Markets Pause for Breath Ahead of Tax Reforms and a Dollar Bounce

While the markets basked in the glory of the Establishment on Monday, with global equity markets making a solid recovery, filling the Trump rally void that had seen the Dow pull back to 21,000 highs seen at the start of March, geo-political risks have yet to be completely priced out, with continued noise from North Korea remaining a cause for concern, not just for Trump and the Chinese but also the markets, with the isolated state’s military capabilities not completely known to the outside world.

News of the North Korean’s putting on a live artillery drill hit the wires this morning, the drill coinciding with a U.S submarine docking on the south, as Trump continues to ramp up U.S military presence in the region in anticipation of a possible strike on North Korea, with or without China’s support and involvement.

The news has yet to feed through to the safe havens, with the both the North Koreans and the U.S doing little more than arm flexing, though things could move quite quickly, Trump having shown that the U.S administration is able to make quick decisions following the strikes on Syria.

The distractions in the Middle East and Asia appear to have had limited impact on the administration’s focus on looking to deliver on campaign pledges, with the markets now sitting back ahead of Trump’s tax reforms due to be rolled out tomorrow evening.

A lack of macroeconomic data out of the U.S on Monday left the Dollar lacking support through the day, with the Dollar giving up gains made through the Asian session, the Dollar Spot Index down 0.12% at 98.977 at the time of the report, falling back from an intraday high of 99.215.

While the Dollar remains on the defensive, the EUR continues to find support following the weekend French election result, with the EUR up 0.16% at $1.08859 at the time of the report. The EUR got a bounce early in the European session this morning, jumping from $1.08869 to $1.08880, with news of Marine Le Pen stepping down as president of the Front National likely to have been a contributory factor to the EUR’s move, Le Pen looking to attract voters in the 2^nd round by distancing herself from the Front National, focusing voters on policies and taking France forward rather than the party which will lead the nation.

The upside in the EUR coming off the back of the election result and noise from the political arena in France has left market appetite for European equities more tentative in early trade, with the bounce in the EUR expected to weigh in multinationals once the dust settles, though at sub-$1.10 levels the effects of EUR strength are likely to remain relatively muted, the upside off the back of Macron’s victory more than offsetting the bounce in the EUR, which has rallied 3.56% year-to-date against the Dollar, despite the FED making its gradual move to monetary policy normalization.

As things stand it certainly looks like the markets are now treading water ahead of Trump’s tax reforms due out tomorrow evening, with a lack of material macroeconomic data through the European session to provide the markets with direction.

The spot light will be on the U.S this afternoon, with macroeconomic data scheduled for release including April’s CB Consumer Confidence and March new home sales figures. Both sets of data will provide the markets with a sense of consumer confidence going into the 2^nd quarter and whether the delay the U.S administration rolling out tax reforms and a fiscal stimulus package has had any immediate impact on sentiment towards Trump and the ability of the Republican Party to deliver.

Based on forecasts, today’s stats will likely be Dollar negative, with new home sales and consumer confidence projected to fall from previous month levels, though the weight on the Dollar is likely to be attributed more to uncertainty over what the administration will deliver tomorrow than today’s stats.