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A choppy week looked set for another reversal after the threat of a tax hike pushed Wall Street sharply lower.
ASX futures fell 15 points or 0.21 per cent, suggesting a soft end to a week that brought a 13-month high on Monday, a mid-week dive to two-week lows and a strong recovery yesterday.
Wall Street
US stocks plunged after Bloomberg News reported the White House was considering doubling capital gains tax for wealthy Americans. The S&P 500 shed 38 points or 0.92 per cent.
The Dow Jones Industrial Average gave up 321 points or 0.94 per cent after briefly losing as much as 42 points. The Nasdaq Composite lost 132 points or 0.94 per cent.
President Joe Biden was mulling tax increases on the wealthy to pay for education, childcare and other spending, according to Bloomberg News and other outlets. Among changes on the table under the ‘American Family Plan’ was an increase in capital gains from the current 20 per cent to 39.6 per cent for Americans earning more than $1 million. The rate might go as high as 43.4 per cent for the extremely rich.
“Biden’s proposal effectively doubles the capital gains tax rate on $1m income earners,” Jack Ablin, CIO of Cresset Capital Management, told CNBC. “That’s a sizable cost increase to long-term investors. Expect selling this year if investors sense the proposal has a chance of becoming law next year.”
The reports triggered an immediate sell-off in some of the pandemic’s best performers. Amazon sank 1.58 per cent, Tesla 3.28 per cent and Apple 1.17 per cent.
Wealthy investors would have an incentive to lock in profits ahead of any tax change, potentially triggering a deeper market retreat if the tax plan gains traction. However, analysts questioned the likelihood of the tax proposal passing. The Democrats hold slender majorities in the Senate and House of Representatives.
“If I want to get something done, the first thing I’m going to do is come with a really extreme request and then I’m going to negotiate back from that. That’s just the way politics work,” Doug Sandler, head of global strategy at RiverFront Investment Group, told CNBC. “I’m not going to guess we’re going to double the capital gains tax because that narrow majority in Congress, that seems too controversial to get passed, but it starts the framework that taxes are going higher,” he added.
The major indices had been trading slightly higher before the first report emerged as investors digested another slew of corporate earnings. Dow component company Dow Inc fell 6 per cent despite beating analyst estimates on earnings and revenues. Southwest Airlines rolled over to a loss of 1.56 per cent. Equifax soared 14.94 per cent.
The market’s early gains followed positive employment news. First-time claims for unemployment benefits declined to 547,000 last week, well below estimates. Continuing claims dropped to 3.67 million, a pandemic low.
Australian outlook
A week of swings looks primed for another downturn, albeit perhaps not too deep. The main driver of the overnight weakness on Wall Street was exclusive to US investors and seems unlikely to proceed in its present form. Still, any capital gains tax increase at all is a headwind for equity markets.
The S&P/ASX 200 briefly erased two weeks of gains on Wednesday before regaining most by yesterday’s close. The index ended last night just ten points below Monday’s 13-month closing peak – a bullish sign that “buying the dip” remains rewarding in these conditions.
Materials led the US retreat overnight, falling 1.75 per cent as iron ore and most metals declined. Energy stocks sank 1.41 per cent despite a skinny gain in crude. Technology lost 1.18 per cent, financials 1.11 per cent and industrials 0.47 per cent. With all 11 sectors closing lower, the closest thing to havens were health, down 0.43 per cent, and real estate, down 0.38 per cent.
Preliminary April readings on manufacturing and services sector activity are due at 9am AEST.
The dollar declined 0.61 per cent to 77.07 US cents.
Commodities
Iron ore retreated for a second day, falling further from Tuesday’s ten-year high. The spot price for ore landed in China eased $2.15 or 1.2 per cent to US$183.60 a tonne.
BHP’s US-listed stock slumped 1.84 per cent after its UK-listed stock put on 0.37 per cent. Similarly, Rio Tinto lost 2.31 per cent in the US after gaining 0.52 per cent in the UK.
Oil inched higher after earlier falling to its weakest level in more than a week as traders fretted about the spread of Covid through India and Japan. Brent crude settled eight cents or 0.1 per cent ahead at US$65.40 a barrel.
Gold suffered its first loss in three sessions, easing from a near two-month peak. Metal for June delivery settled $11.10 or 0.6 per cent lower at US$1,782 an ounce. The NYSE Arca Gold Bugs Index declined 2.14 per cent.
Key industrial metals retreated amid reports of Chinese buyers baulking at elevated prices following strong increases this year. Benchmark copper on the London Metal Exchange dropped 0.4 per cent to US$9,421.35 a tonne. Aluminium dipped 0.1 per cent, nickel 0.8 per cent and tin 0.4 per cent. Lead improved 1.5 per cent and zinc 0.4 per cent.
