US stocks are wobbling as investors struggle to navigate through a very muddied global outlook and a wrath of earnings updates that for the most part has priced in a slow return to pre-pandemic life. The US economic recovery remains strong as jobless claims continue to improve and the housing market eases off its peak. The eurozone is about to become the economic recovery flavor of the week, perhaps quarter, but ECB President Lagarde did little to boost short-term optimism that they were closer to following Canada’s lead in tapering asset purchases. The COVID situation across India and Japan remains a drag on risk appetite, but shouldn’t derail optimism for the second half of the year.
Wall Street hit the panic button and headed for the sidelines after reports that President Biden will propose capital gains taxes as high as 43.4% for those making over USD1M per year. The plan could mean a 56.7% and 56.22% total capital gain levy in California and New York respectively. Sticker shock over some of these tax figures will be hard to shake off for some investors. The biggest risks to the stock market are the Fed’s taper tantrum and aggressive tax hikes. This will likely be the initial high ask from the Biden administration on taxes. Some traders are looking for an excuse to lock-in profits and they might choose to use this tax story as their catalyst.
**Update (2:35pm ET) Later reports circulated that Pres Biden plans to increase capital gains tax for top earners to 39.6% marginal rate and not the previously reported 43.4%. When taking into consideration an existing surtax on investment income, the rate could reach 43.4%.
ECB plays it safe
The ECB policy decision and press conference were a snoozefest. Financial markets were eager to see if the ECB would be like Canada and deliver an optimistic tone that could suggest the June policy meeting could be the beginning of their tapering of asset purchases. The ECB kept the main 7-day refinancing rate unchanged at 0.00% and reconfirmed that the Pandemic Bond Buying Fund (PEPP) size will stay at $1.85 trillion and remain until at least March 2022. The ECB statement affirmed faster bond buying.
Lagarde failed to deliver clarity over the pace of bond purchases, urging markets to focus on the monthly numbers and not the weekly PEPP purchases.
The euro did little following the ECB event. Lagarde reiterated that the ECB doesn’t target an exchange rate. The euro had modest gains but most of them were erased after Lagarde’s comments.
The aftermath of the Archegos Capital blowup will likely trigger big changes from the SEC that include more transparency on shorts and derivative trading. These changes will take time to form and should lead to less volatility which in the end will be more positive for US stocks.
Lira weakens on US/Turkish tensions
The Turkish lira plunged against the dollar on worsening tensions between the US and Turkey. President Biden is expected to announce the symbolic designation of genocide over the 106th anniversary of the mass killings of Armenians. Biden will be the first US president to do so and that will only throw more fuel to the fire that is the rocky relationship between his administration and the government of President Erdogan.
The lira was already vulnerable given the recent drama over Erdogan’s overreach with the central bank and a brutal second COVID wave. US relations with Turkey will just provide another catalyst for the lira to weaken towards 8.5 and perhaps even the 9 handle against the dollar.
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