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US tax reform still key this week ahead of Thanksgiving


As traders look ahead to Thanksgiving this week there is still much to move markets. Tax reform remains crucial for the outlook of the dollar, but is also impacting across markets as it drives a safe haven bias. We look at how these various factors impact on the outlook for forex, equities and commodities markets this week.

Thanksgiving

With concerns over the progress of tax reform, there are two themes emerging. The flattening US yield curve is weighing on sentiment. Disappointing recent Chinese industrial production and retail sales reflect weaker signs in both halves of China’s economy. Risk appetite has suffered with resources prices dropping, with investors now  questioning the one way bet on equities. Lower risk assets are beginning to perform better. The safer major currencies are outperforming with the euro and yen benefitting at the expense of commodity currencies (Aussie and Kiwi). Gold is finding support, whilst the US yield curve continues to flatten. There are several reasons why the yield curve could be flattening. Firstly, Fed is tightening in a low inflation environment. Is this a policy mistake? Core CPI did tick higher last week but it was interesting to see the longer end of the curve barely budged. Secondly there is scepticism over the effectiveness of Congress to deliver tax reform that will be long term growth positive. Finally, a technical issue over supply with the US Treasury recently announcing an increased focus on issuing shorter dated maturities (2s and 5s). The concern is that an inverted yield curve has foreseen the past seven recessions in the US. For now inversion is a long way off, with the 2s/10s spread c. 62 bps. However, just 6 months ago the spread was over 100 bps. If it continues falling at this rate the safe haven plays may find demand growing further.

 


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At Hantec Markets Ltd we provide an execution only service. Any opinions expressed by analyst Richard Perry should not be construed as investment advice or an investment recommendation. This report does not have regard to the specific investment objectives, financial situation and needs of any specific person who may receive it. Forex and CFDs are leveraged products which can result in losses greater than your initial deposit. Therefore you should only speculate with money that you can afford to lose. Please ensure you fully understand the risks involved, seeking independent advice if necessary prior to entering into such transactions.