Trump vs Earnings

European stock markets are poised to open higher later this morning, after weaker retail sales in Germany virtually secures ECB largesse for the foreseeable future. The BOJ upgraded its economic forecasts, but did not suggest that it would tighten monetary policy anytime soon, which has given USD/JPY time to recover early on Tuesday. But US politics is still the main theme in town, and today we will watch to see if there is any fallout from Trump’s decision to fire the acting Attorney General overnight.

It’s been an interesting start to the week, with protests against President Trump’s immigration ban dominating market news and reaction. Trump’s use of executive power has not stopped with immigration; on Monday he signed a new order that will cap business regulation. While politics took centre stage at the start of the week, earnings from Apple and Exxon on later today, along with a flurry of central bank meetings this week will be critical for determining what matters more to markets right now: politics or economics.

Yet another executive order…

US stocks may have closed in the red on Monday; however they managed to claw back some of their losses after a new executive order to cap business regulation. This new order is operating a one in, two out rule, and any new regulation will be subjected to higher levels of scrutiny going forward. Reducing red tape and regulation for business was another of Trump’s campaign promises, and it helped to ignite the stock market rally that saw the Dow Jones Industrial Average soar to 20,000 last week. A week ago, this order could have triggered another leg higher in the equity market rally; however, on Monday the reaction was muted. Perhaps the pace of Trump’s executive orders has frightened some investors, who worry about the risk of policy mistakes from this rooky President (see my note from Monday, below). If so, then we may start to see the ‘Trump trade’ shift as a political risk premium limits further potential upside for US equity prices.

Trump trade not over yet

Surprisingly, volatility levels have remained relatively muted, the Vix index closed below 12 on Monday. This suggests that investors are not giving up on the “Trump trade” yet, and although recent political developments have caused concern, the bias remains for further stock market gains. But, it’s worth remembering that future political developments may disrupt stock market rallies, and investors could lose their nerve if the President remains trigger happy with his executive orders in the coming days and weeks.

Earnings key for equity market sentiment

Ahead today, there are some key earnings releases including Exxon Mobil and Apple. These are both bell-weather companies for the US economy, and if they report strong earnings later today then we could see a resumption of the stock market rally from last week.

Could a dovish FOMC statement be on the cards?

Whether or not a potential rally can be sustained, may depend on the Fed meeting on Wednesday. Although we don’t get a press conference, the statement will be closely watched for any signs that the Fed is looking to raise interest rates. It is worth noting that recent economic data misses, including the GDP report for Q4, and even signs of weaker than expected inflationary pressure – the annual PCE deflator for December rose to 1.6%, lower than the 1.7% expected – have caused the US economic surprise indicator to fall back from recent highs. Thus, the bigger surprise from this week’s FOMC meeting could be an increasingly dovish tone to the Fed statement, as it tries to calm any nerves caused by recent political developments. If this proves to be the case, then the dollar could be at risk from a sharper sell off, and potentially the dollar index could drop below 100.00, while stocks could resume their rally.

The Fed, Trump’s next target?

At some point this year we believe that the Fed, if it continues to normalise monetary policy, could be on course for a clash with the Trump administration. If the Fed embarks on a hiking cycle, even a mild one, then the dollar is, on balance, likely to rise this year. In contrast the US government wants an export, manufacturing driven economy, which would benefit from a weaker dollar. While we don’t expect the President to comment on this week’s Fed meeting, if he does dare to criticise any future Fed decisions then financial stability could be at risk, volatility could rise and we would expect to see stocks sell off, and safe havens like the yen, the Swiss franc and gold surge.