A taxing Friday

A wave of risk aversion swept US markets overnight after US President Biden signalled his intention to increase capital gains tax on high-income earners massively. That undid the excellent work of the US weekly Initial Jobless Claims, which unexpectedly retreated for the second week in a row to 547,000. Despite the spike in Covid-19 cases in parts of the US, the jobless claims data suggest that recovery momentum in America continues to accelerate.

Of course, what President Biden wants, and what he will get, could be two totally different things, especially when it comes to tax rates. Goldman Sachs suggests the tax hike will be watered down to 28% from above 40%, an entirely reasonable conclusion. Although the major US indices retreated by around 1.0% as the story hit the major wires, already in Asia, US stock index futures are staging a recovery, suggesting the knee jerk is running out of steam already.

It was yet another murky development that has contributed to a very noisy week for financial markets without any tier-1 data to get their teeth stuck into. The resultant tail-chasing market moves have been there for all to see. Although major US indices are down by between one and two per cent for the week, they are all at or very near record highs still. The same can also be said for European markets, so despite this week leaving investors’ ears ringing, the recovery theme remains on track.

ECB holds the course

Overnight the European Central Bank was more neutral than a bottle of distilled water, as it left its bond-buying programme unadjusted, rates unchanged and gave no real clue as to its future intentions. That left the euro mostly untouched versus the US dollar, with most of the action in EUR/GBP, which rallied powerfully on a vaccine catch-up play.

If this week has proved anything, it is the value of not trading one’s portfolio intra-day based on press-generated headlines in a slow data week. Everything appears mostly as it was this time last Friday within a couple of per cent. All you would have achieved for your troubles was frazzled nerves and a large commission bill.

One exception is my good friend bitcoin. The future of finance (allegedly) flash-crashed while I was having a few days off earlier this week. Notably, it broke out of a two-month rising wedge at 56,000 of tax-payer-backed fiat US dollars last weekend. Subsequent corrective rallies have failed at the bottom of the rising wedge, and today bitcoin has fallen to around USD50,000. Dogecoin rose 110% last week in a day, I believe; it may have lost that by now, I don’t know. I am sure a crypto “institutional expert” will be around to say that the falls in both a merely “technical corrections” to overbought short-term markets.

It is clear that bitcoin is more sensitive to capital gains tax threats than most “asset” classes. The threat of regulation, either directly in developed markets or indirectly via the taxman, has always been crypto’s Achilles’s heel, in my opinion. Yes, you could store those juicy capital gains offshore as a US citizen, but we know how the G-Man treats tax evaders. It is not pretty.

Back to the charts, the downside breakout of bitcoin through USD56,000.00 has a target of USD42,000.00. That might come this weekend, or next week or perhaps not at all. Hopefully, we will hear as many “experts” saying this is a sign of bitcoin becoming a “maturing mainstream asset” if it falls 10% this weekend, as we do when it rises, or a crypto-exchange chooses to IPO. That indeed would be a sign of mainstream maturity, in my opinion. In the meantime, don’t hate me for being bearish bitcoin in the near term; I’m just following the charts, as I often do on other mainstream asset classes.

Although Asian stock markets may receive a temporary US capital gains tax hiccup to finish the week, the data calendar does contain a few morsels. Japan’s Jibun Flash Manufacturing PMI for April improved slightly to 53.30, while Services Flash PMI remained unchanged at 48.80.

Japan’s Inflation and Core Inflation were uninspiring, with inflation as elusive in Japan as it has been for the last 25 years. Taken with a Services PMI still in the contractionary territory and likely to take another hit from the Covid-19 regional states of emergency starting this weekend, The Bank of Japan is unlikely to move next week at their midweek meeting.

More intriguing will be Malaysia and Singapore’s Inflation rates, both released in a couple of hours. Headline Inflation for March YoY should rise to 1.40% and 1.25%, respectively, albeit from very low base effects from this time last year. Surprises to the upside could weigh on equities in both markets, although the next MAS decision is now six months away.

India Foreign Exchange Reserves this evening will be interesting to note. The Indian rupee has been crushed under the surprise Reserve Bank of India QE announcement recently. Also, the tragic explosion of Covid-19 across the country. It will be interesting to see if foreign currency reserves have dropped notably, indicating that the RBI has intervened heavily to defend the rupee. A significant fall in reserves could negatively affect the local currency, suggesting investors are leaving the country. That oversimplifies that actual process. In all honesty, the relationship isn’t that linear. But in a market with itchy trigger fingers, such details won’t count for much.

The US and Europe release Market PMI’s later today, with the data expected to show improvements in Manufacturing and Service, less so on the services front in Europe for obvious reasons. With the week entirely dominated by the sentiment du jour, they are unlikely to be market impacting unless we have some considerable deviations from the market expectations.

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