White House shake out rattles the market

Personnel issues in the White House left investors nervous over the direction of the Trump administration for a second time in so many weeks, pulling the major US indices lower. On Tuesday, Secretary of State Rex Tillerson, often considered the voice of reason in a sometimes very chaotic White House, was ousted by Trump over a difference of stance towards foreign policy. With Tillerson out the door, the market is assuming that Trump is aiming for a more aggressive foreign policy; enough to send a chill through the markets.

In a choppy day of trading, weighed down by the latest shake-up in the White House, the Dow closed down over 170 points, the S&P declined 0.6%, whilst the Nasdaq snapped a 7-day winning streak closing 1% lower as investors took the opportunity to book profits after a golden run for tech stocks. The same mood is seen in Asia overnight, as major indices across the region traded lower; Europe is also pointing at a negative open.

Nothing new expected from Draghi
The economic calendar for the UK is quiet again today. Investors instead will be focusing on the eurozone, where German CPI numbers are expected to show inflation remained constant at 1.4% year on year. ECB President Draghi is also due to speak in Frankfurt this morning. Given that it is less than a week since a dovish Draghi appeared, we are not expecting there to be any changes to his cautious tone.

US Retail sales in focus
Thanks to Tuesday’s US inflation report, investors remain at ease over the future pace of interest rate rises with US CPI data appearing to reaffirm the Fed’s case for just three interest rate hikes this year, rather than the four or more feared just one month ago.

Today’s retail sales figures will be the next big test as we move closer to the FOMC policy announcement next week. Expectations are for retail sales to have increased 0.3% month on month in February, an increase from January’s disappointing -0.3% decline. It’s fair to say that with Friday’s weak wage growth, core inflation remaining constant at 1.8%, market fears over a more aggressive path to monetary policy tightening by the Fed have eased considerably. However, a solid surprise to the upside today could go some way to allowing nerves to creep back into the market. In this scenario we would expect bond yields to move higher, boosting the dollar whilst weighing on US equity indices

The CME Fed Watch is currently pricing in 87.4% probability of a rate hike in March. Even another weaker than forecast retail sales print this month is very unlikely to put the Fed off raising interest rates when it meets next week. Instead a softer reading is likely to convince the market that the current goldilocks conditions are expected to hang around for a while longer. In this case we would expect the dollar to remain weak and US equity indices to charge higher.

EUR/USD heading to $1.25?
On the back of US political concerns EUR/USD has rallied to $1.24, a level not seen since last Thursday when dovish Draghi sent the Euro plummeting 200 points. A weaker than forecast retail sales print could see EUR/USD test resistance at $1.2445, before charging higher towards $1.25. On the contrary, a surprise to the upside could see EUR/USD break support at $1.2350 before heading downwards to $1.23 and $1.2270.

Opening calls
FTSE to open 21 points lower at 7117
DAX to open 71 points lower at 12,150
CAC to open 21 points higher at 5221