After the Trump administration and GOP's tax reform effort cleared a procedural hurdle in the Senate on Friday morning, the optimism among investors sent spot gold down $7 per ounce (-0.55%) to $1,282/oz. Spot silver lost 7¢ to $17.16/oz. While platinum slipped about $2, palladium once again charted the opposite path from the other precious metals, adding 1.5% to trade back above $960/oz.
Here's a recap of Thursday's market action:
Gold: $1,289.70/oz (+$9.20, +0.72%) Silver: $17.23/oz (+26¢, +1.53%) Platinum: $922/oz (+$3, +0.33%) Palladium: $949/oz (+$3, +0.32%)
Dow Jones: 23,163.04 (+5.44, +0.02%) S&P 500: 2,562.10 (+0.84, +0.03%) Nasdaq: 6,605.07 (-19.15, -0.29%) DXY: 93.14 (-0.27, -0.29%) WTI crude: $51.39/bbl (-65¢, -1.25%)
We've been hearing about it off and on for much of the year, but it appears that the latest move by the Senate to push some kind of tax reform legislation forward is convincing many that the much-awaited tax cuts will soon become a reality. It should be noted that Republicans in the House and Senate have all but admitted that the current plan will add $1.5 trillion to the deficit, which is really not all that surprising if corporate tax rates are going to be considerably lower.
One wonders if tax reform is really driving markets. Opinions on the matter differ: Some have suggested the idea has already been priced in, as Wall St has crept more than 20% higher this year (while bullion has advanced about 10%). Both of these facts could be explained by the weaker dollar this year.
There have been rather low volumes and low volatility during the current stock market run. This suggests that we may be due for a big movement in one direction or the other before the calendar year it out. If indeed the hope for tax reform is behind even a portion of the higher movement, analysts and investors need to consider the downside risk of any delay or impediment to passing the tax cuts.
There are also some trends hidden within the stock market's churn higher. Yesterday, rising shares of Apple accounted for half of the gains on the Dow Jones, again demonstrating the poor market breadth that has characterized equities in 2017: The gains are concentrated in just a few companies, which checking the performance of an index doesn't always reveal.
The 10-year Treasury yield eased back to 2.37% as investors shunned safe havens in favor of stocks to close out the week. The dollar also surged 0.4% to above 93.6 on the DXY index. It posted similar gains against the Japanese yen, British pound, and euro individually. Wall St futures pointed about 0.3% higher.
There are still more factors that pose a risk to the current rally in stocks, chief among them the future leadership of the Federal Reserve. President Trump is preparing to nominate a new Fed Chair. Although there are several people who are considered "in the running" for the position, insiders believe the decision will be between current Fed governor Jerome Powell or Stanford economist John Taylor. They come from opposing sides of the policy debate: Powell is a noted dove and Taylor is about as hawkish as they come. In fact, the eponymous "Taylor Rule" suggests that the fed funds rate should be 4% right now given economic conditions; after two rate hikes this year, the benchmark rate set by the central bank is still at just 1.25%.
There are murmurs that whoever Trump nominates to the Fed will be confirmed by the Senate, but the expectation is that there will be a sharp correction in the stock markets if Taylor prevails due to his hawkish outlook on interest rates.
The two fluid narratives about tax reform and changing faces at the Federal Reserve will likely stay in the headlines and weigh on U.S. markets in the near term.
The opinions and forecasts herein are provided solely for informational purposes, and should not be used or construed as an offer, solicitation, or recommendation to buy or sell any product.