By Vikram Subhedar
LONDON (Reuters) - Stocks recovered while the dollar rose off four-month lows on Tuesday as anxiety over Donald Trump's setback on healthcare reform gave way to tentative hopes for the U.S. president's planned stimulus policies.
Hopes that the Trump administration will now prioritise tax reforms coupled with still-robust economic data and corporate earnings forecasts spurred some investors to look past creeping doubts about Trump’s ability to deliver on campaign promises.
Europe's STOXX 600 (STOXX) rose 0.4 percent helped by financials and pharmaceutical stocks.
The dollar index against a basket of major currencies edged up 0.1 percent to 99.252 (DXY), after plumbing a trough of 98.858 overnight, its lowest level since Nov. 11.
"Risky asset markets have rebounded from yesterday’s opening low, supporting our view of the current market setback as a risk pause and not a turning point towards generally lower risk valuations," analysts at Morgan Stanley (NYSE:MS) said in a note to clients.
The Trump administration's failure to undo Obamacare raised concern among investors that planned tax reforms face a rockier road though Congress. The White House said it would take the lead in crafting legislation to overhaul the tax code, adding: "We're going to work with Congress on this."
Morgan Stanley said that given some of the savings that were to come from replacing Obamacare would be lost, the upcoming tax reform may turn out to be a smaller package or result in a higher fiscal deficit.
U.S. stock futures (ESc1) were up 0.1 percent.
The dollar steadied after its worst week since Trump’s election after talk of more rises in Federal Reserve interest rates this year.
"Clearly we shouldn't forget we are going to see at least two more hikes by the Fed this year and that there is still the potential for the next one to be pulled forward to June," said CIBC strategist Jeremy Stretch.
Sterling
In emerging markets, the South African rand and government bonds extended losses after Finance Minister Pravin Gordhan was ordered home by the president, triggering speculation of an imminent cabinet reshuffle.
Recent weakness in the dollar underpinned crude oil prices though persistent worries about oversupply kept gains in check.
Prices for front-month Brent crude futures (LCOc1), the international benchmark for oil, were up 0.6 percent. In the United States, West Texas Intermediate (WTI) crude futures (CLc1) rose 0.7 percent.