Equity markets have started the week in an extremely enthusiastic manner anticipating Tax Reform holiday cheer. The House will presumably hold a vote on the tax reform bill Tuesday afternoon, paving the way for the Senate to vote either Tuesday or Wednesday and the bill will finally land on President Trump’s desk shortly after that.
Wall Street’s S&P 500, Dow and NASDAQ all closed at fresh records with the Tech-laden index courting the 7,000 level for the first time but closing just below.
There’s a definite buzz on the street as we approach the finish line for the year; there are few if signs of buyers' fatigue. Senate leaders feel incredibly confident that the bill will pass, but hey, crazier things have happened.
The dollar is still looking for its mojo and despite the US yields rising and effervescent US equity market the dollar fell under some minor pressure, perhaps reflecting the expected market tone in 2018. For the dollar to stage a significant rally, it’s in desperate need of an inflation injection as at this moment, as markets remain overly skeptical that this tax reform bill will deliver a substantial bump to the US economy. But it’s not only forex traders; Moody’s also chimed in with a pessimistic long-term view.
Outside of the rangy year-end G-10 markets, the focus was on EM political developments with both the South African rand, and the Indian rupee stealing the show.
The rand was the best performer overnight as the street views the Cyril Ramaphosa election as enormously market-friendly. But while the market remains in a state of euphoria, at some point, a sanity check will take place.The South African economy has enormous structural issues, so ultimately it will be the incoming reforms and economic policy that will eventually decide the market future direction. I suspect the market will position for an eventual correction.
The rupee was taken for a wild ride yesterday as the market read far too much into the first headline story that the ruling party was in tight competition sending the market to 64.72 in a frenzied manner. But in the end, the BFP party claimed a victory of sorts but M. Modi lost 14 seats to the main opposition party. The one-month NDF held steady trading ranges overnight as spot traded just above 64.20. But the 14 seat swing has left an element of political doubt in traders minds, and the rupee rally could bottom out heading for year-end as dealers start to reduce positive election speculative wagers.
Fed Chatter
The Federal Reserve board's opposite bookends were on the wires overnight. Minneapolis Federal Reserve President and noted dove, Neel Kashkari said low inflation, wage weakness and a flattening yield curve caused him to dissent at last week’s vote.
His hawkish colleague, San Francisco Fed President John Williams, said: “We are operating on all cylinders which are, I think, a positive sign of the sustainability of the expansion.”
Oil prices
Oil gains backpeddled after a last-minute resolution as the oil workers in Nigeria called off the strike, easing supply concerns.
Oil prices remain supported by Forties pipeline issues and with no definite timeline for the repairs to finish it will presumably underpin Brent in the near-term. However, US production continues to ramp up. And with the IEA chiming in, shale supply is expected to grow more than OPEC estimates. Tomorrow's inventory report is shaping up to be an all-hands-on-deck event.
Overnight US production worries won the day. WTI dropped from $57.65 to $56.80/b, but prices bounced to $57.15/b at the close on short covering.
The Euro
The euro traded above 1.1800, but the move was tempered by political noise which may rear its head at the end of the week, with the Catalonia election in Spain this Thursday. Polls are suggesting a tight race between the two opposing party views on independence.
The ECB will likely continue to subdue euro topside moves, and for the euro to take off it requires a hawkish ECB narrative that might not be forthcoming in early 2018.
The Japanese Yen
Given the lack of action, overnight its hard not to think yen traders are looking to buy the rumor sell the fact on the tax bump. Too dull a trade in my view and time is probably better spent planning Xmas dinner.
The Australian Dollar
RBA minutes are kicking off the trading session in Singapore. After last week's hawkish policy statement, the bar was set relatively high for a roaring follow-up in the minutes. The Aussie barely blinked as the RBA offered up little new.
The Malaysian Ringgit
The market remains very quiet heading into year-end, but the optimistic side of global growth and resilient commodity prices should steer the MYR through year-end on an even keel.