Markets Say `Tell Us What We Don't Know' On Trump Tax Proposal

(Bloomberg) -- The efficient market theory rang true when it came to the reaction of stocks, bonds and currencies after the Trump administration unveiled its initial proposal to cut corporate and individual tax rates.

After President Donald Trump’s April 22 tweet that he’d deliver “big tax reform” helped trigger a rally in U.S. stocks the past two days, the S&P 500 lingered close to a record high as his top economic adviser Gary Cohn and Treasury Secretary  Steven Mnuchin listed the goals of the overhaul. The dollar rallied into the announcement before easing gains. Treasury bonds remained positive even as the outline raised the risk of bigger deficits.

The plan’s political prospects aside, the market reaction suggests that much of the benefits of the proposal were already priced in while investors continue to charge into riskier assets on speculation lower taxes will spur economic growth.

Here are the main market moves following the 1:30 p.m. announcement in Washington:

Trump’s tweet last week rekindled demand for stocks that pay the highest effective tax rates, a group that includes phone-services providers and sellers of consumer necessities. They had faltered in the past six weeks on speculation reform wouldn’t take hold until next year. A 1.6 percent rally in the past three days has the basket back within 1 percent of a record.

The proposal didn’t include any mention of a border-adjusted tax, a measure that may in theory lead to a massive dollar appreciation. The administration also gave scant indication on what tax rate it’ll adopt to lure $2.6 trillion of offshore cash home.

The dollar’s 0.3 percent gain was relatively subdued for good reason: The tax changes may just be a dud for the greenback, simply because most of the offshore assets are already in the currency. At Apple Inc., which has the most overseas cash among S&P 500 members, more than 90 percent of its $216 billion stash is in the U.S. currency, according to former employees with direct knowledge of the matter that Bloomberg interviewed in November, when Trump was elected.

For Microsoft Corp., the second-largest holder of money abroad, dollar-denominated bonds alone make up more than 60 percent of total cash, securities filing shows. At Cisco Systems Inc., Chief Executive Officer Chuck Robbins said investors should expect a limited impact from the dollar on the owner of the third biggest cash pile.

To be sure, this year’s 5 percent rally in emerging-market currencies could be at risk if Trump’s proposals end up lending further support to the U.S. dollar. MSCI’s developing-nation currency index has fallen the past two days as the president’s grumbling about unfair competition with Canadian wood and dairy brought trade talk back to the fore.

Investors will seek cushion in sovereigns with robust foreign-currency reserves and likely differentiate between companies with revenue and earnings in the dollar versus the local currency, according to Steve Hooker, a Hartford, Connecticut-based emerging-market money manager at Newfleet Asset Management LLC, which oversees $12 billion.

Any reduction to tax rates, particularly those on the wealthiest earners, would in theory weaken demand for state and local bonds -- a haven for those looking for income that’s exempt from U.S. income taxes. But municipal bonds haven’t reflected such a risk: Since the election, municipals have lost 0.5 percent, one third the decline posted by U.S. Treasuries, according to Bloomberg Barclays indexes. And the yield on 10-year benchmark munis has dropped to about 92 percent of Treasuries from as much as 108 percent in December -- reflecting the of the tax break.