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S&P 500 and Dollar Rally on Tax Talk, But is There Trend?

S&P 500 and Dollar Rally on Tax Talk, But is There Trend?

2017-02-10 04:22:00
John Kicklighter, Chief Strategist
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Talking Points:

• US President Trump hint of new, favorable tax policy in 2-3 weeks sends US equities, Dollar climbing

• Risk appetite is more difficult to sustain than just the loose promise of a favorable policy development

• The Trump-Abe meeting, Italy credit rating, UofM sentiment survey, China lending and UK trade are top event risk Friday

See what live coverage is scheduled to cover key event risk for the FX and capital markets on the DailyFX Webinar Calendar

Finally, a move from the market other than a listless change in tack within congestion. Both US equities (as a lead on risk-oriented assets) and the Dollar advanced with technical ambition this past session. The question - as it always is for traders - is the degree of follow through to this move. The motivation for the initial wave was another unexpected update from the US President. During a meeting with airline executives, Donald Trump said new, favorable tax policy would be announced in the next two to three weeks. Along with infrastructure investment, this was one of the key policy commitments investors latched on to after the election to project favorable winds for the US economy and business sector.

However, the flush of hope in coming corporate and individual tax cuts may not provide the market lift the administration may want. Front-running speculation exhausted itself after the early November election; and the critical economic programs anticipated have yet to be realized. With benchmarks like the S&P 500 at a record high and VIX already scraping the bottome of its historical range, there will be hesitation in throwing caution to the wind. For the Dollar, the positive capital inflow expectations with the tax speculation contradicts the Dollar restraint the executive branch has promoted with policy and evaluations these past weeks. The 'Strong Dollar' policy has come under implicit fire, which makes a rally difficult to fuel through the same channel.

Ahead, the Dollar has good occassion to play the most motivated mover in the market. For scheduled event risk, the University of Michigan consumer sentiment survey can assess the market's sensitivity to policy and economic connections for translation between policy and price action. Meanwhile, import inflation will cater to monetary speculation. All things considered, the meeting between the US President and Japanese Prime Minister Shinzo Abo may prove the most pressing event. Trade policy is a key driver, and this relationship has been shadowed by accusations of currency manipulation with other attracks (Mexico, China, Germany) hanging in the air. Elsewhere, the Italian sovereign debt review will remind us of the ever-lingering European financial crisis; Bitcoin tumbled this past session due the first actions of the PBoC's actions on the digital currency exchanges; and technicals have solidified range structures that will be tested by volatility. We discuss all of this with an eye to the final session of the week in today's trading Video.

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