Donald Trump’s first congressional address didn’t trigger a storm as feared, yet failed to satiate investors due to a serious lack of details. As expected, Donald Trump announced significant rise in defense budget and the reinforcement of immigration laws. He reiterated his focus on jobs creation and cited that many US companies including Ford Motor, Wal-Mart and Softbank Group announced ‘billions of dollars in investment’ which would create ‘thousands of new American jobs’, without however giving accurate numbers and a clear strategy for the future. The freshly elected US President said he would spend up to $1 trillion in infrastructure, twice as much as $500 billion hinted following his election. However, he has avoided key subjects such as the financing of the extra spending, the federal deficit, amendments to regulations and the banks.
The US border tax plan, aiming to replace the corporate income tax by 20% increase on imports and domestic sales, failed to gather an unanimous consent, given that the import-driven businesses as retailers, carmakers and refineries opposed to the plan, while export-driven businesses were delighted to be exempt of taxes.
The US stock indices traded with limited downside, as investors gave the Trump Administration the benefit of doubt, although Trump’s policy details, or lack thereof, is increasingly disconcerting. Asian traders were buyers of the US stock futures. The Dow Jones futures gained 0.25%, while the S&P 500 and Nasdaq futures advanced 0.33% and 0.27% respectively.
The US stock markets are ready to renew record at the New York open, especially given that the Federal Reserve (Fed) rate hike expectations could further boost the cross asset flows from bonds to stock markets.
On a side note, we warn that the VIX index, the volatility index on S&P500 futures, rose 6.87% to one-month highs (13%). The VIX index stepped above the past 100-day average (11.72%). Further rise in volatility to 15% and above could be interpreted as an early indication of rising anxiety vis-à-vis the US stock markets. Traders in hurry to readjust Fed expectations
The US dollar appreciated across the board, as two influential Fed members, Dudley and Williams called for an interest rate hike at the FOMC’s March meeting. In fact, prospects of significant fiscal spending could push more Fed members to the hawkish camp. The expectations of a Fed rate hike spiked up to 80%.
The euro bounced lower after hitting the 50-day moving average (1.0636) against the greenback. The divergence between the Fed and the European Central Bank (ECB) policy outlook is favourable for a further slide toward 1.0520/1.0490 (major 61.8% retracement on January 2 to January 30 recovery / Feb 21 dip) and 1.0451 (minor 76.4% retracement).
Likewise, the GBPUSD remained capped below its 50-day moving average (1.2410). The softer pound, firmer oil and commodity prices drove the FTSE 100 above the 7300p mark at the open.
Pharmaceuticals lagged on the risk-on play. AstraZeneca (-0.12%) and GlaxoSmithKline (+0.03%) open under pressure after Donald Trump urged to bring drug prices lower ‘immediately’. Some colour out of Asia
In China, the February manufacturing PMI beat estimates, as manufacturing in Australia expanded significantly faster over the same month (59.3 versus 51.2 a moth earlier). The Australian GDP printed 1.1% quarter-on-quarter in Q4, up from -0.5%q/q. Hence, Australia avoided a technical recession, a term used to define two consecutive quarters of contraction in growth. The Aussie (+0.14%) was the only G10 gainer against the US dollar. The AUDUSD rebounded from 0.7637 to 0.7700. With the rising US yields, the lack of carry appetite could dent the positive momentum in AUDUSD in the short-term, yet the pair is expected to find buyers above 0.7604 (minor 23.6% retracement on December 22 to February 22 rise) and 0.7545 (200-day moving average). The topside is seen clear up to 0.7585 /0.7800 mid-term resistance area.
The smooth market action following Trump’s speech, re-pricing of the Fed rate hike expectations and solid data from China and Australia revived a relief rally in the Asian stock markets. Nikkei (+1.44%) and Topix (+1.16%) gained as the USDJPY traded past the 100-day moving average (113.30). The bias turned neutral from negative, as 111.45/111.60 has become the mid-term support to the fresh neutral view.
Shanghai’s Composite (+0.17%) and Hang Seng index (+0.16%) lacked enthusiasm on Trump’s import tax plans.