Global markets are in recovery mode after a sharp midweek tumble that handed a number of equities benchmarks their worst one-day falls since the US presidential election. Divisions within the US Republican party over President Donald Trump’s plans to repeal Obamacare spurred concerns among investors that Mr Trump might struggle to get his other pro-business policies passed.
Wall Street turned lower in late trade last night as news emerged that a crucial House vote on the new Republican healthcare bill would be delayed. Paul Ryan, the Republican Speaker of the House, abandoned the vote after efforts by the White House to convince conservative rebels to support the bill failed.
The S&P 500 reversed a moderate early advance to close 0.1 per cent lower at 2,346, while the Dow Jones Industrial Average and the Nasdaq Composite also shed earlier gains. The S&P had risen as much as 0.4 per cent earlier in the session. On Tuesday, the benchmark US equity index suffered its first fall of more than 1 per cent since the US presidential election in November, prompting many market observers to warn that the “Trump reflation trade” might be running out of steam.
The outcome of the vote to repeal the US Affordable Care Act and replace it with the American Health Care Act would provide important clues as to “how revolutionary a Trump administration can be”, said Jim Reid, macro strategist at Deutsche Bank. “If, in the honeymoon period of the new administration, they can’t pass a bill replacing Obamacare which is very unpopular with the Republicans, then it clearly will dramatically reduce expectations of wider tax reform. “Pass it and ‘Trump trades’ may get back some of their recent lost energy.” John Higgins at Capital Economics argued that, even if the healthcare bill was defeated, Mr Trump’s planned fiscal stimulus would merely be delayed rather than scuppered. But he added: “We still believe that investors in the stock market have put too much emphasis on the boost to earnings that may result from changes in the tax code and not enough on the drag that is likely to stem from further strength in the labour market and the dollar. “We think the post-election party balloon will continue to deflate and are sticking to our view that the S&P 500 will end this year at 2,300.”
The vote has been delayed to later on Friday, with Mr Trump issuing an ultimatum to House Republicans that they either pass the bill overhauling the nation’s healthcare system or reject it and he will move on to the rest of his legislative agenda. The US dollar index is 0.2 per cent higher at 99.965, eyeing its first back-to-back daily gain in almost a fortnight.
The UK market underperformed, however, as sterling maintained its recent upward momentum against the dollar. The FTSE 100 edged up 0.2 per cent as the pound rose 0.3 per cent to a one-month high of $1.2519, and 0.4 per cent versus the euro to €1.1606.
Sterling’s latest leg higher came in response to data showing that UK retail sales rose 1.4 per cent last month, way ahead of expectations, while the year-on-year rate of growth climbed to 3.7 per cent from 1 per cent in January. But economists were far from excited about the data. “Taking the three months to February, sales volumes declined by 1.4 per cent on the previous three months,” said Philip Shaw at Investec. “This may well exaggerate the underlying slowdown, we are not convinced that sales are actually falling. But the main point is that the gain of close to 5 per cent recorded in 2016 is not going to be repeated in 2017.”
The euro slipped 0.1 per cent against the dollar to $1.0784, although the US currency was down 0.2 per cent versus the yen at a four-month low of ¥110.89. There was little response in the markets to the European Central Bank’s latest allocation of cheap loans to banks under the final TLTRO2 operation. The headline figure significantly beat expectations with €233.5bn allotted to 474 banks. While the high figure arguably augurs well for lending growth, it also no doubt reflects recent signals from certain policymakers that the ECB might exit its negative rate policy before too long.
The New Zealand dollar was down 0.2 per cent to US$0.7030 after the country’s central bank held interest rates at a record low of 1.75 per cent and played down the prospects for possible tightening this year. The Australian dollar was down 0.2 per cent at $0.7614 and facing a four-day losing streak — its longest this year. Also weak on Friday was the British pound, down 0.3 per cent at $1.248 and looking to end a three-day run.
EUR/USD which rose to a high above 1.0785 was sold to a low around 1.0760 as US healthcare news dominated once again. The buck was buoyed by clarity that the House will vote on the healthcare bill between 18:00 to 20:00GMT tonight and hawkish comments from Dallas Fed Robert Kaplan. In the data space, we get a flurry of flash manufacturing and services PMI reports from the Eurozone, while the US durable goods orders and flash manufacturing PMI data will be reported in the North American session. In terms of technicals, Tuesday’s low at 1.0717 is our first level of support followed by March 16th low at 1.0704. On the upside, yesterday’s high at 1.0804 and Wednesday’s high at 1.0825 are in focus.
GBP/USD slid to a low near 1.2470 amid a generalised demand for the greenback and comments from BoE MPC member Vlieghe who said he does not believe that higher inflation rates will lead to higher rates. No data scheduled today in the UK, leaving focus on US durable goods orders and flash manufacturing PMI data later in the North American session. From a technical view, yesterday’s low at 1.2459 may offer some support ahead of Wednesday’s low at 1.2421. On the upside, the overnight high at 1.2522 and the February 23rd high at 1.2570 are in focus.
Having hit fresh four-month lows in yesterday’s session, Usd/Jpy staged a good recovery to above 111.40 as hawkish Fed comments from Kaplan and news that the House will vote on the healthcare bill Friday afternoon gave a prop to the buck. From a technical view, yesterday’s high at 111.57 is our first level of resistance followed by Wednesday’s high at 111.79. In terms of support, yesterday’s low at 110.60 and the November 22nd low at 110.23 are on focus.
GBP/EUR is lower in early European trade after BoE policymaker Vlieghe played down the chance of rate hike in response to higher inflation levels. The pair which rose to a high above 1.1600 in early Asian trade was sold to a low around 1.1575 in recent activity. From a technical view, yesterday’s low at 1.1551 may offer some support ahead of Tuesday’s low at 1.1492. On the upside, the March 2nd/February 17th lows at 1.1638/36 may offer some resistance ahead of March 2nd high at 1.1698.