Originally published by Rivkin Securities
US equities rebounded on Wednesday with both the S&P 500 and Nasdaq 100 up +0.19% and +0.66% ahead of The House of Representatives vote on republic legislation to repeal Obama care. This is seen by the market as Trump’s first real test since becoming president and will set the tone for tax cuts and infrastructure spending, which is what the market has been pricing in since November. Failure to push ahead with this legislation will be seen as a defeat for Trump and the market may react negatively in the short-term however this should be seen as a buying opportunity.
What the market is really looking for is tax cuts, something all Republicans can generally agree on. This can be achieved through the Budget Reconciliation process, which only requires a simple majority as opposed to the 60 votes usually required to pass legislation in the Senate. Monetary policy remains accommodating with real yields (nominal - inflation) remaining negative and the underlying fundamentals for the US economy remain strong. Company earnings are growing, optimism is near record highs, employment gains are solid and we are seeing signs of building wage pressures. It is also important to note that these trends were already in place before Trump was elected, in short there are a lot of positives to look for.
Oil prices finished modestly lower after US inventories continued to build, rising by 4.954 million for the week ending March 17th compared with estimates for 3 million. Both WTI and Brent crude finished -0.17% and -0.47% lower respectively. Interestingly prices closed well above their lows of the session and from a technical aspect there is now the heightened risk of a short-term bounce. The chart below shows that recent lows have not been confirmed by momentum indicators, forming a bullish momentum divergence that signals the strength of gains may be fading. Given the significant declines recently the market short oil may have become a very crowded trade. The failure to push decisively lower despite the build in inventories suggests selling pressure may be exhausted and any short covering could see the price move sharply higher.
OPEC officials will also be key in supporting prices, previously we have seen a step up in bullish rhetoric from officials following declines and there is no reason to suggest that this will not be the case this time. Looking ahead OPEC cuts are due to expire in June although it is highly likely they will announce an extension or even increased cuts.
Locally the S&P/ASX 200 finished 90.10 points or -1.56% lower on Wednesday although we can expect to recover some of these declines this morning with ASX SPI200 futures up +19 points in overnight trading.
Data releases:
· UK Retail Sales (MoM & YoY Feb) 8:30pm AEDT
· Fed Chair Janet Yellen Speech 11:00pm AEDT
· US Continuing & Initial Jobless Claims (Mar 11h & 18th) 11:30pm AEDT
· US New Home Sales (MoM Feb) 1:00am AEDT
· Euro-zone Consumer Confidence (MoM Mar) 2:00am AEDT
· Fed’s Kashkari Speech 5:00am AEDT
Chart 1 - WTI Crude Oil
