Dow Logs Best Day Since April

Daily Analysis - 23/08/2017

Renewed Hope of US Tax Reform Boosts Sentiment


The benchmark Dow Jones Industrial Average notched it best performance since April following reports that the Trump administration has been making steady progress on its tax reform plan despite other conflicts dominating the headlines. Dow futures surged almost 1.00% to close Tuesday at 21892.

Global Investors Remain Cautious as Risk Assets Gain

A Politico news report from Tuesday reported that US President Donald Trump and key lawmakers found common ground on approaching tax reform measures. The prospect of tax reform was one of the main market catalysts that drove momentum higher after Trump's victory in November. Equity markets also found support from news that Norway’s $1 trillion sovereign wealth fund was increasing its exposure to stocks.

Boeing was among the biggest gainers, rallying 1.70% after the aerospace company received a government contract for replacing the aging Minuteman III intercontinental ballistic missile system. Dow futures have since rebounded from the lows hit in early Wednesday trade. The short-term trend remains upwards, with 21900 representing immediate upside resistance. A break above yesterday’s peak could take the index futures to levels closer to 21970. However, what should be worrying from a trading standpoint is that volumes remain below average, a development traditionally associated with reversals.


German Investor Sentiment Slumps

For a third consecutive month, German investor morale declined amid concerns that the widening emissions scandal engulfing the auto sector and continued strength in the Euro will weigh on the economy. The closely-watched ZEW Expectations Index, which tries to forecast economic conditions six months ahead, tumbled to 10.0 in August from the 17.5 recorded back in July. That figure marked the lowest reading in the index since October of last year and compares with a Bloomberg median estimate for a drop to 15.0.

The German car industry is still reeling after the revelation of an emissions cheating scandal, which has the potential to damage its reputation among foreign buyers. At the same time, exporters must reckon the Euro’s year-to-date gain of 12.00% against the US dollar which is threatening to dampen German exports. DAX 30 futures ended Tuesday at 12243 before pulling back modestly in early Wednesday trade.


Japanese Manufacturing Activity Reaches 3-Month High

Factory activity in Japan expanded at its fastest pace in three months through the end of August, buoyed by a surge in export orders according to a leading private survey unveiled overnight. On a seasonally adjusted basis, the Markit Japan Flash Manufacturing PMI climbed to 52.8 in August from a final reading of 52.1 in July. The index rose to its highest point since May, remaining above the 50-mark that separates expansion from contraction for the 12th straight month. The index for new export orders was the most notable gainer, rising to 52.2 from 50.9 in July.

The Markit PMI data comes two days after a Reuters survey showing that Japanese manufacturer confidence soared to highest in a decade in August, providing further confirmation of a broadening economic recovery. EURJPY reversed from the key support at 129.150 to last trade around 128.600.


Canadian Retail Sales Miss Consensus

Retail activity in Canada cooled during June following three consecutive months of solid gains.  Data from Statistics Canada released on Tuesday showed that sales edged 0.10% higher on a monthly basis, coming in just shy of the 0.30% advance projected by analysts surveyed by a Reuters poll. The Canadian economy has been witnessing a consumption boom for years, as cheaper credit encouraged householders to borrower.

Policymakers expect the spending run to continue, even as the Bank of Canada gradually lifts interest rates. The Central Bank last month raised rates for the first time in almost seven years with another hike widely expected in October. Despite the tightening, households should account for roughly two-thirds of growth over the coming three years per a Central Bank forecast from a month ago. EURCAD is off the highs of the session, with the pair currently hovering around 1.4800.


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