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The Republicans are close to reaching an agreement on the tax reform bill: a vote next week in both the House and the Senate is increasingly likely, followed by the signing into law by the president before Christmas......

 The main compromises reached so far are as follows: the tax rate on corporate earnings is reduced to 21% (from 35%) and will come into force as of January 2018; the maximum tax rate on households’ income is cut to 37% (from 39.6%); the Alternative Minimum Tax on businesses is repealed, and pass-through businesses will benefit from a 20% deduction of capital income. Discussions are still open on other aspects (child tax credit, estate tax, tax rate on the repatriation of profits held abroad), but a reconciled bill should be agreed on by the end of this week. Although there are still no explicit declarations of voting intentions, and several senators have reserved their vote pending an assessment of the measures, at this point there is a very good chance of the tax reform being approved swiftly. The effects of the reform should be moderately expansionary in the next two years.

Based on the Joint Committee on Taxation’s dynamic estimate, the deficit should widen by 1 trillion dollars in 2018-27 (static estimate: +1.4 trillion), and growth should increase on average by 0.8pp in the period. The Treasury forecasts an (illusory) increase in growth of almost 1pp a year. Based on the information available, we think it is reasonable to expect a positive effect of around 0.3 pp per annum in 2018-19, declining thereafter. The macroeconomic impact of the reform is likely to be contained by the fact that many measures addressed to households will be temporary, and that part of the tax cuts enjoyed by businesses could be distributed to shareholders rather than invested.

Brexit: the British government’s remarkable concession on the customs regime at the border with Northern Ireland will buffer the fallout of exiting the EU on the United Kingdom’s foreign trade.

Last week, negotiations on the United Kingdom’s exit from the European Union brought a major surprise. The British government managed to persuade the DUP unionists, which support the government, to uphold a political declaration which commits the UK to keep Northern Ireland aligned with EU regulations on the internal market and the customs unions. The feared government crisis has been averted for now. Together with the concessions made on the exit bill and on the rights of respective expatriated citizens, this has allowed negotiations to move on to phase two, on the terms of the long transition period that will follow the formal exit from the EU. However, alignment will pose problems of no simple solution for the United Kingdom: unless the entire country agrees to guarantee the same alignment (which could happen, despite the affirmation that the decision has not implications in terms of the final agreement) Northern Ireland would be included in two different customs systems, creating an ambiguity which would have to be managed. In any case, such a political commitment empties out of any real substance the promise made by hard Brexiters that the country would have reclaimed its law-making sovereignty, what’s more without offering any guarantee at all of access to the single market for services. Another problem for the UK government emerged this week when Parliament approved an amendment imposing a meaningful vote in Parliament on the final agreement the government will sign with the EU, before it is legally enforced. But what could happen if the agreement is rejected? In theory, the United Kingdom would in any case exit the Union, with no forms of mitigation, if time were too short (and/or the EU unavailable) to revise the terms rejected by the British Parliament. Therefore, the ratification vote could prove to be more a formality than a key passage.


Appendix
Analyst Certification

The financial analysts who prepared this report, and whose names and roles appear on the first page, certify that: (1) The views expressed on companies mentioned herein accurately reflect independent, fair and balanced personal views; (2) No direct or indirect compensation has been or will be received in exchange for any views expressed. Specific disclosures: The analysts who prepared this report do not receive bonuses, salaries, or any other form of compensation that is based upon specific investment banking transactions.

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This research has been prepared by Intesa Sanpaolo S.p.A. and distributed by Banca IMI S.p.A. Milan, Banca IMI SpA-London Branch (a member of the London Stock Exchange) and Banca IMI Securities Corp (a member of the NYSE and NASD). Intesa Sanpaolo S.p.A. accepts full responsibility for the contents of this report. Please also note that Intesa Sanpaolo S.p.A. reserves the right to issue this document to its own clients. Banca IMI S.p.A. and Intesa Sanpaolo S.p.A. are both part of the Gruppo Intesa Sanpaolo. Intesa Sanpaolo S.p.A. and Banca IMI S.p.A. are both authorised by the Banca d'Italia, are both regulated by the Financial Services Authority in the conduct of designated investment business in the UK and by the SEC for the conduct of US business.
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Valuation Methodology

Trading Ideas are based on the market’s expectations, investors’ positioning and technical, quantitative or qualitative aspects. They take into account the key macro and market events and to what extent they have already been discounted in yields and/or market spreads. They are also based on events which are expected to affect the market trend in terms of yields and/or spreads in the short-medium term. The Trading Ideas may refer to both cash and derivative instruments and indicate a precise target or yield range or a yield spread between different market curves or different maturities on the same curve. The relative valuations may be in terms of yield, asset swap spreads or benchmark spreads.

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Intesa Sanpaolo S.p.A. trading ideas are made in both a very short time horizon (the current day or subsequent days) or in a horizon ranging from one week to three months, in conjunction with any exceptional event that affects the issuer’s operations. In the case of a short note, we advise investors to refer to the most recent report published by Intesa Sanpaolo S.p.A’s Research Department for a full analysis of valuation methodology, earnings assumptions and risks. Research is available on IMI’s web site (www.bancaimi.com) or by contacting your sales representative.

Source: BONDWorld

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