Trifecta of French election, Trump tax cut and strong earnings send Euro and markets spiking

Marine Le Pen

Trump promises huge on tax cuts, but can he deliver

President Trump echoed his Treasury Secretary Mnuchin Friday by promising an announcement on Wednesday that would deliver large tax cuts to both individuals and corporations. (Mnuchin promised extensive tax cuts in an interview to the Financial Times on Thursday.)

“We’ll be having a big announcement on Wednesday having to do with tax reform. The process has begun long ago but it really formally begins on Wednesday,” Trump said on Friday before going on to say that,”both businesses and individuals will recieve a “massive tax cut…bigger I believe than any tax cut ever.”

This is likely Trump’s trademark hyperbole rather than fact.  The markets don’t like an over promise followed by an underwhelming delivery. The largest tax cut in recent history was under the Reagan administration who cut the top margin individual income tax rate from 70% to 50%.  That will likely be hard to beat. The markets are currently reacting more to the French outcome in this initial climb. The Trump team wants to deliver a tax reform package that is not only business and tax payer friendly but also has a decent chance of making it through Congress and to the President’s desk.

This may mean focusing more on lowering tax rates for the upper middle class on down and leaving the elites of the country out of the individual tax reform plan. The elite in the US would benefit from cutting corporate taxes which would also make the US more competitive in the global market and may encourage more corporations to keep or return jobs to the US.

Earnings season so far and what is to come

Over 75% of S&P companies that reported beat analysts consensus. 189 S&P companies report their earnings this week. If the 75% beat rate continues or even slips only slightly it will instill confidence in investors regarding the health of the US economy.

However observers of the markets have to remember that in this Alice in Wonderland-like economic climate, sometimes good economic news is bad for the markets and bad news is good. The reason for this is as the US economic outlook improves with strong earnings, the more likely the Federal Reserve is to hike interest rates. Each time interest rates go up the Fed is taking a little more of that stimulus away that helped deliver an 8 year growth cycle in the US markets.

Euro and Markets jump on French election results.

When markets opened late Sunday afternoon the EUR/USD jumps a full percentage point which is a staggering price move in the foreign exchange markets. The S&P 500 also saw a 1% rise as of Sunday evening.

In the weeks leading up to Sunday’s election in France, far right wing candidate and President of the National Front part Marine Le Pen was polling as high as 30% in the 11 candidate race. Le Pen is running on a platform focusing on proposing referendums for France to leave the European Union and NATO, implement strong immigration reform and is generally anti-globalist policies. She finished the first round of voting with a disappointing 21.4%, second to independent centrist candidate Emmanuel Macron, who is pro European Union.

Macron and Le Pen will have a run off election in two weeks. Many French analysts believe it will be difficult for Le Pen to consolidate enough of the vote to overcome Macron’s lead.