The decline in US stocks last week was the biggest one week decline since last year’s US election, and it surely reflects some concern that the optimism about President Trump’s various programs for reform may well have been somewhat misplaced.
President Trump is already having to row back on his assertion that tax reform would have to wait until health reform had been dealt with. The President’s action in pulling the health care bill is undoubtedly a setback particularly since distaste for Obamacare was one area where there was a great deal of consensus amongst Republicans.
The inability of the President to gain the required support here doesn’t bode well for further interactions with respect to other areas of reform on tax and banking as well as his infrastructure plans, though approval plans for the Keystone pipeline did get the green light on Friday.
This failure would seem to suggest that investor optimism is likely to be misplaced if they think that it will be easier for President Trump to shift gears and focus on tax reform and fare any better than he has on health care reform. If anything it will be much harder given that the consensus on this is probably likely to be much more difficult to achieve than on health care, which suggests that a lot of the optimism about the reflation and fiscal stimulus trade may well have to be reassessed as well.
Bond markets are already starting to reflect this change with a sharp decline in yields in the past two weeks, in the wake of this month's Fed rate hike, begging the question as to whether US stock markets might well have further to fall.
European markets also paused for breath last week despite better than expected economic data from across the region, with a sharp slide in oil prices helping temper the recent upward momentum, with the FTSE100 in particular underperforming.
Another rise in US rig counts last week reinforced the inability of the recent OPEC production cuts to make a dent in the current inventory overhang, which saw oil prices hit four month lows last week.
The weekend recommendation by OPEC and non-OPEC members to extend their recently agreed production quotas beyond June may well help support prices in the short term, however the ability of US shale producers to adapt offset these cuts and has already meant that inventory reduction has proved to be somewhat elusive.
This flexibility on the part of US shale producers could well see crude prices fall further, particularly since oil markets have been geared to a move higher for the last few weeks.
It’s also set to be a big week for the pound as the UK government gets set to fire the starting gun on the process to leave the European Union, and trigger Article 50 on Wednesday. This could well prompt some sterling weakness in the short term; however there is the possibility that it could prompt a sharp counter reaction. After all it’s not as if anything much will change in the short term.
On the data front we have the latest German IFO Business climate survey for March, which is expected to see a slight pickup in March, to 111.2 from 111, though we could see an upside surprise given how strong last week’s flash PMI’s turned out to be.
EURUSD – key resistance remains in and around the 1.0830/40 area, with the 200 day MA also coming into view at 1.0945 on a break of 1.0850. Pullbacks need to hold above 1.0680 for a test of the 200 day MA to pan out.
GBPUSD – Friday’s pullback from last week’s high at 1.2532 could well see a decline back towards the 1.2380 area in the short term. While above 1.2200 the upside momentum remains intact for a move towards the February highs above the 1.2700 area, where we also have the 200 day MA.
EURGBP – currently finding resistance above the 0.8670 area with the potential to head towards 0.8710, and trend line resistance from the 14th March highs at 0.8785. Above 0.8730 we could head back towards the highs at the 0.8800 area.
USDJPY – currently finding support around the 110.60 area, but needs to get back above the 111.60 area to stabilise and head back towards 112.50. The short term bias has shifted towards the 110.20 area and potentially 108.50.
FTSE100 is expected to open 43 points lower at 7,293
DAX is expected to open 46 points lower at 12,018
CAC40 is expected to open 23 points lower at 4,997
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