Good morning,
The phrase "fiscal cliff" I hate with a passion. Created by the likes of Mickey Mouse market commentators to add drama to the everyday lives of you and I.
The reason I mention this is, whilst sitting at the bus station last night, I was pondering the predicament in the US. With the tax cuts due to come to an end, Obama will now have to consider how the sudden cancellation of these policies will impact.
Lets look at the aims of the taxes. They were designed for one reason, increase consumer purchasing power. Whether this is to increase consumer spending, or ease the burden of higher mortgage payments, it was aimed to help support individuals during this period of tight credit and low growth.
As mentioned before, despite flooding the system with capital, banks remain reluctant to lend, causing tighter credit markets. This then has a knock-on effect on everything from car loans, home loans, all the way down to credit card limits.
And this is the real question, how do will encourage consumer spending that includes supporting/boosting the housing market?
Ans:
1. Increasing individuals spending power, outside of the bank infrastructure.
2. Encourage banks to increase lending, and associated securities.
Dealing with No.1 first. According to the University of Wisconsin, spending looks like this, as a total of American house hold spending:
Age 21: 9.5%
Age 30: 21.7%
Age 40: 27.4%
Age 49: 25.1%
Age 59: 16.2%
Age 75: 10.0%
By adjusting rules on inheritance tax, the government could encourage the transfer of capital from a lower spending group, to a hire one without impacting near term tax payments.
Currently, the US tax system for estate tax, allows the annual transfer(or "gift") payment of US$13,000 per person per year, caped at US$1m over a lifetime. By relaxing the laws for annual gifts, flows should increase to the lower age brackets, which currently represent 30% of the total annual expenditure in the US.
This should also help support housing markets, where even at correct rates, first time homebuyers are struggling to raise the large deposits needed to own property.
This brings us onto No.2; Banks will now feel more comfortable lending due to lower risk of default. With increased lending by the banks, we should see competition within the mortgage space push "real interest rates" lower, whilst encouraging an increase in mortgage securitisation. Despite the hatred of these products, with set guidelines and credit agencies correctly rating the risks, we should see mortgage markets improve.
This would of course need to pass the republicans, which given the general publics sentiment towards banks will be tough to pass, but given Romney's attempt as easing higher rate tax payers liabilities we should see support of a policy that reduces inheritance tax.
Covering the future inheritance tax revenue. Well, this could be balanced in a number of ways. In places such as the UK, investment taxes have been added on second properties or tax exempt savings plans have been scaled back. Given the inflows of capital into the market, an increase in capital gains tax could be an option, however, the expectations of revenue could be missed should markets remain weak over the next 3 years.
This is not the only option, but it certainly would solve a number of short/medium term issues. America will not be forced to endure a sudden stop of tax cuts, which would make data extremely hard to read and policy adjustments thereafter. I suspect there will be some near term extensions but at reduce rates, hopefully increasing sentiment once more.
Overnight, markets saw some considerable volume drops. US down around 28% and Europe of an average of 15%, this is bucking the idea that volumes would improve after the US election.
The overhang of macro news in both regions, and the new China premier is leaving many investors on the sidelines.
FTSE flat avg volume; O/P: financial, cons.services U/P: basic mats, health
CAC -0.4% low volume; O/P: financial, health U/P: tech, industrial
DAC +0.1% avg volume; O/P: cons.services, health U/P: industrial, tech
IBEX -0.9% v.low volume; O/P: basic mat, utils U/P: industrial, cons.services
With the Euro breaking below 1.27, European CDS's firming and bond yields indicating outflows, equity markets are once again going defensive. The strength overnight in financial's feels more like a technical bounce after banks like HSBC are off around 3% from last weeks highs.
In the US, its much the same story. Firming US$ sees defensives outperform.
S&P flat v.low volume; O/P: financial, cons.services U/P: basic mats, health
Sector maps highlight demand for safety. It seems we cant catch a break as eyes that followed the US presidential election are now all focused on the tax cuts expiry. We need to see more clarity from leaders going into these events if they wish to stabilise markets domestically and globally.
Markets.We will see continued fears over the European and US marco environment. Yesterdays late rally came quickly to an end, leaving me looking for markets to ease on the open, before finding some support, then trading sideways in a tight range.
This is an opportunity to pick up some of the better basic material names. Oil and copper would be the top picks and I will be watching cements closely.
The Euro is also getting to levels were I would accumulate, both against the US$ and the JPY.
Data.09:00 Philippines exports
12:30 Japan industrial production
15:45 France current a/c, non farm payrolls
16:00 Spain CPI
17:00 Italian CPI
17:30 UK PPI, CPI
17:30 Italian government debt
18:00 German ZEW survey
20:30 US small business optimism
03:00 US monthly budget statement
Events.Monti meets French prime minister
15:30 EU budget framework
20:45 EU regional-aid recipients hold meeting in Brussels
22:30 Greek finance minister speaks to lawmakers
22:45 Italy's Monti meets UK's Cameron
Bonds.11:00 Thailand 1,3 and 6 month auction, 3year auction
11:45 Japan 5year auction
17:00 Netherlands 10year auction
18:00 Italian 1year auction
18:00 Greece 1 and 3 month auction
00:30 US 3, 6 month auction
Earnings.Home depot(US), Pirelli(IT), K&S(GE), E.ON(GE), Vodafone(UK), Mediaset(IT), Vivendi(FP), Acciona(FP), Banco Espirito Santo(SP), Unicredit(IT), Intesa Sanpaolo(IT), Enel(IT), Salvatore Ferragamo(IT), Banco Popolare(SP), Man Wah(HK), Bumi resources(IJ), Bank Pekao(PW), Impel(PW)
Stoddart
No comments:
Post a Comment