Equities are selling off on the back of headlines of the Biden administration’s proposed hike to capital gain taxes – an almost doubling to 43.4%, according to a media report – while UST 10y yields were backing up toward 1.58%. These headlines gave an excuse for the US Bond yields to fail at the same levels they have for the past week (1.58-1.6%).
The people most concerned with capital gains are high-end active traders and hedge funds. The problem is that most of these folks provide a good chunk of liquidity to the market, which is the immediate cause for concern; much of your typical investor stock is with pension funds who typically have no tax liability so the fall could be limited.
The market knew that taxes were going up, but there was uncertainty surrounding whether it would be 2021 or 2022. It would seem investors are now assuming sooner rather than later.
And while the initial knee-jerk reaction is for fast money to sell, longer-term investors could sit tight – after all, who says Trump or another tax hawk might not come along in election 2024 and lower them again, suggesting the sell-off might be limited. And if there was a time to announce a capital gains hike, it’s best to do so when stocks are at a record high.
This week has been mainly about risk reduction, but it’s a tough market to navigate. UBS flow data suggests quite heavy selling pressure on Tuesday – some of the heaviest since the beginning of the month – indicating that investors were actively reducing risk. Having said that, the sell-off was pretty orderly, and volatility declined, and it appears the market is better hedged than just a couple of weeks ago. But it’s becoming clear there’s less of a clear direction to markets after the solid start for the year; however, some slight buying materialized on Wednesday, potentially squeezing out short-term shorts.
Oil continues to chop around but is unable to break free of the two-day slump.
US-Iran discussions are progressing as the US is now signalling that it’s open to easing sanctions where a deal will ultimately lead to a ramp-up in production from Iran. The deteriorating Covid-19 situation in India has also pressured oil. But as the market moves past these concerns and expectations for a US-Iran deal become consensus, oil may be poised to catch up with base metals back at the highs.
EURUSD is on a bit of a rollercoaster after the ECB meeting. Initially, it was paid up to 1.2069 during the press conference Q&A on PEPP but then started to come under pressure when ECB President Lagarde commented on negative interest rates. At the same time, the USD had a general bid tone with US equities under light pressure.
The stronger dollar could negatively influence MYR sentiment, but the more significant positive offset could be lower US yields and stabilizing oil prices. That’s not to mention the FX market seems to be moving past Covid worries as even the Indian Rupee rallied.
As the market moves past peak ECB and BoC dovishness, gold's solid physical demand this month could give up some ground to central bank policy normalization.
For more market insights, follow me on Twitter: @Steveinnes123
The information is not to be construed as a recommendation; or an offer to buy or sell; or the solicitation of an offer to buy or sell any security, financial product, or instrument; or to participate in any trading strategy. Readers should seek their own advice. Reproduction or redistribution of this information is not permitted.
Today’s key charts focus on oil, where the recent rally has stalled amidst talk of a lift in sanctions and speculation of a production boost.