The Week in Review
- The key development last week was US President Trump’s failure to get his health care changes through Congress. The US S&P 500 slumped 1.4% on Tuesday, and meandered at these lower levels for the rest of the week. Trump has signalled he’s given up trying to make changes in this area for the foreseeable future, arguing he’ll simply let “Obamacare” implode on its own. Instead, Trump has set his sights on what the market really cares about – tax cuts!
- The UK terrorist attack, while attracting global headlines, had limited market impact. In a data light week, US durable goods, new home sales and consumer sentiment were all firm – highlighting the solid underlying momentum in the US economy. Among the Fed speakers out last week, the only notable comment was from Williams who hinted at the possibility of 4 rate rises this year – compared to the Fed’s current median estimate of only 3. Again, market impact was limited, with markets more focused on Trump’s health care failure.
- Closer to home, data was also light with the main focus being the decision by major banks to jack up home loan rates, particularly for investors. These actions, together with a looming likely crackdown on investor lending by APRA, should reduce any risk of an RBA rate hike anytime soon to deal with housing issues in Sydney/Melbourne. Minutes to the March RBA meeting released on Tuesday were also balanced, suggesting the Bank is not any closer to a tightening bias. Elsewhere, a slump in iron ore prices saw resource stocks retreat.
Likely Highlights in the Week Ahead
- Data both globally and locally this weeks is also light, suggesting markets will focus on Trump’s next moves regarding tax. Elsewhere, the UK is set to formally trigger Article 50 of the EU agreement, notifying other members of its intention to leave. The UK will then have a two-year period to re-negotiate a new deal with the EU, before all current agreements (including free market access) simply cease – leaving it in a (still reasonable) most-favoured nation status regarding trade under WTO rules. There’s also a bunch of Fed speakers again, including Yellen herself. China’s PMI manufacturing index is also out on Friday.
- Locally, private credit data on Friday will be of modest interest – particularly the degree of ongoing strength in investor property borrowing, and whether the (slightly worrying) softening in business credit last month continued.
- The post-US election “Trump Pump” finally looks to be petering out, with markets trying to find the next excuse to rally. With outright PE valuations high, the Fed sounding hawkish, and markets having had a good run in recent months, a decent correction should be on the horizon – but with so many apparently ready to “buy the dip”, the pullback so far has been fairly shallow. Indeed, a renewed focus on tax cuts by Trump might give the market renewed optimism, or at least continue to keep market pull backs well supported. Also protecting the downside is the fact the US economy is humming along, and Fed speakers remains fairly cautious in their statements.
- All up, many key markets remains trapped in recent ranges – notably US 10-year yields failed to break above 2.6%, and are back at 2.4%. The US dollar is also back testing support around the break-out levels following Trump’s election last year. Locally, the S&P/ASX 200 has tried and failed several times to break 5800, ditto 2400 on the US S&P 500. Rather than serious market corrections, we could be entering a period of frustrating sideways movement.
Have a great week!