European markets saw a little bit of pre-Christmas profit taking kick in yesterday after two successive days of solid gains, as investors awaited the outcome of the twin votes on tax reform taking place in Washington DC last night.
Having teased, tantalised and promised the markets for most of this year that we would see some significant measures to reform the tax code it seems that US President is on the cusp of delivering some measures that, depending on who you listen to, are either transformative or unfair.
There is no doubt that the US tax system needs some measure of reform, however that is where the consensus would appear to start and end.
The measures include a corporation tax cut from 35% to 21%, while there are a range of modifications to various deductions and tax reliefs, coming to a sum which is expected to cost $1.5trn over the next ten years.
The wider debate is over whether the US economy needs this sort of fiscal stimulus at a time when economic growth is already trending above 2.5% and unemployment is at a multi-year low of 4.1%.
Last week the reaction of bond markets was one of ambivalence about the likelihood of these measures getting passed, however US yields have jumped sharply higher in the last two days as the prospect of higher inflation and growth prompted some positioning adjustments in anticipation that the measures, if passed, could prompt conditions that might see rates have to rise faster than expected next year.
Having seen the bill pass through Congress fairly easily last night, and pass through the Senate this morning it seems increasingly likely that the bill will be signed into law by President Trump in the coming days, though it will need to go back to a revote in Congress after a procedural snag made last night’s vote invalid. That obstacle aside it now looks increasingly likely that just over a year since being elected that President Trump is likely to have something to show for his first year as President.
The big question now is whether having seen stocks rise in anticipation of legislation being passed, that the current momentum is maintained or we see a case of “buy the rumour, sell the news” as we head towards the Christmas break.
The pound has had a rather mixed couple of days so far this week despite a CBI manufacturing survey which showed that industrial orders stayed at a 30 year high in December. The UK’s economy may be growing at a slower rate than a year ago, but the manufacturing sector appears to be on fire.
On the consumer side things are less rosy given CPI inflation at a five year high and below inflation wage rises, however last week retail sales for November showed a better than expected rise of over 1%. Today’s CBI retail sales numbers for December could well give clues as to whether that November rebound extended into this month, as it will include the Cyber Monday numbers which came in the wake of Black Friday.
Expectations are for a slight slowdown from the 26 reading seen in November, however it is still expected to come in at a fairly decent reading of 21.
Bank of England governor Mark Carney will also be appearing in front of the Treasury Select Committee in his role as part of the Financial Stability Committee, and the recent financial stability report which oversaw the latest round of UK bank stress tests. It seems likely that the Bank of England governor will face further questions about the state of UK household finances as well as the impact on UK banks of various Brexit scenarios, and to what level of detail the Bank has modelled a specific “hard Brexit” scenario.
EURUSD – continues to range trade between 1.1920 trend line resistance from the September highs and the lows of the last couple of weeks at 1.1700. A move below the 1.1700 area retargets the November lows at 1.1570.
GBPUSD – currently has support around the 1.3300 area which is also this month’s lows. A break through here opens up a test of trend line support from the March lows at 1.3200. A break above the 1.3420 area reopens a move towards 1.3500.
EURGBP – failed again at the 50 day MA yesterday just below the 0.8880 level. This is currently preventing a retest of the 0.8980 area. Key support remains back at the 0.8740 area, with a close below targeting a move towards 0.8650.
USDJPY – continues to range trade with resistance at the 113.80 area and solid support down near the 111.60 area. A move below 111.60 retargets the 110.70 level.
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