FTSE +14 points at 7267
DAX +8 points at 11830
CAC +10 points at 4855
Euro Stoxx 50 +8 points at 3317
Today is finally the day Donald Trump will speak before the Congress for the first time. Markets, especially the US stock markets, are holding their breath as Trump prepares to unveil his much-expected fiscal plan. According to White House aides, US President Trump would propose $54 billion increase in defense spending, which would be 10% rise on the current defense budget. Such historical rise in the military budget would certainly imply sharp cuts in several federal agencies’ budgets to balance the sheet. Consequent cuts are expected for the State Department and the Environmental Protection Agency (EPA).
Trump also vowed to spend ‘big’ in infrastructure. Recently he had hinted at as much as $500 billion infrastructure spending, besides ‘phenomenal’ corporate tax cuts. Based on Trump’s early promises, the expectations are high. The US stocks extended gains as we move toward Trump’s address in Washington tonight. The Dow Jones (0.08%) extended record for the twelve consecutive sessions to $20851. The S&P 500 (0.10%) traded at the record high of $2371.54.
Today’s major question is could it be a buy-the-rumour sell-the-fact? Or could Trump surprise the markets beyond the actual outrageous pricing? Hedging positions and stops could amplify a potential sell-off in the US stock markets in case of disappointment in the US session.
The US dollar remained rangebound against the G10 majors in Asia. The probability of a Federal Reserve (Fed) rate hike in March is priced in at 50% in the US sovereign bond market.
The USD/JPY traded in the tight range of 112.45/112.82 in Tokyo, after preliminary data revealed an unexpected 0.8% month-on-month contraction in Japan’s industrial production in January. Soft data revived the Bank of Japan’s (BoJ) doves, as Japan’s export driven recovery plans need the yen to remain cheap. In opposition, the recent bearish reversal in USD/JPY suggests the possibility of a further appreciation in yen against the greenback. The USD/JPY could slide down to 110.60/110.00 (Fibonacci 50% level on post-Trump rally /psychological level). Offers are presumed pre-113.20 (100-day moving average).
Nikkei (+0.06%) and TOPIX (+0.09%) closed the day flat after being in demand the most of the session; energy stocks (+0.94%) lead gains.
The WTI (+0.20%) deals with solid offers pre-$55. A positive breakout would cheer up the latent buyers and pave the way for a positive shift in the price range to $55/$57. On the other hand, failure to break above this level could trigger a short-term downside correction to $53.40 / $53.00 (50-day moving average / weekly support).
In China, the People’s Bank of China (PBoC) said it would allow foreign firms to repatriate profits normally. China is also preparing to open its sovereign bond market to foreign investors and allow them to conduct FX derivative business to hedge against the currency risks. In summary, China speeds up reforms to halt the decline in growth. According to a recent Bloomberg survey, analysts expect the Chinese government to revise the growth target to 6.5% in 2017, down from 6.5%-7.00% range a year earlier.
The AUD/USD consolidates the positive trend, as the 50-day moving average has crossed above 100 and 200-day moving averages. This is a solid bullish signal for an extension of gains toward 0.7775/0.7800 area, especially as the iron ore is set for its best run in five years. Iron ore futures in Dalian (China) declined from three-year high levels yet for the fourth session over five. But for now, the pause is interpreted as a consolidation after the iron ore future prices rose by more than 35% since December. Therefore, the significant rise in iron ore demand should remain supportive of a further AUD demand. Any Trump related sell-off could provide an additional support from carry traders, as the US 10-year yields remain rangebound between 2.30%-2.40%. The EUR/AUD extends losses below the 1.40 handle.
The EUR/USD remained capped below the 50-day moving average (1.0640) yesterday, although the French 10-year yields hit a month low on hopes that the rise in Emmanuel Macron’s popularity could be an important barrier to much-feared Le Pen victory in the upcoming French presidential election. On the other hand, the Eurozone banks cut their cross-border lending given the rising stability concerns at the heart of a monetary union in crisis. The lending among the EZ banks fell by 6% in January. Traders seek top selling opportunities, especially on a potential Trump-related rally.
EUR/USD offers are touted at 1.0647 /1.0680 (100-day moving average / weekly resistance), before the critical 1.0705 (38.20% retracement on post-Trump decline). From a policy perspective, the European Central Bank (ECB) is not expected to announce another round of TLTRO (Targeted Long-Term Refinancing Operations) although the current program is due to end next month. The latter could avoid additional sell-off in the EUR/USD yet will certainly not discourage sellers from taking fresh short euro positions.
Across the Channel, the pound trades on a slippery ground against the greenback. Cable traded down to 1.2383 on speculations that Scotland could call for another independence referendum. The GBP/USD consolidated between 1.2422/1.2451 in Asia.
The FTSE 100 is set for a slightly positive open on softer pound and higher demand in energy company shares in the continuation of a positive session for oil industry in Asia.