Markets Lower On Tax Reform Concerns; Brexit In Focus

Overnight the US equity market slumped, and the dollar eased back as concerns over the US tax reform weighed on sentiment. All major US equity indices were lower, with the Dow breaking a five-session winning streak, in which four sessions saw it hit record highs.

Tax reform stumbles
Downbeat sentiment came after the tax reform hit another stumbling block, causing investors to fret over whether the bill will ever clear the Senate. Florida Senator Marco Rubio said that he would not back the Republican tax reform bill without a credit for poorer working families being included. His opposition is a problem because of the tight margins of 52-48 in the Senate. Republicans can’t afford to lose more than two votes, or the bill won’t get the necessary approval. Adding to tension, several Republican Senators are experiencing health problems, which could also prevent them voting.

Following Rubio’s comment US indices took a turn for the worse. Investors have been watching the twists and turns of this bill with great focus, because of its expected impact on big firms.

US futures are pointing to a mixed start of Friday. Tax reform developments are expected to direct trading once again. Any signs of the Republicans squeezing the deal through, could see the markets quickly recoup yesterday's losses.

US retail sales lift the dollar
The dollar index eased back from an earlier high, struck on news that retail sales beat analysts’ estimates. The dollar jumped early on as retail sales data registered a 0.8% increase month on month in November, twice more than the expected figure. This shows that consumer demand strengthened as the all-important Christmas shopping season kicked off, which is good news for the economy and potentially inflation going forwards.

Whilst the dollar index closed in positive territory, the dollar traded mixed versus certain currencies. GBP/USD closed higher, EUR/USD fell, following the ECB meeting and has failed to pick up since.

ECB inflation forecast knocks euro

ECB President Draghi lifted growth forecasts for the bloc, yet investors were left disappointed by inflation projections. These numbers showed that despite strong economic growth, eurozone inflation is still on course to undershoot in 2020 at 1.7%, effectivly killing any remaining hope of a rate rise in the not too distant future.

The eurozone economic calendar is light today, which means the euro could find itself drifting lower on a lack of fresh catalysts towards a support at €1.1765 before breaking down to €1.1740.

Brexit back in the spotlight
After central bank mania over the last few days, Brexit developments will once again be the main focus as Theresa May continues meetings in Brussels. In the previous session, she won the backing of EU leaders who warned MP’s in Westminster, over striking down a Brexit deal at the last minute. The warning came after Theresa May suffered her first defeat in the Commons, weakening her political position considerably and giving Parliament the right to vote on any final Brexit bill.

The pound has traded higher versus the dollar for the past two consecutive sessions and has also kicked off Friday on the front foot. With few other distraction Brexit headlines and possibly a little Friday fatigue could drive trading.

The FTSE looks set to take the lead from weaker sessions in US and Asia overnight. FTSE futures are pointing to start around 0.3% lower this morning at 7435. Should a stronger pound strongly influence FTSE trading, we could see the index tumble towards 7400 heading into the weekend.

Opening calls
FTSE to open 9 points lower at 7439
DAX to open 23 points lower at 13,045
CAC to open 12 points lower at 5345