US Indices climb higher on tax reform optimism; Catalan Vote Sends Ibex And Euro Lower
US stocks were once again higher overnight, as more tax reform announcements boosted the indices. Big firms such as Wells Fargo (NYSE:WFC), Boeing (NYSE:BA), AT&T (NYSE:T) and Comcast (NASDAQ:CMCSA) pledged to spend the savings they will make from the tax reform, on higher wages and construction. The share price of these stocks gained substantially, except Boeing; they are set to be big beneficiaries of the tax reform. The pledge to increase wages is particularly relevant at the moment, given that US average hourly wages are not moving higher, even as the labour market tightens, and stubbornly low wage growth adds to the Federal Reserve’s inflation mystery.
US Inflation in focus
Today we will learn more about the state of inflation in the US, with the release of the Personal Consumption Expenditure (PCE), this is the Fed’s preferred measure of inflation. Fed officials are expressing an increasing amount of concern over the sluggish inflation in the US, which refuses to hit the Fed’s 2% target despite 3.2% economic growth and unemployment at historic lows. Core PCE us expected to have picked up in November to 1.5%, from 1.4%. Should the reading be stronger than anticipated, the dollar which has steadily lost ground all week but reversed early on Friday, could continue climb higher.
Pro-independence wins majority In Catalonia
European bourses are pointing to a softer start on Friday, with the Spanish IBEX standing out as a noticeable loser. The calling of regional elections in Catalonia, Spain, appears to have backfired for the Spanish Government as the pro-independence parties won enough seats to form a regional coalition government. The three pro-independence parties won 70 of the 135 seats, crucially ahead of the 68 needed. However, it remains to be seen whether these three parties are able to create a government between them, especially given their different views to solving the same problem.
Even if these three parties manage to form a coalition, we are unlikely to see a repeat of Octobers’ violent clashes on the streets following the illegal independence referendum. The road to independence will be a struggle given that Madrid currently rules over Catalonia and that outside of Catalonia most sided with Madrid and refused to acknowledge Catalonia’s independence. However most parties appear to agree that dialogue is the way forward.
EUR/USD under pressure
Interestingly in October, the IBEX fell lower on the separatist political concerns, whilst the euro remained solid, suggesting that the markets viewed the issue as a Spanish domestic political issue, rather than a eurozone wide one. This time, the euro has also reacted, falling sharply lower, hitting $1.1815 before rebounding slightly to $1.1845. The euro is pricing in further political risk between the Spanish government and the Catalan regional government, which potentially comes at a time when political risk in Germany could also become a bigger concern, given that the political vacuum there still hasn’t been filled.
Opening calls
FTSE to open 18 points lower at 7585
DAX to open 22 points lower at 13,087
CAC to open 12 points lower at 5373