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World Week Ahead: Eyes on US probe, tax bill, jobs data

Monday 4th December 2017

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Aside from the latest US jobs data, and what that means in terms of potential interest rate hikes, investors will closely eye any progress on the Republican tax bill and the special US probe of Russian interference in the 2016 election.

Last Friday, Wall Street sank on news that former national security adviser Mike Flynn pleaded guilty to lying to federal agents and is now cooperating in the investigation led by Special Counsel Robert Mueller. 

“For the first time in a long time, the political risks are starting to seep into the capital markets,” Chris Harvey, head of equity strategy at Wells Fargo & Co, told Bloomberg. “There is some real possibility that [US President Donald] Trump has some issues and the market is pricing in those issues … That also seeps into taxes.” 

On Saturday the US Senate approved its tax bill, moving Trump closer towards his first legislative accomplishment. The Senate and House of Representatives now will seek to merge their two tax bills and then send the final result to Trump to sign into law.

While benchmark indexes recovered some of the Flynn-linked losses, they still closed in the red for the day. On Friday, the Dow Jones Industrial Average fell 0.2 percent, as did the Standard & Poor’s 500 Index, while the Nasdaq Composite Index fell 0.4 percent.

“Right now the market is assuming that everything will work out, but you’ve got a tremendous number of moving parts,” Phil Orlando, chief equity market strategist at Federated Investors in New York, told Reuters. 

Investors flocked to the perceived safety of US Treasuries when stocks retreated, sending the yield on the 10-year note five basis points lower Friday. The US dollar weakened.

“Politics generally doesn’t have a profound impact the market but to the extent the political story results in a change in policy and affects the growth, then it does,” Walter “Bucky” Hellwig, Birmingham, Alabama-based senior vice president at BB&T Wealth Management, told Bloomberg. “All eyes are on the headlines right now as the market will react one way or another depending on how the story unfolds.”

For the week, the Dow rallied 2.9 percent, the S&P 500 climbed 1.5 percent. However, the Nasdaq dropped 0.6 percent—reflecting a rotation out of the some of the bull market’s high-flying tech stocks.

Investors will scrutinise the ADP employment report on Wednesday, weekly jobless claims on Thursday, and the government's nonfarm payrolls report on Friday.

Other US economic data will show up in the form of reports on factory orders, due today; international trade, PMI services index, and ISM non-manufacturing index, due Tuesday; productivity and costs, due Wednesday; as well as consumer sentiment and wholesale trade, due Friday.

Brian Peery, a portfolio manager at Novato, California-based Hennessy Funds, said a government shutdown or the tax bill failing would prompt a swift sell-off, but that rising consumer confidence would ultimately continue to push the market higher over the next year, Reuters reported.

“If I‘m looking at a 10 percent correction, I‘m a buyer,” Peery told Reuters. 

In Europe, the Stoxx 600 Index ended Friday with 0.7 percent slide from the previous day’s close, ending at the lowest level in two weeks. 

Investors will eye today’s meeting of British Prime Minister Theresa May and European Commission President Jean-Claude Juncker in Brussels.

“Consensus is that they will reach agreement on some key roadblocks,” according to TD Securities in a note. President of the European Council Donald “Tusk has said that the divorce bill and Irish border must be resolved by Monday in order for EU leaders to approve Phase 2 talks at their Dec 14-15 meetings.

Any disagreement on Monday (or postponement of the lunch) will jeopardise this, with sharp market reaction. A joint publication on the issues would be a positive signal of near-certain progress,” according to TD Securities.

Oil prices rose on Friday, a day after OPEC and other key oil producers including Russia extended an agreement to limit production through the end of 2018. Even so, oil futures posted a loss for the week.

"It is not clear to us that these extended output cuts will be effective in bringing stocks down to the level which OPEC is targeting," Capital Economics' economists Oliver Jones and Thomas Pugh wrote in a note. 

"Admittedly, we expect demand growth to remain strong next year. But a surge in non-OPEC supply, especially from the US, is likely to hamper OPEC’s efforts to rebalance the market," Jones and Pugh noted. "So even with OPEC limiting production, we still expect stocks to rise a little, putting some downward pressure on prices."

(BusinessDesk)



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