Risk rally on hold ahead of the weekend
(Arnaud Masset, market analyst)
After rallying strongly during the first couple of weeks of February, the US dollar suffered a substantial sell-off as investors ended the week on the back foot. The reflation trade that has been fuelled by Donald Trump’s announcement regarding a “phenomenal” tax plan is now running out of steam as investors lose faith amid a serious lack of details. Indeed, President Trump has been back-pedaling on many of his campaign promises and/or early announcements as president. There are therefore growing concerns among investors that he will significantly under-deliver.
After losing 1% against the single currency, the greenback stabilised above 1.06 ahead of the weekend. The dollar index rose 0.20% as the GBP and the EUR slid 0.24% and 0.27% respectively. Only the Japanese yen was able to hold ground - rising 0.28% - as investors seek safe haven assets. Gold was also gaining ground, climbing 0.15% to 1,240.
On the equity side, shares across the globe fell sharply on Friday. The Nikkei slid 0.58%, while the broader Topix Index was down 0.42%. In Europe, the Euro Stoxx 600 was down 0.40%. US futures were also blinking red on the screen. Treasury yields are moving south as investors rushed into bonds. There is little hope for this dynamic to reverse during the day as the economic calendar is really light and no press conference is expected on either the political or monetary policy fronts.
Strong US data supports stock rally
(Peter Rosenstreich, head of market strategy)
The Philly Fed manufacturing index failed to significantly correct as many analysts predicted after a strong November. Instead, it rose to a new post financial crisis high. The business confidence index surged to 43.3 against an expected 18. The employment portion of the index was softer than one would have expected give the topline read, especially regional manufacturing labor. However, the overall tone of the labor market was solid. Today's report reinforces our view of a modest improvement in the health of the US economy. We retain our expectations of two 25bp hikes beginning in June but cannot rule out a proactive hike in March (Fed Fund market pricing in 30% probability). The strong growth expectation also supports higher US equity prices despite tailing P/E above historical average. Lower interest rates and global volatility combined with stronger EPS estimates and fundamental data suggest new highers are justified. However, the rally will need Trump to provide promised tax reform in order to trade higher. And on this fact we are concerned. As expressed yesterday we have yet to view Trump as a successful statesman rather then just a bully, indicating that all policy will be challenged (even policy with bi partisan support). Our expectations for a sustained USD rally remain weak and we see USD buying as an opportunity to reload USD shorts (especially in select EM currencies).