All eyes are on the White House today, which is due to make the ‘big announcement’ on Donald Trump’s major tax reforms.
The US stocks are on the rise, as Trump prepares to unveil significant tax cuts on corporate and personal income. We already know that he plans to dampen the corporate tax rate to 15% from 35%, the top income tax rate to 15% from 39.6%, and propose 10% increase on offshore earnings.
Solid US corporate earnings gave an additional boost to stock investors on Tuesday.
As a result, Wall Street rolling index is consolidating above the $21’000 level. The all-time high ($21’162) could be bettered within this week, if investors are satisfied with the White House announcement. If not, we could see a renewed downside correction toward $20’740 (50-day moving average) and $20’293 (minor 23.6% retracement on Trump-reflation rally).
Likewise, the S&P 500 has tested the all-time high of $2’400. Solid earnings from Caterpillar (NYSE:CAT) and McDonald’s (NYSE:MCD) helped further boosting the appetite before the White House announcement.
In summary, money moves from bonds to equities, lifting the bond yields higher. The US 10-year yields are up to 2.33%.
European and the UK stocks are set for a flat open. The FTSE daily rolling index has stabilized above the 7270p (200-day moving average) in the overnight session, yet with a softer positive momentum on the hourly basis.
What could go wrong? An announcement highlighting the tax cuts without mentioning how to finance the multi-billion dollar deficit it would add to the government’s budget, could dampen the mood. Therefore, it is worth mentioning that the downside risks on the stock markets prevail due to an eventual lack of details, as it has often been the case over the first 100 days of Trump’s presidency.
The risk-on was also on Asian traders’ plate on Wednesday. Nikkei (+0.98%) and Topix (+1.06%) gained as the USD/JPY advanced to 111.39 in Tokyo. Improved risk appetite and higher US yields could encourage a further rise in the USD/JPY. The next critical resistance is eyed at 112.13 (major 38.2% retracement on December – April decline), if surpassed, should signal a mid-term bullish reversal and bring the 115.00 mark back on the radar.
The Bank of Japan (BoJ) is expected to maintain the status quo at Thursday’s monetary policy meeting. The BoJ should also deliver a dovish accompanying statement, based on Governor Kuroda’s comments that the BoJ will remain easy until the 2% inflation target is reached. Due on Friday, the March inflation ex-fresh food may have steadied at 0.2% year-on-year, comfortably far from the BoJ’s policy target.
The euro has had a solid week so far, after the first round of the French election was perceived as a major relief from the markets, which already declared Macron the next President of France. The far-right finalist Marine Le Pen is given 39% chances of winning the final round of the election versus 61% for the centrist Emmanuel Macron.
The French election considered out of the way, EUR-traders’ attention shifts to the European Central Bank (ECB). The ECB will meet on Thursday and will likely keep the policy unchanged. Yet, the market is calling for a more hawkish accompanying statement from President Draghi. He is expected to give more details about the Quantitative Easing (QE) exit plans at the June meeting, six months earlier than previously anticipated. In this respect, Draghi is expected to adopt his communiqué as early as this week.
On a side note, it is well possible that the markets have gone well head of themselves, given that we could also expect the ECB to be less emotional and more pragmatic and wait until the official result of the French election before moving into action.
The EUR/USD extended gains to 1.0950 as the ECB hawks are taking the lead before Thursday’s meeting. The 1.10 level is the next natural target and wet the EUR-bulls’ appetite. Support to the positive trend that started in April is seen at 1.0860 (minor 23.6% retrace on April rise) and the critical 1.0804 (major 38.2% retrace).
German 10-year yields spiked to 0.38% for the first time in April, as a combined result of the first round of the French election and anticipation of the ECB QE exit. French 10-year yields remained capped below 1.00%.
On the data front, the inflation in Australia stagnated at 0.5% q/q in the first quarter. The consumer prices rose 2.1% on yearly basis from 1.5%, marginally lower than 2.2% expected by analysts. The AUD/USD was rapidly handed back to the bears after testing 0.7554 in Sydney. Sellers are touted above 0.7545 (200-day moving average), betting on a re-test of the 0.7472 (March support), before 0.7454 (50% retracement on December – March rise).
Quick glance at technicals on LCG Trader:
DAX intraday: support seen at 12420.00 (pivot). Long positions above 12420.00 with targets at 12590.00 & 12655.00 in extension. Below 12420.00 look for further downside with 12335.00 & 12267.00.
EUR/JPY intraday: further upside. Long positions above 120.40 (pivot) with targets at 122.90 & 123.75 in extension. Below 120.40, downside potential to 119.45 & 118.85. RSI is bullish and calls for further upside.
USD/CAD intraday: bullish bias above 1.3540 (pivot). Long positions above 1.3540 with targets at 1.3625 & 1.3660 in extension. Below 1.3540, downside potential to 1.3490 & 1.3450.
Gold spot intraday: downside prevails. Short positions below 1267.50 (pivot) with targets at 1260.00 & 1256.00 (major 38.2% Fibonacci support) in extension. Above 1267.50, upside potential to 1272.00 & 1275.00.