US: Returning back to normal – Westpac

Sean Callow, Research Analyst at Westpac, explains that a week ago, we had just seen the largest daily fall in the S&P 500 since September 2016 as allegations against US president Trump sparked a wave of impeachment headlines and for the less excitable pundits, at the very least the prospects of swift action on business-friendly policy changes looked to have faded.

Key Quotes

“The dust has since settled somewhat since then. The S&P 500 has risen for 5 straight sessions, reaching a record high close. Of course, there hasn’t been a sudden improvement in President Trump’s political fortunes over the week. Delivering substantive reform on tax and healthcare policy is likely to be more challenging than assumed earlier in the year. (Though inaction on trade policy is arguably a positive).”

“Clearly this is not causing sustained concern in equity markets. And the Fed remains confident enough about a rebound in growth in Q2 – not to mention keen to show its political independence – to proceed with another rate rise in June. Pricing for this has rebounded from 65% a week ago to 83%. Yet yields further out on the US curve are little changed, leaving e.g. the 2 year US T-note-German bund spread about flat on the week – and lower on the month.”

“The dollar’s price action after the FOMC meeting was certainly not promising for USD’s short term prospects. And the calmer risk mood has seen 15 of 16 currencies deemed “major” on Bloomberg rise against the dollar over the past week (JPY the underperformer).”

“We seem likely to see a continuation of this trend in the week ahead, with risk appetite likely to support the likes of AUD, NZD and Asian currencies. Pricing for a June Fed hike should limit the dollar’s downside but 2-10yr yield support will be less clear, especially against EUR as markets ponder the extent of ECB policy tweaks on 8 June.”