Trump tax pledge amp UK manufacturing boost markets

Trump’s tax pledge

Just a few words from Trump was enough to put the Trump Trade well and truly back on the map. In a market that has been craving direction for many sessions, the US President’s comment “something phenomenal on tax in the next two to three weeks” was enough to trigger a break out as investors have renewed hope that fiscal stimulus is still at the forefront of Trump’s agenda.

Given Trump’s love of drama and the time scale of 2 – 3 weeks we do need to question if he will be able to produce anything meaningful in this timeframe, but in their desperate need for a catalyst investors have been willing to look beyond this and are happy to take his word on it.

On the renewed promise of corporate tax reforms the major US equity indices once again rallied to all-time highs on Thursday, the Dow Jones reaching 20200, whilst the S&P shot to 2310. The US dollar also looks set to post its first weekly gain this year after climbing for seven consecutive days.

With US stock indices flying high on optimism and the US dollar index rallying back above 100.00 questions over the sustainability of the Trump Trade are returning. Once again, we are seeing examples of how the market stands ready to move higher on promises and optimism; however, when expectations are so high, there is plenty of room for disappointment when these expectations are not met.

Should Trump fail to deliver on his own hype with a meaningful, tangible tax reform in the next few weeks then the prospect for a correction in the markets is high.

Trump over shadows political trauma in Europe

Trumps promise has also given European markets a boost and is helping investors look through the political trauma in Europe. European equity indices look set for the third straight day of gains, although remain lower on the week as political woes continue to be the dominant theme; problem child Greece in also back in the headlines and seeing in a sharp increase in Greek borrowing costs.

Manufacturing smashes expectations

Dollar strength has been dominating the cable story, however industrial production and manufacturing output figures have pulled sterling off session lows and charging back above $1.25.

Industrial production activity increased (yoy) 4.3% ahead of an expected 3.2%, whilst manufacturing output came in at (yoy) 4% versus an estimated 1.7%.

These figures smashed expectations. After the strong readings for November there had been some concerns that we would see a payback in December, but this hasn’t been the case. The economy is continuing to surprise on the upside showing resilience in the face of the Brexit referendum and as we approach the triggering of Article 50.

However, although momentum is clearly continuing, the largest contributor to the outstanding manufacturing figure was pharmaceuticals and these have a tendency to be highly erratic, so this is likely to be a one off rather than a new norm.

That said we are continuing to see the benefits of a lower pound valuation coming through in the data and the pharmaceutical sector is also reaping the benefits of a more competitive currency.

Sterling quickly moved higher after the release, charging through $1.2500, whilst the FTSE remained in positive territory with the construction sector receiving a boost from news that construction activity increased 1.8% yoy versus an expected 1% increase.