The prospect of another US rate rise, after Fed chief Janet Yellen’s comments earlier this week, as well as the outline of a potential future tax reform plan by the Trump administration, were enough to prompt US markets to take another leg higher yesterday, with the S&P500 hitting another record high.
The new tax plan would reduce corporate tax to 20% from 35%, while also proposing just three tax bands of 12%, 25% and 35%, instead of the current seven. The cut to corporation tax in particular has fuelled speculation of a large scale repatriation of US dollar profits, which are currently situated overseas. This inevitably has seen the US dollar index continue its recent rise, closing higher for the third day in succession.
More importantly as far as companies are concerned there was a feeling that most of the benefits of the tax changes, including the ability to write off capital expenditure for five years, would be particularly beneficial for smaller companies, which perhaps helps explain why the US Russell 2000 outperformed its larger cap peers, surging 2% also closing at a new record high.
It is important to remember though that we have been here before but we do finally seem to be closer to some form of tax plan than we were at the beginning of the year.
There is certainly potential for a lot to go wrong between now and the end of the year, given the unpredictability of the President, but investors are now once again starting to price back in some of what was being priced in at the beginning of the year.
On the data front we’re still seeing patchy economic performance with poor housing data yesterday, though durable goods was more promising.
Today’s final US Q2 GDP is expected to be confirmed at 3%, with personal consumption set to remain at 3.3%, though there is a small chance that could be revised lower after a downward revision to the June retail sales number earlier this month.
Weekly jobless claims are expected to tick back up slightly to 270k, after last week’s 259k, while the latest August trade numbers could offer an indication as to the extent of any disruption caused by hurricane Harvey to US port activity at the end of August. Expectations are for a deficit of $65bn.
It is also worth keeping an eye on sterling today given that Bank of England governor Mark Carney is due to speak later this morning at the Bank of England 20th anniversary independence conference.
Markets will be particularly attuned to any change of tone with respect to the governor’s and the MPC surprise reverse ferret on the outlook for interest rates at the most recent meeting.
Yesterday’s sharp rise in realised sales for September from the CBI showed that despite rising prices the UK consumer remained fairly buoyant with retail activity hitting its best levels in two years, with grocery and clothes sales particularly strong. If UK consumers are feeling the pinch they certainly aren’t showing it at the moment.
This resilience certainly helps to support the case for a rise in UK rates by year end and it would be highly surprising if Mark Carney were to shift tack on that. It would certainly do nothing for his already fragile credibility were he to do so.
Departing Fed vice chairman Stanley Fischer is also expected to speak at the same conference in what could be one of his last speeches before he leaves the Fed board next month.
EURUSD – continues to drift lower with a test of the 1.1600 level now possible having broken below the 1.1800 area which was the neckline of the triple top break out. Only a close back above the 1.1830 level negates this scenario and argues for a retest of the 1.1900 area.
GBPUSD – current sterling weakness could see a fall back towards the 1.3280 area though it is finding some support at the 100 week MA at 1.3360. While above here the upside remains for a retest of the 1.3660 area. A move through this level could see a move towards 1.3755, on the way to a move towards the 1.4000 area.
EURGBP – the 200 day MA around the 0.8720 area remains the next target, however it would be a surprise to see a move beyond here. Pullbacks need to stay below the 0.8820 area while we have broader resistance at last week’s high at 0.8900.
USDJPY – popped above 113.00 yesterday before drifting back and as such we could still see a move towards the 114.00 level, but we are starting to look stretched, which raises the prospect of a slide back towards the 112.20 area. Only a break below the 111.30 area, argues for a return towards the 110.20 level.
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