Article by ForexTime
“Great optimism for future of U.S. business, AND JOBS, with the DOW having an 11th straight record close. Big tax & regulation cuts coming!”.
This was President Trump’s tweet on Saturday after the Dow posted its longest streak of records in three decades.
I totally agree with this statement and give the “11th straight record close” credit to him as market fundamentals alone are not enough to justify current valuation levels where S&P’s trailing 12-month price to earnings ratio sits at 21.5 when it’s 5 and 10 year’s average are at 16.7 and 16.1 respectively.
Tuesday will be Trump’s chance to add fuel to the rally when he addresses the joint session of Congress, and since markets are already pricing in lot of good news, any disappointment will provide a catalyst for profit taking.
The newly appointed Treasury Secretary, Steven Mnuchin, indicated that tax reforms should pass before Congress’ August recess, and this is what should be confirmed by the President on Tuesday along with policies on spending and trade. I believe it’s time to see a shift in his tone, and realigning his priorities from what we’ve seen in the past couple of weeks. A clear plan is required at this stage to keep the rally in equities alive, although I don’t see much more potential to the upside.
Gold’s performance also indicates that investors are becoming more skeptical concerning the equities rally. The yellow metal surged to highest levels since November 11 on Friday, to trade above $1,260. The performance of equities and gold suggest that investors don’t want to give up on further potential gains in stocks, but at the same time they’re hedging against a steep correction which will continue to provide support for gold.
Interestingly, the U.S. dollar did not perform in a similar fashion to stocks. Hawkish Fed, strong data, and shifting in markets expectations towards higher interest rates all failed to provide the greenback a sound push. This can be explained by Mnuchin’s comments, when he indicated that significant tax reforms could raise growth above 3% in 2018, meaning that there will be recognition lag to growth from the time fiscal policies are implemented, and this doesn’t require monetary policy to tighten at a fast pace in 2017.
Next week we’ll see if Mnuchin views reflect in Fed speeches, with Fed presidents, John Williams, Robert Kaplan, Lael Brainard, Stanley Fischer, and Fed Chair Janet Yellen scheduled to speak. It will also be busy on the economic front with lot of data to digest including durable goods orders, revised fourth-quarter GDP, pending home sales, consumer confidence, personal consumption expenditures, personal spending, manufacturing and services ISM’s.
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Article by ForexTime
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