While European markets had a disappointing day yesterday, the late evaporation of strong early gains in US markets on Tuesday turned out to be a temporary blip, as the Dow rallied over 300 points, with most of the gains helped by an afternoon announcement from Apple about its future investment plans in the US.
The company said that as a result of the recent changes in US tax laws that it would look to expand its operations in the US by creating around 20,000 new jobs, while also repatriating a significant amount of the US dollar it currently holds overseas over the next few years. The estimated sums are expected to be in the hundreds of billions of US dollars, while the company also announced it would be paying a one-off tax bill of $38bn.
Not surprisingly tech stocks also rallied sharply on an expectation that we could see similar moves by other US companies who have large overseas cash piles, with the S&P500 also making a record close above 2,800.
For all the criticism of President Trump, the nature of his presidency and his economic policies, he appears to have got what he wanted in prompting US companies to reinvest their profits back into the US economy.
We also saw the US dollar bounce strongly on the back of the same news, as well as a positive Beige Book survey, with yields also pushing higher as markets started to price in a faster face of prospective rate rises, with both Charles Evans of the Chicago Fed and Robert Kaplan of the Dallas Fed painting a positive outlook for the US economy, with the prospect of three rate rises this year as a base case scenario.
The euro slipped back after a number of ECB officials said they were uncomfortable with the current level of the single currency with ECB Vice President Constancio saying there was no justification for it to be at current levels. With an ECB meeting next week it is quite likely that with inflation well below the target rate of 2%, any further gains are likely to result in further verbal interventions between now and then.
The strength of the euro does appear to be acting as a drag on European markets and the DAX in particular which has continued to struggle to get anywhere near to the record highs that we saw in November last year.
The pound continues to squeeze the pessimists until the pips squeak hitting a new post Brexit peak against the US dollar at 1.3943 yesterday before retreating. It also had a good day against the euro hitting a four week high and its best level this year, after MPC member Michael Saunders gave a fairly balanced outlook for the UK economy for the coming months, saying that further rate rises would probably be needed over time.
In Asia markets there have continued to remain buoyant with the main focus this morning on the latest Chinese Q4 GDP numbers as well as December industrial production and retail sales.
The Chinese economy is expected to end 2017 on a strong note with retail sales in particular showing a particular resilience as the Chinese authorities attempt to rebalance the economy towards a more consumption based model. A crackdown on pollution and a move away from the traditional smokestack industries towards a more technology and consumption based economy has seen a much stronger economic performance than expected this year.
Q4 GDP is expected to come in at 6.7 % rounding off a much better than expected year than was expected to be the case at the beginning of 2017, given the target was 6.5%.
Retail sales are expected to come in at 10.1%, while industrial production is expected to rise 6.1%, both slightly down from the November numbers.
Not surprisingly given this positive backdrop markets in Europe look set to open higher this morning after last night’s gains on Wall Street, though investors will also be making a note of comments from Bundesbank chief Jens Weidmann, and in particular his views on the timing of when the ECB might look to stop their bond buying program, as well as the timing of potential rate rises.
EURUSD – the failure to push above 1.2300 has seen the euro slide back towards support at the 1.2160/70 area. A break here has the potential to target a retest of the 1.2080 area. The bias remains for a move towards the 1.2600 area and 61.8% retracement level of the 1.3995/1.0340 down move.
GBPUSD – yesterday’s move above the 1.3830 area saw the pound push up towards the 1.3980 area, pulling back from 1.3943. The 1.3980 area is the 38.2% retracement of the 1.7190/1.1950 down move and a significant obstacle to a move through 1.4000. Support comes in at the 1.3650 area and or 1.3500.
EURGBP – the failure to overcome the 100 day MA at 0.8910 has seen the euro slip back to the 0.8805/10 area. This needs to hold to prevent a move back to 0.8740. Above 0.8910 targets the 0.9000 area.
USDJPY – rebounded from the support area at 110.10 but needs to move above the 111.50 area to retarget the 112.00 area.
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