The tax-driven rally in US equity markets failed to sustain last night. Three major indices opened higher but quickly erased earlier gains and end up down overall.
Technology shares suffered heavy selling pressure as investors are rotating out from valuation-rich sector in an attempt to lock in profits amid complicated tax overhaul reconciliation in the US Congress. Nasdaq index has dropped over 2.5% since it reached an all-time high on 28th Nov.
Technically, it’s near term trend has turned bearish, with 10-Day simple moving average line and SuperTrend (10, 3) both turning south. This suggests that the bearish side has started to take control, and we may have more raining days to come.
Asian equity markets were mixed on Monday following major progression on US tax reform during the weekend. Nikkei slid half a percent to 22,707 points while Hang Seng climbed 0.22% to 29,138 points. Shanghai Composite and Singapore’s STI were both lower amid profit taking activities. European equities rebounded after Friday’s slump,
In Singapore, the STI climbed 10 points this morning despite a weak US session last night. This suggests that local investors remained calm against the headwind of overseas noises. Banks continued to climb on improved economic outlook, while offshore and marine sector may be under pressure after 2% drop in crude oil price overnight.
The US dollar advanced against all of its G10 peers, gaining the most against Japanese yen and Swiss Franc because anticipation of a tax overhaul strengthened the outlook of economic growth as well as inflation. This will further result in tightening monetary outlook and pave the way for more rate hikes and Fed balance sheet shrinking in the years to come. All of these suggests a stronger dollar.
On the flip side, in the long term there is rising risk of emerging market capital outflow as a result of rising US interest rates and favourable tax treatment to repatriation funds if the tax reform passes all the greenlights. Improvement in the US economy and tightened monetary policy will further strengthen the US dollar, which will reinforce EM capital outflows as well.
This downside, however, will be partially cushioned by improved macroeconomic conditions in Asian countries, especially the export-oriented China, Japan, Korea and Taiwan. As the US demand picks up and positive feedback loop is formed, Asian exporters will receive more orders and investments.
Nasdaq - Cash
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