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James Hyerczyk
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U.S. equity markets surged to record highs on Friday, driven by optimism created by President Trump on Thursday with his promise to release a tax plan within the next two to three weeks. At the mid-session, the benchmark S&P 500 Index was up 0.44%, the blue chip Dow Jones Industrial Average was higher by 0.57% and the NASDAQ Composite was posting a 0.44% gain.  Rising energy prices contributed to the rally in the S&P 500 Index. All three major indexes are on pace for solid weekly gains.

U.S. Treasurys

Trump’s remarks also helped drive U.S. Treasury yields higher since lower taxes tend to drive up inflation. On Friday, the benchmark U.S. 10-year yield rose to 2.423 percent. Short-term two-year yields hovered around 1.2 percent.

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Gold

April Comex Gold futures fell for a second day after hitting a three-month high earlier in the week. With Trump’s promise of a major tax announcement shortly, higher stocks and higher yields helped make gold a less desirable investment. Rising Treasury yields also helped drive up demand for the U.S. Dollar. This negatively affected foreign demand for dollar-denominated gold.

U.S. Dollar

March U.S. Dollar Index futures hit a 10-day high on Friday and was in a position at the mid-session to post its biggest weekly gain since mid-December. While Trump’s comments on tax reform Thursday provided most of the support for the dollar, expectations of a constructive meeting between Trump and Japanese Prime Minister Shinzo Abe also helped boost the Greenback.

A little over a week ago, investors were selling the dollar in preparation for a possible trade war after Trump said China, Germany and Japan were currency manipulators. Since then, however, conditions have changed drastically with the dollar attracting huge buying interest. The index benefitted from a higher USD/JPY on expectations that Abe could signal increased Japanese investment in the United States. Furthermore, rising Treasury yields also helped widen the spread between U.S. government bonds and Japanese government bonds.

Although Trump called out the Japanese for currency manipulation, he is not expected to make this the focus of his meeting. Instead, he is likely to discuss trade and investment deals.

Early Friday, Trump said he was backing down from criticisms of China’s “One China” policy. This helped increase interest in the dollar and boost risk appetite in Asia and Europe.

Economic News

In U.S. economic news, import prices rose 0.4 percent in January. This beat the 0.2 percent increase estimate. Export prices rose 0.1 percent last month. This came out in line with expectations. Finally, preliminary consumer sentiment for February came in at 95.7, below the expected 98.5.

 

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