK, SWK, TEL, UTX
  • Earnings After the Close: AMP, DFS, F, FFIV, LRCX, RJF, SLG, TCBI, VAR

Other Key Events:

  • None

Thursday January 25th

Economic Calendar: 

  • 8:30 AM EST               Weekly Jobless Claims
  • 8:30 AM EST               Continuing Claims
  • 8:30 AM EST               Advance Goods Trade Balance for December
  • 8:30 AM EST               Wholesale Inventories MoM, Dec-P
  • 9:45 AM EST               Bloomberg Consumer Comfort Index
  • 10:00 AM EST             New Home Sales MoM for December
  • 10:00 AM EST             Leading Index for December
  • 10:30 AM EST             Weekly EIA Natural Gas Inventory Data
  • 11:00 AM EST             Kansas City Fed Manufacturing Activity for January

Earnings Calendar:

  • Earnings Before the Open: ADS, AEP, ALK, BIIB, BMS, CAT, CCMP, CELG, FCX, LUV, MMM, NOC, OSK, PX, RCI, RTN, SHW, UNP
  • Earnings After the Close: BDN, ETFC, FLEX, INTC, ISRG, MXIM, PKI, SBUX, SIVB, TMST, WDC

Other Key Events:

  • European Central Bank (ECB) Policy meeting 7:45 AM EST – press conference 8:30 AM

Friday January 26th

Economic Calendar: 

  • 8:30 AM EST               Gross Domestic Product (GDP) for Q4-A
  • 8:30 AM EST               Personal Consumption for Q4
  • 8:30 AM EST               GDP Price Index for Q4-A
  • 8:30 AM EST               Core PCE QoQ for Q4-A
  • 8:30 AM EST               Durable Goods Orders, Dec-P
  • 1:00 PM EST               Baker Hughes Weekly Rig Count

Earnings Calendar:

  • Earnings Before the Open: APD, CL, COL, GNTX, HON, HRC, LEA

Other Key Events:

  • China industrial profits for December

The content of this post was created by the Hammerstone Group. The Hammerstone Institutional Forum, a chat-based platform for traders, provides subscribers with up-to-the-minute breaking news headlines and instant analysis that drive the market. For more information please visit www.thehammerstone.com. For more information on the stocks mentioned in the Hammerstone Recap, please contact Brian Ducey at brian@thehammerstone.com.

This article is from the Hammerstone Group and is being posted with the Hammerstone Group's permission. The views expressed in this article are solely those of the author and/or the Hammerstone Group and IB is not endorsing or recommending any investment or trading discussed in the article. This material is for information only and is not and should not be construed as an offer to sell or the solicitation of an offer to buy any security. To the extent that this material discusses general market activity, industry or sector trends or other broad-based economic or political conditions, it should not be construed as research or investment advice. To the extent that it includes references to specific securities, commodities, currencies, or other instruments, those references do not constitute a recommendation by IB to buy, sell or hold such security. This material does not and is not intended to take into account the particular financial conditions, investment objectives or requirements of individual customers. Before acting on this material, you should consider whether it is suitable for your particular circumstances and, as necessary, seek professional advice.


16058




Macro

US Senate To Vote On Stop-Gap Funding 12PM EST Monday


Morning Briefing January 22nd 2018


A quiet economic docket on Monday, markets will have one eye on ECB and BoJ rate announcements later in the week.

The European calendar kicks off at 0800GMT with Spanish Industrial Orders data.

At 1000GMT Eurozone Government Debt/Deficit Figures will be released.

Across the Atlantic, the Chicago Fed National Activity Index will be published at 1330GMT.

Also at 1330GMT is Canadian Wholesale Trade data.

The ECB will call for bids on the latest 7-day MRO at 1440GMT, before publishing the latest PSPP bond buying data at 1445GMT.

During the session ECB President Mario Draghi and ECB Executive Board member Benoit Coeure will participate in the Eurogroup meeting, in Brussels..

Global Economic Trading Calendar


Markets


SNAPSHOT: Below gives key levels of markets in the second half of the Asia-Pac session: - Nikkei 225 down 44.49 points at 23765.08 - ASX 200 down 9.005 points at 5997.3 - Shanghai Comp. up 7.541 points at 3495.405 - JGB 10-Yr future down 1 ticks at 150.37, JGB 10-Yr yield down 0.2bp at 0.083% - Aussie 3-Yr future flat at 97.71, Aussie 3-Yr yield up 0.1bp at 2.235% - Aussie 10-Yr future flat at 97.13, Aussie 10-Yr yield up 0.2bp at 2.868%- US 10-Yr future down 3 ticks at 122.06, US 10-Yr yield down 0.93bp at 2.6499 %

US: Despite rumours of a vote on Sunday night in the US the Senate has now adjourned with a vote on a stop gap funding bill at 12 noon EST on Monday, meaning the government will remain closed at least part of Monday.

STOCKS: Stocks are mixed in Asia on Monday, in Japan the Nikkei 225 is down 36 points at 23,772. The index has recovered off lows of 23,697 hit early in the session. It has been a quiet Asia session with the main focus being the US government shutdown. Despite rumours of a vote on Sunday night in the US the Senate has now adjourned with a vote on a stop gap funding bill at 12 noon EST on Monday, meaning the government will remain closed at least part of Monday. The uncertainty initially saw yen strength which pushed the Japanese index to session lows, before the USD staged a mile recovery taking USD/JPY back to unchanged levels on the session and helped the Nikkei 225 recover. – In Australia the ASX 200 is flat on the session, last at 6,007. Iron ore prices are higher which has helped support the index, but a drop in the financial sector has moderated gains. In China the Shanghai Comp is up 2.5 points at 3,490, in Hong Kong the Hang Seng is up 14 points at 32,270. Shares in Hong Kong extend a record breaking run of gains though analysts caution that the index is looking overbought. In the US futures are negative as the government shutdown extends, e-mini S&P down 2.75 points.

OIL: Oil is higher in Asia-Pac trade, WTI last up $0.21 at $63.58, Brent is up $0.23 at $68.84. Oil dropped sharply in Asia trade on Friday but recovered most of the decline during European and US hours to close with only a small loss on the day. Oil is supported in Asia by comments made over the weekend by Russia and Saudi Arabia. Saudi Oil Min said that cooperation between oil producers should continue. Russian Energy Min said that cooperation with OPEC should continue. However both ministers stopped short of specifying the form that this cooperation would take, leading some to speculate that it may not be further production cuts. - Meanwhile on Friday Baker Hughes US Rig Count figures showed that drillers reduced oil rigs to 747 in the latest week, a reduction of 5 rigs

GOLD: Gold is lower in Asia-Pac trade on Monday, last down $1.07 at $1,330.77. Gold was initially higher at the start of the session as the US government shutdown dragged on, but dropped after news that a vote would be held later on Monday. Despite rumours of a vote on Sunday night (US time) in the US the Senate has now adjourned with a vote on a stop gap funding bill at 12 noon EST on Monday, meaning the  government will remain closed at least part of Monday. The news saw the dollar index gain, DXY last up 0.039 at 90.612  which put downward pressure on gold

FOREX: The US government shutdown was the main focus of the session, fluctuations in the dollar driving forex price action in Asia. Despite rumours of a vote on Sunday night (US time) the Senate has now adjourned with a vote on a stop gap funding bill scheduled for 12 noon EST on Monday, meaning the government will remain closed at least part of Monday. The news saw the dollar index gain, DXY last up 0.039 at 90.612 which reversed the earlier decline in the dollar. - The euro has gained in Asia trade on encouraging signs from Germany that a coalition deal could finally be reached, months after the inconclusive election. Gains in the euro over the weekend put extra pressure on the dollar, EUR/USD opened at session highs of 1.2275 before trending lower through the session to 1.2217 last. GBP/USD saw a similar move to EUR/USD, encouraging comments from French Pres. Macron over a bespoke Brexit deal saw cable open at session highs of 1.3897 before dropping to session lows of 1.3857 last. - USD/JPY saw subdued trade, last flat at 110.78, market looks ahead to BoJ rate announcement tomorrow.

Technical Analysis


BUND: (H18) Bears Targeting 200-WMA

*RES 4: 161.56 Hourly support Jan 9 now resistance
*RES 3: 161.31 21-DMA
*RES 2: 160.97 Highs Jan 16 & 17
*RES 1: 160.85 High Jan 19

*PREVIOUS CLOSE: 160.56

*SUP 1: 160.30 Lows Jan 15 & 18
*SUP 2: 160.11 2018 Low Jan 12
*SUP 3: 160.08 Bollinger band base
*SUP 4: 159.78 Monthly Low Sept 28    

*COMMENTARY: Failure to capitalise on the recovery from 2018 lows saw the significance of 160.97 confirmed with bulls needing a close above to ease bearish pressure and shift focus to 161.55-162.37 where key DMAs are situated. Above 162.37 is needed to target 163.78. The sell-off reconfirms immediate focus back on 160.11 2018 lows and overall focus on 158.47-159.78 where the 200-WMA is noted. Closes below the 200-WMA were last seen briefly in 2011.

EUROSTOXX50: Bulls Now Focused On 3708.82-3714.26

*RES 4: 3714.26 Monthly High July 20 2015
*RES 3: 3708.82 2017 High Nov 1
*RES 2: 3670.47 Low Nov 6 now resistance
*RES 1: 3668.56 Bollinger band top

*PREVIOUS CLOSE: 3649.07

*SUP 1: 3628.13 High Jan 18 now support
*SUP 2: 3603.30 Low Jan 17
*SUP 3: 3587.91 55-DMA
*SUP 4: 3570.51 Low Jan 5

*COMMENTARY: The close above the much talked about 3642.10 resistance adds to bullish confidence and sees focus shift to 3708.82-3714.26 where 2017 and monthly highs are situated. Bears now look for a close below 3628.13 to signal a false break, easing bullish pressure and seeing focus back on layers of support 3546.81-3587.91 where the 55-DMA is located. A close below the 200-DMA is needed to confirm focus on 3467.78 2018 lows.

Eurex Futures Market Close


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This article is from Eurex Exchange and is being posted with Eurex Exchange’s permission. The views expressed in this article are solely those of the author and/or Eurex Exchange and IB is not endorsing or recommending any investment or trading discussed in the article. This material is not and should not be construed as an offer to sell or the solicitation of an offer to buy any security. To the extent that this material discusses general market activity, industry or sector trends or other broad based economic or political conditions, it should not be construed as research or investment advice. To the extent that it includes references to specific securities, commodities, currencies, or other instruments, those references do not constitute a recommendation to buy, sell or hold such security. This material does not and is not intended to take into account the particular financial conditions, investment objectives or requirements of individual customers. Before acting on this material, you should consider whether it is suitable for your particular circumstances and, as necessary, seek professional advice.


16057




Macro

Calculating the Impact of Tax Reform


Weekly Market Compass: Will the benefits outweigh the concerns?

In a number of places around the world, it’s an exciting time to be a taxpayer — or tax attorney. That’s because a variety of countries have brought or are bringing tax cuts to fruition.

At the end of 2017, the US saw the passage of a tax reform bill with many elements to it, ranging from household tax cuts to corporate tax cuts. In France, tax cuts, including a business tax cut, were implemented. The Netherlands and Belgium both enacted tax cuts in 2017. In December, Japan enacted new corporate tax cuts, including ones tied to incentives. And other countries are pondering corporate tax cuts in order to remain competitive with those countries that have already lowered taxes on their businesses.

Not all tax cuts have the same impact

There can be an assumption on the part of investors that all tax cuts are a positive for the economy and markets. For example, the US Treasury Department thinks that the Trump administration’s entire tax reform package will be very economically impactful, increasing gross domestic product growth by 0.7% on average per year over the next decade. However, that tax package is comprised of a variety of different tax cuts. And while tax cuts have historically stimulated their respective economies, not all tax cuts are created equal. The Congressional Budget Office has analyzed the impact of various tax cuts in the US, indicating that tax cuts for lower- and middle-income individuals historically have produced a greater multiplier effect than tax cuts for higher-income individuals and corporations. But that, of course, is a gross generalization. My colleague Kevin Holt, Chief Investment Officer of Invesco US Value Equities, wrote in his 2018 outlook that he believes the repatriation tax cut will be a one-time jolt, not an ongoing benefit. However, he believes the real economic benefit will come from the drop in the corporate tax rate — from 35% to 21%. Kevin also noted that this tax cut could result in wage inflation, which in turn could place upward pressure on the 10-year Treasury yield — a potentially positive development for value stocks and active management.

I agree with Kevin that US corporate tax cuts could have a significantly positive impact on the economy, which in turn is likely to favor more cyclical stocks. All else being equal, earnings will improve for most companies whose effective tax rates are lowered, which is likely to place upward pressure on stock prices. In addition, corporate tax cuts incentivize capital spending, which should provide a return on investment in years to come.

The potential consequences of tax reform

It’s important to recognize that taxes are a way for governments to not only collect revenue, but to incentivize certain behaviors. As I mentioned, the new US tax legislation encourages business investment by offering tax benefits for capex spending. Japan’s recent corporate tax reform legislation does something very similar: It offers lower tax rates to companies that raise employee wages and/or spend on capex — two behaviors that the Japanese government clearly wants to encourage. Historically, US home ownership has been rewarded with generous tax deductions. And since the 1990s, saving for college has been incentivized through the tax deferrals offered by 529 college savings plans in the US. (The new US tax law expanded that incentive to include certain federal tax benefits for families saving for K-12 private school as well.)

However, new tax laws can alter or eradicate incentives as well. The 2017 Tax Cuts and Jobs Act has changed some incentives that could have a significant impact on the US economy. For example, the deduction that households can take for mortgage interest was capped going forward, as was the deduction that households can take on property taxes. This of course reduces the tax advantages of homeownership in general. In particular, it disadvantages states with high taxes and states with high home prices, which are for the most part one and the same. As my colleagues at Invesco Real Estate explained:

“Most economists agree that the passage of tax reform legislation should result in a modest uplift to near-term US economic growth, driven by a reduction in the corporate tax rate, a lowering of personal tax rates for most Americans, and other stimulative measures. However, upcoming changes regarding the deductibility of state and local income taxes and mortgage interest may have far-reaching implications with a direct impact on commercial real estate fundamentals. These changes will likely have a negative impact on higher-tax jurisdictions, such as New York, New Jersey and California. More specifically, the changes may result in a lower propensity for home ownership and may accelerate the ongoing demographic shift to lower-tax states. Additionally, lower disposable income in higher-tax markets might negatively impact consumer spending, thereby impacting the retail, storage, multifamily and seniors housing sectors. While lower-tax states may benefit from these trends, the generally low barrier for new real estate orientation of these markets may serve as a modest offset to increased demand for real estate.”

In the US, interest on corporate debt, which had heretofore been fully deductible, is now capped at 30% as a result of the 2017 legislation. This will likely decrease the amount of debt that corporations rely on for financing, since there are not as many tax advantages to issuing debt. This is particularly so given that the corporate tax rate has been reduced; this also lowers the value of the deduction. In addition, my colleague Matt Brill of Invesco Fixed Income wrote in a recent blog that the new legislation, which creates a repatriation tax of 15.5% on liquid assets and 8% on illiquid assets, should encourage companies to bring back their own overseas cash rather than borrow funds through bond issuance in order to fund dividends and stock buybacks. Matt estimates that the net result would be additional corporate deleveraging and a significant drop in the supply of bonds going forward as companies issue less debt. Overall, he believes US tax reform is “overwhelmingly positive” for the US investment grade bond market.

Will the benefits of tax cuts outweigh the concerns?

In short, tax cuts in the US and around the world have the potential to be a source of positive stimulus for their respective economies — and have an impact on financial markets. However, we must hope that the benefits of the tax cuts offset the disadvantages. For example, tax cuts typically result in lower tax revenues and higher sovereign debt levels, as they often don’t pay for themselves because their respective multiplier effects are not high enough.

In addition, there is legitimate concern that implementing tax cuts at a time when the global economy is accelerating could cause the economy to overheat. For example, the US Federal Open Market Committee contemplated the impact of tax legislation on the economy in December, as was indicated in the group’s meeting minutes. Concerns about the economy overheating could cause the US Federal Reserve (Fed) and other central banks to pre-emptively tighten monetary policy, or tighten too quickly. Last week, Federal Reserve Bank of New York President William Dudley warned about this possibility, suggesting that the Fed may have to “press harder on the brakes” in the next several years if the economy accelerates, which increases the possibility of a hard landing for the economy. Even more concerning is that these tax cuts are occurring in the midst of a global economic growth cycle. If tax cuts — an arguably potent form of fiscal stimulus — are occurring now, with a global growth acceleration in the works, then we have to worry about what dry powder we will have available when the economy next goes into recession, whenever that occurs.

In summary, there are many implications of tax reform around the world. I hope to return to this topic in future commentaries in order to more fully explore implications in different countries.

Calculating the impact of tax reform by Invesco US

Important information

The multiplier effect measures how much a change in fiscal policy affects income levels in the country due to the new policy’s effect on spending, consumption and investment levels in the economy.

Capital spending (or capital expenditures, or capex) is the use of company funds to acquire or upgrade physical assets such as property, industrial buildings or equipment.

The opinions referenced above are those of Kristina Hooper as of Jan. 16, 2018. These comments should not be construed as recommendations, but as an illustration of broader themes. Forward-looking statements are not guarantees of future results. They involve risks, uncertainties and assumptions; there can be no assurance that actual results will not differ materially from expectations.

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This does not constitute a recommendation of any investment strategy or product for a particular investor. Investors should consult a financial advisor/financial consultant before making any investment decisions. Invesco does not provide tax advice. The tax information contained herein is general and is not exhaustive by nature. Federal and state tax laws are complex and constantly changing. Investors should always consult their own legal or tax professional for information concerning their individual situation. The opinions expressed are those of the authors, are based on current market conditions and are subject to change without notice. These opinions may differ from those of other Invesco investment professionals.

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Invesco Distributors, Inc. is the US distributor for Invesco Ltd.’s retail products and collective trust funds. Invesco Advisers, Inc. and other affiliated investment advisers mentioned provide investment advisory services and do not sell securities. Invesco Unit Investment Trusts are distributed by the sponsor, Invesco Capital Markets, Inc., and broker-dealers including Invesco Distributors, Inc. Each entity is an indirect, wholly owned subsidiary of Invesco Ltd. PowerShares® is a registered trademark of Invesco Ltd., used by the investment adviser, Invesco PowerShares Capital Management LLC (PowerShares) under license. PowerShares and Invesco Distributors, Inc., ETF distributor, are indirect, wholly owned subsidiaries of Invesco Ltd.

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This article is from Invesco and is being posted with Invesco’s permission. The views expressed in this article are solely those of the author and/or Invesco and IB is not endorsing or recommending any investment or trading discussed in the article. This material is for information only and is not and should not be construed as an offer to sell or the solicitation of an offer to buy any security. To the extent that this material discusses general market activity, industry or sector trends or other broad-based economic or political conditions, it should not be construed as research or investment advice. To the extent that it includes references to specific securities, commodities, currencies, or other instruments, those references do not constitute a recommendation by IB to buy, sell or hold such security. This material does not and is not intended to take into account the particular financial conditions, investment objectives or requirements of individual customers. Before acting on this material, you should consider whether it is suitable for your particular circumstances and, as necessary, seek professional advice.


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