Although some of the selling momentum experienced yesterday throughout the stock markets has cooled down, the market headlines across the globe continue to be dominated by the executive order from Donald Trump to ban certain nationals from entering the United States.
While it has to be taken into account that the record moves seen in the stock markets last week would increase the risks of some investors being tempted to take profits from positions, there is no doubting that this move from Trump has caused outrage across the globe and such actions represent a risk to the market sentiment. There was, for example, some market movement following the news overnight that Donald Trump fired the acting US Attorney General for questioning the legality of his immigration clampdown, contributing towards losses being seen across the trading session in Asia.
Investors definitely need to be aware that the markets behaved very suddenly towards pricing in heavy premiums following the US election outcome based on fiscal promises, but so far it is the far-right agenda that we have seen the most movement on from the Trump administration.
Fiscal stimulus, job growth and infrastructure spending were the contributors towards the milestone levels in the stock markets, although the agenda so far has been more heavily pointed towards protectionism and moving the United States away from globalisation – quite the opposite in comparison to the “partnership and peace” message Trump delivered following his election victory that soothed investors nerves following his election victory.
I do believe that investors need clarity on how the Trump administration will move forward with fiscal stimulus and infrastructure spending, rather than blacklisting certain nationals and getting into a war of words with Mexico over the wall, otherwise there is a risk of the stock markets entering a correction. Basically, the previous moves that were seen are not justified without clarity on what investors priced in.
Dollar still slipping against emerging currencies While the dollar has edged higher against emerging currencies in Europe such as the Turkish lira and Russian ruble, the greenback has slipped somewhat against Asian currencies like the Malaysian ringgit, Thai baht and Indian rupee. These are marginal losses but likely related to the overwhelming consensus that the Federal Reserve will be leaving US interest rates unchanged tomorrow. The Asian currencies in general are among those most vulnerable to higher US interest rates, especially considering the amount of bonds that are held in these nations from foreign investors.
What needs to be taken into account with the US interest rate decision tomorrow is that the Federal Reserve is likely to highlight the area of uncertainty over the US fiscal direction following the Trump inauguration. This might be seen as a minor issue now, but if Trump is not able to deliver on fiscal intentions and instead continues to isolate the United States from globalisation, it does risk the Federal Reserve needing to keep US interest rate policy unchanged for longer.
EUR/USD back above 1.07 The EUR/USD has managed to move back above 1.07 on Tuesday following the news that consumer prices in January increased by 1.8%. This is a significant annual increase and will once again open the debate over whether ECB President Mario Draghi will need to provide guidance on the ECB stimulus program and whether the current level of stimulus needs to be tailed back following inflation moving back towards the central bank goal of 2%. Expect for Mario Draghi to continue stressing that inflation needs to be consistently around the target level at 2%, before the central bank acts and this would also dissuade investors away from pricing in further recoveries into the euro.
GBP/USD looks at risk to falling below 1.24 There has been pressure on the British pound following the reports earlier this morning that Theresa May might be aiming to invoke Article 50 earlier than expected on March 9. It is quite surprising that Theresa May is reportedly aiming to pull the trigger on Article 50 earlier in March rather than later in the month, especially considering the continuous uncertainty over the strategy to exit the European Union. Investors are also likely to be kept on their toes over the next two days as MPs begin a two-day debate on the European Union bill, allowing the government to trigger Article 50.
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