After two days of back to back triple digit gains in the Dow for the first time since the election, overnight the torrid rally has faded, with European shares and U.S. stock futures little changed ahead of Trump’s big unveil of his much anticipated tax cut plan as investors seek new impetus for a flagging relief rally. And, if as some traders expect, the rally is likely to be reignited no matter what Trump announces today (although a less hyperbolic plan may in fact be more favorable for risk, as it makes Trump’s plan more likely instead of being shot down by Congress).
Despite the tapering of euphoria, world stocks hit another all time high on the back of strong earnings and the realization that whatever Trump says, the S&P – less than 1% from all time highs – will likely hit a new record. The MSCI world equity index, which tracks shares in 46 countries, was up 0.1% to a fresh record high. It is up nearly 2% this week and 8.35% since the start of the year. As Bloomberg’s David Ingles charts, the market cap of all stocks in the index, and thus the world, has just surpassed $50 trillion for the first time ever.
“On top of (the French election result) we have had a very decent set of corporate earnings in the U.S. and that helped push the market further along the same direction,” said Investec economist Philip Shaw. “I am unsure how further along we really are on the tax cutting agenda, but it is certainly not doing market sentiment any harm,” he added.
Further details on President Trump’s tax cutting plans are expected to be announced later on Wednesday, potentially reviving reflation bets. The threat of a U.S. government shutdown this weekend also receded after Trump backed away from demanding Congress include funding for his planned border wall with Mexico in a spending bill.
The dollar rebounded modestly for a second day after plunging in the past week to lows not seen since November, gaining against most group-of-10 currencies even as the WTI slide continues, with crude languishing below $50 a barrel after a report on U.S. supplies. European stocks halted a five-day advance that had taken them to the highest since 2015 as earnings painted a mixed picture on growth.
According to Bloomberg, investors are waiting to see if Trump’s conciliatory tone on the border wall could help avert a government shutdown even as most members of the Congress are in the dark about the $1.1 trillion spending bill. Policy reviews by the Japanese and European Central Bank may also set the tone for rest of the week.
European shares pulled back slightly from 20-month highs as some disappointing corporate results weighed on the market but Asian stocks powered ahead. The Stoxx Europe 600 Index was little changed, after a five-day rally to the highest since August 2015.
Japan’s Topix index rose 1.2 percent, climbing for a fifth straight day for the longest winning streak this year.Futures on the S&P 500 Index were flat after the underlying gauge climbed 0.6 percent on Tuesday, to within 10 points of its closing record.
The early FX price action this morning has been in the EUR, as the market has faded the story out late yesterday that the ECB are considering signalling a tweak in their monetary policy stance in the wake of the Macron first round victory at the weekend. This sounds premature to say the least, and alongside this, we have seen Draghi and Co curbing some of the hawkish sentiment in response to their last meeting. The recovery EU wide is a little better than fragile, but as the Fed have been struggling to do in their communication to the market, the ECB now face a similar task.
The slew of positive news pushed the Nasdaq composite to a record high on Tuesday while the Dow and S&P 500 brushed against recent peaks.
Against a strengthening dollar, the euro held on to the bulk of the gains made earlier this week; it fell 0.13 percent to $1.0911, but is still up 1.72 percent from Friday’s close.
U.S. Treasury yields, meanwhile, rose above 2.30 percent for the first time in two weeks. “U.S. bond yields have broken higher without the support of commodity prices which is one of the clearest signs that the Trump trade is back,” Morgan Stanley analysts said in a note. Euro zone government bond yields nudged up ahead of Trump’s keenly anticipated tax announcement.
Oil prices resumed their downward trend on Wednesday as data showed a rise in U.S. crude inventories and record supplies in the rest of the world cast doubt on OPEC’s ability to cut supplies and tighten the market.
Economic data include revision of retail sales. Procter & Gamble, PepsiCo are among companies scheduled to publish results. Alphabet, Microsoft, Amazon.com, Twitter, Intel, Barclays, Bayer AG and Total SA are among major companies releasing results later this week. The Bank of Japan is widely expected to keep the settings on its monetary easing program unchanged at the end of a two-day policy meeting on Thursday. Though inflation remains well below the central bank’s 2 percent target, it’s ticking up. The ECB sets monetary policy later that same day. With officials indicating little chance of a policy change, the focus will be on any signals from President Mario Draghi that the central bank is debating an exit from its extraordinary stimulus.
