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World Week Ahead: Optimism turns to tax cuts

Monday 27th March 2017

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After US President Donald Trump’s failure to garner enough support for the Republican healthcare bill, investors are set to refocus on his attempt to bring about promised tax reform — a key reason for Wall Street’s rally since November.  

Healthcare reform, on hold after House Republicans scrapped the vote on Trumpcare, offered the latest stumble for the Trump administration, following a push-back on unpopular initiatives on immigration and international trade. 

Last week, the Dow Jones Industrial Average dropped 1.5 percent, the Standard & Poor’s 500 Index retreated 1.4 percent, and the Nasdaq Composite Index declined 1.2 percent.

It was Wall Street’s largest slide since the week leading up to the US election, according to Bloomberg.

US Treasuries climbed. 

Even so, investors remain optimistic Trump will deliver, in some form, on other promises.

"The market believes it raises the probability of a tax cut later this year since Trump is showing more strategic behaviour,” Paul Zemsky, chief investment officer of multi-asset strategies and solutions at Voya Investment Management in New York, told Reuters.

Investors’ optimism was justified, according to US Treasury Secretary Steven Mnuchin. 

"I think there is some good news that's baked in, but yet, I think there is further room for significant growth in the economy that would be reflected in the markets," Mnuchin said on Friday at an event sponsored by news website Axios, Reuters reported. 

"The consequence would be that the market could go up significantly," Mnuchin said.

Some analysts believe investors might have to settle for watered-down tax cuts. 

Meanwhile, ongoing evidence of a robust economy warrants valuations, regardless of Trump’s inability to deliver on key promises. 

"The evidence suggests to me that there is some Trump fairy dust sprinkled on this rally," Alan Gayle, director of asset allocation at RidgeWorth Investments in Atlanta, Georgia, told Reuters. “That said, the underlying fundamentals do look better.”

The latest economic data published in the coming days include the Dallas Fed manufacturing survey, due today; international trade in goods, S&P Corelogic Case-Shiller home price index, consumer confidence, and Richmond Fed manufacturing index, due Tuesday; pending home sales index, due Wednesday; the third estimate of fourth-quarter GDP, and weekly jobless claims, due Thursday; as well as personal income and outlays, Chicago PMI, and consumer sentiment, due Friday.

The US Federal Reserve, which earlier this month lifted its target interest rate and flagged two more hikes this year, might offer fresh clues on the path. 

Fed officials set to speak this week include Charles Evans and Dennis Kaplan today, Esther George and Kaplan on Tuesday, Evans, Eric Rosengren, and John Williams on Wednesday, Loretta Mester, Kaplan, Williams, and William Dudley on Thursday, as well as Neel Kashkari and James Bullard on Friday.

In Europe, the Stoxx 600 Index’s 0.2 percent fall last Friday brought its weekly slide to 0.5 percent.

Here, key economic data eyed in the coming days include Germany's IFO business climate, due today; Germany's import price index, due Wednesday; euro-zone economic and consumer confidence data, and Germany's consumer price index, due Thursday; Germany's retail sales and unemployment, as well as euro-zone CPI, due Friday.

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