The stock market had a nice showing on Tuesday. Reportedly, it had to do with some optimism that President Trump and Congressional leaders are making progress on a tax reform effort. Those feelings of goodwill have eroded this morning, however, as remarks from the president last night and a New York Times article highlighting the rift between the president and Senate Majority Leader McConnell have covered yesterday's optimism with a wet blanket.
The S&P futures are down 10 points, the Nasdaq 100 futures are down 27 points, and the Dow Jones Industrial Average futures are down 72 points.
Now, before going any further, we should acknowledge that we don't believe yesterday's rally was all about some giddiness that a tax plan was coming together. It couldn't be when taking into account that a number of the reform options cited in a Politico article (eg. reducing the corporate tax rate to 22-25% and ending state and local tax deductions) didn't live up to the advance billing of the benefits a tax reform plan would produce.
To wit, there had been talk of a reduction in the corporate tax rate to 15%; and we doubt taxpayers in the high-tax (and highly populated) states of California and New York, for example, will be thrilled at the idea that they won't be able to deduct state and local taxes.
It sounded good that a spirit of compromise might be at work in Washington, and following recent losses for the major indices, it was just enough to spark some buy-the-dip action. In effect, though, Tuesday's gains had more to do with squeezing short sellers in a thin market than it did with a genuine belief that the president and Congressional leaders have suddenly had a kumbaya moment on tax reform.
President Trump rolled over that notion last night when he threatened a government shutdown if his plan to build a wall along the Mexican border does not get funding. Meanwhile, The New York Times posted a piece last night that made it sound as if the president and Senate Majority Leader McConnell aren't even on speaking terms at the moment -- or at least polite speaking terms.
These latest developments aren't exactly engendering a great deal of confidence that the budget and debt ceiling discussions next month will have a harmonious ring to them.
Anyhow, there is a bit more credibility in our mind with the excuse that politics is weighing on sentiment this morning than there was with the claim yesterday that big point gains for the major indices were the byproduct of tax reform optimism.
A disappointing earnings report from home improvement retailer Lowe's (LOW) has also been a negative factor this morning along with a revenue warning from London-based WPP (WPPGY), the world's largest advertising company, that was attributed to lower spending by its customers. Shares of LOW and WPPGY are down 4.8% and 10.6%, respectively.
The aforementioned developments have overshadowed some otherwise pleasing preliminary PMI reports for August out of the eurozone. Flash readings for the U.S. will be released at 9:45 a.m. ET and will be followed by the New Home Sales report for July (Briefing.com consensus 615,000; prior 610,000) at 10:00 a.m. ET.
In typical fashion, the Treasury market has perked up as the political dust has been kicked up again. At the same time, the dollar is losing ground against a basket of major currencies. The 10-yr note yield is down three basis points to 2.19% while the U.S. Dollar Index is down 0.3% at 93.26.