DR.CHENJIAZI ZHONG

In Brief

• U.S.: Hurricane Harvey hit insurance stocks and auto giants; U.S. nonfarm payrolls preview
• Euro: The euro hit a multi-year high after Draghi did not comment on the currency strength
• U.K.: Home prices reverse monthly rise
• Thoughts: M&A could be the biggest beneficiary from a tax cut on repatriated profits

On the U.S.

As Houston grapples with Hurricane Harvey, Wall Street is reeling in its aftermath. Energy stocks fell as much refining activity around the Texas coast came to a standstill. In addition to energy names, property and casualty insurance company stocks were also among Wall Street’s casualties August 28 in an otherwise mixed day for the market.

On August 23, the ADP survey sent a strongly positive surprise by informing that the private sector added 237,000 employees in August, exceeding the expectations of around 185,000. This was the largest monthly increase in five months. The June figure was revised upward to 201,000 from 178,000. The July NFP and August ADP suggest that the employment sector has accelerated its recovery from previous strong levels. That said, the employment sector has been on the healthy path for long.

On Euro

The euro soared to its highest level in over two years against U.S. dollar after European Central Bank (ECB) President Mario Draghi did not comment on a strong euro, which most analysts had expected. The dollar index dropped to a more than one-year low following Draghi’s speech and after Federal Reserve Chair Janet Yellen made no reference to U.S. monetary policy in her speech. Euro has climbed 13% year to date against the U.S. dollar, as it benefited from political dysfunction in Washington and the Federal Reserve’s gradual monetary tightening pace. A solid euro zone currency is a headwind for the export-driven euro zone economy.

On the U.K.

U.K. house prices fell by 0.1% in August compared to a modest increase of 0.3% in July, according to the figures from lender Nationwide on August 29. As compared with the same month last year, prices rose by 2.1%. Nationwide Chief Economist Robert Gardner said the slowdown in the housing sector was surprising, given the strength of the labor market and falling unemployment rate. House prices posted three consecutive monthly drops in the three months through May before rising in June, the longest run of declines since 2009, signaling that demand might be cooling as accelerating inflation squeezes consumers. Consumer price inflation stood at 2.6% in July, down from May’s peak of 2.9%, but still well above the Bank of England (BOE) ‘s 2% target and the pace of growth in wages.

Thought: M&A Could Be Biggest Beneficiary from a Tax Cut on Repatriated Profits

A subtle but an important change has occurred since the U.S. election is that companies electing to engage in M&A have outperformed companies choosing other outlets for the uses of their cash. Perhaps most significantly, the amount and efficacy of share repurchases have waned significantly over the period. The economy could benefit from changes in the tax code that would rest somewhere between a simple corporate tax cut and tax reform.

Any legislation will include both a cut in the statutory corporate rate and on taxes paid on repatriated corporate profits. M&A activities could be the biggest beneficiary from an influx of foreign profits abroad, especially at a time when the political winds are far from predictable. In this sense, U.S. companies may choose to do their capital expenditures via acquisitions as opposed to greenfield additions to plant. This may be another tailwind for small-cap stocks that are burdened with higher taxes and regulatory costs than their large cap cousins.