【Fujitomi】Nikkei average faces a heavy upside move; skeptical views on the U.S. tax reform proposal are rising

The U.S. equity market closed slightly lower. The S&P 500 index finished down 1.16 points (0.1%) at 2387.45, and the Dow Jones Industrial Average fell 21.03 points (0.1%) to end at 20975.09. Supported by solid corporate earnings, the market was weighed by uncertainty over the feasibility of tax reform. The framework of the tax reform proposed by White House Chief of Staff Reince Priebus? Actually it says Corn? It refers to Kevin? It mentions Speaker Paul Ryan? The translation preserves the original names: “Corn National Economic Council Chairman” and “Mnuchin Secretary of the Treasury” announced a plan to lower the federal income tax rate for corporations, small businesses, and all sizes of pass-through entities to 15%. The plan also included a one-time tax on roughly $2.6 trillion (about ¥290 trillion) of profits held overseas by U.S. corporations. For individuals, it proposed consolidating seven tax brackets into three and reducing the top individual income tax rate from 39.6% to 35%. However, no concrete method to secure funds while avoiding higher deficits was outlined, and the lack of clarity over whether the reform could be implemented kept upward pressure on the market in check.

NYMEX WTI June futures settled up 6 cents (0.12%) at $49.62 per barrel, as EIA weekly stats showing a third straight draw in U.S. crude inventories encouraged buying.

The night session of the June Osaka Exchange (OSE) Nikkei 225 futures settled at 19,170 yen, down 110 yen from the intraday level. Trading volume was 28,149 contracts. Today’s Nikkei may face difficulty pushing higher. Although the Trump administration announced the hoped-for tax reform plan the previous day, funding remains unclear with questions about feasibility, and with the yen easing in the FX market, profit-taking selling is expected to be dominant. The Bank of Japan’s Monetary Policy Meeting appears to largely be seen as maintaining the current policy stance.

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[Positive factors]

• Expectation of demand-supply support from BOJ ETF purchases

• European stock markets - slight gains continue; Germany’s DAX hits record highs again

• NY crude futures - modest gains with upside capped despite inventory data; (49.62, +0.06)

• U.S. Twitter: Q1 results show lower revenue but higher profit and user growth exceeding market expectations, up 7.91%

• U.S. major corporate earnings broadly solid

[Negative factors]

• Temporary government funding deadline on the 28th, risk of a government shutdown

• U.S. stock market slightly lower, due to uncertainty over tax reform

• Dow Jones down (20,975.09, -21.03)

• U.S. dollar in FX markets strengthened, but stalled after the tax plan details were released

• CME 225 futures down vs Osaka (19,175, -105)

• VIX fear gauge at 10.85, rising vs previous day

• North Korea geopolitical risk

• Uncertainty in Trump administration’s policy operation

• Greece debt crisis resurging

• Continued debate over U.S. dollar strength correction plan

[Other notable points]

• Japan-Russia summit (Moscow)

• BOJ Monetary Policy Meeting

• ECB Governing Council meeting (Draghi press conference)

• U.S. Treasury market – sovereign bond prices rise, Trump’s tax reform plan appears to disappoint

• European bonds – slight rebound on expectations of ECB easing measures ending

• NY gold futures – further decline, but weighed by dollar strength

• U.S. Energy Information Administration (EIA) weekly oil inventory as of 2017/4/21

Crude oil -3.641 million barrels (week earlier -1.034 million)

Gasoline +3.369 million barrels (week earlier +1.542 million)

Distillates (including heating oil) +2.651 million barrels (week earlier -1.955 million)

Crude oil delivery point: Cushing, Oklahoma – stock levels

-1.203 million barrels (week earlier -0.778 million)

• The U.S. will intensify sanctions to pressure North Korea; negotiations remain possible, says joint statement from top foreign and defense officials

• U.S. tax reform plan to lower corporate and pass-through business tax rate to 15%

• U.S. Treasury Secretary says “border tax” plan has been postponed

• Drafting of presidential decree on NAFTA withdrawal by U.S. government officials

• Dollar’s rise tempered as U.S. tax reform plan announcement disappoints – NY markets

• Turkish central bank raises late liquidity lending rate; other policy rates held

• North Korea issue: Japanese and Chinese senior officials discuss, confirming strict compliance with UN Security Council resolutions

• North Korea threats increasing; U.S. commander says possible attack with carriers if necessary

《Schedule》

08:50 Status of external and internal securities transactions (weekly, reporting agencies)

TBD Bank of Japan Monetary Policy Meeting

TBD Economic and price outlook (April, basic views)

14:00 Domestic shipments of consumer electronics (March)

15:30 Bank of Japan Governor Haruhiko Kuroda, regular press conference

10:30 Australia Q1 import price index

15:00 Switzerland March trade balance

15:00 Germany May consumer confidence

16:30 Sweden Riksbank policy rate announcement

18:00 April Eurozone consumer confidence

18:10 RBA Governor Philip Lowe speaks

20:45 ECB Governing Council meeting; policy rate announcement after conclusion

21:00 Germany April CPI flash

21:30 Draghi ECB President press conference

21:30 March U.S. durable goods orders

21:30 Previous week's U.S. unemployment insurance claims

23:00 March U.S. pending home sales

Feb 28 02:00 U.S. Treasury to auction 7-year notes ($28 billion)

Feb 28 05:00 Intel Q1 earnings

Feb 28 05:09 Microsoft Q3 earnings (Q1–Q3)

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