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Risk Appetite Diminished as Senate Republicans Confirmed Intentions of Delaying Corporate Tax Cut Print E-mail
ONG Focus | Insights | Written by Oil N' Gold | Fri Nov 10 17 00:26 ET

Market sentiment soured as Senate Republicans confirmed the intention to delay corporate tax cut to 2019. Wall Street slumped with DJIA and S&P 500 indices dropping -0.5% and -0.6% respectively. US dollar fell across the board with the DXY index down -0.45% for the day. Safe haven assets strengthened as both Japanese yen and gold climbed higher. US Treasuries also firmed, sending yields lower. 2-year yields slipped -2 points to 1.633% while 10-year yields dropped -1 point to 2.33%. in the commodity sector, crude oil prices climbed higher on Saudi Arabia's plan of cutting crude exports by -0.12M bpd in December. Geopolitical tensions in the Middle East showed signs in intensifying as Saudi Arabia, UAE and Kuwait advised their citizens not to travel to Lebanon. The front-month WTI crude contract gained +0.63% while the Brent contract was up +0.69% for the day.

US Tax Reform

As noted in their vision for the tax reform plan, Senate Republicans propose to implement a corporate tax rate cut to 20% on January 1, 2019, one year later than the House proposal released last week. On other aspects, the members retain the seven income tax brackets but the tax rates are slightly different from the House proposal, whilst they propose to preserve existing mortgage-interest deduction for home purchases with up to US$1M of debt. Senate Republicans also propose to maintain the estate tax while doubling the current US$5.49M exemption for individuals. If the discrepancies between the House and Senate Republican proposals are reconciled, the amended plan would be put on vote, tentatively on the week of November 20. However, such timeline appears challenging given the apparent differences between the different proposals, let alone democrats' pledge to take a hard line on the plan.

Saudi-Iran Conflict

Saudi Arabia, UAE and Kuwait advised their citizens not to travel to Lebanon and to leave the country if they are there. According to Saudi Arabia's state agency, SPA, the Ministry of Foreign Affairs urges the "Saudi nationals visiting or residing in Lebanon are asked to leave the country as soon as possible", due to "the situations in the Republic of Lebanon". It added that "the Kingdom advised all citizens not to travel to Lebanon from any other international destinations". UAE and Kuwait, Saudi's allies, shortly followed and made similar announcement. The move is believed to have been driven by rising tensions between Saudi Arabia and Iran over Lebanon and Yemen.

Macroeconomic Events

Released earlier today in Asia session, RBA in its Statement of Monetary Policy revised lower the GDP growth outlook. It now expects growth to reach +2.5% this year, compared with 2-3% projected in August, before rising to +3.25% in 2018, down from previous forecast of +3.75%. As the central bank noted, "the drag on growth from the end of the mining boom has eased and is likely to end some time in the next year or so". On inflation RBA forecasts headline CPI to rise to +2% by the end of this year. Inflation is not expected to reach +2.25% until end- 2018.

European Commission upgraded the Eurozone's GDP growth forecast to +2.2% for this year, up from +1.7% previously, before easing to +2.1% in 2018 (previous: +1.8%) and +1.9% in 2019. The inflation outlook was revised lower to +1.5% for this year (previous: +1.6%), before moderating further to +1.4% in 2018 and recovering to +1.6% in 2019. The Commission downgraded UK's GDP growth forecast to +1.5% for 2107, down from +1.8% previously. Growth is expected to reach just +1.3% in 2018. On the dataflow, Germany's trade surplus widened to 24.1B euro in September, with exports and imports expanding +7.7% y/y and +7.5% y/y respectively. UK's RICS housing survey showed a net gain in house price of +1% in October, missing consensus of +4% and September's +6%. US wholesale inventory gained +0.3% m/m in September, in line with expectations. Weekly initially jobless claims rose +10K to 239K in the week ended November 4. This came in higher than consensus of 231K.

For the rest of the day, the UK would release its industrial production, manufacturing production and construction output data for September. Separately, visible trade deficit probably narrowed to 12.8b pound in September. In the US, the preliminary reading of the University of Michigan sentiment index probably slid -0.1 point to 100.6 in November.


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