Risk appetite returns

Wall Street put in a solid performance last night and this has helped European indices rally for a second consecutive day. Investors appear to be more sanguine about the Trump administration’s failure to push through health care reform at the end of last week. The feeling is that tax reform will still go ahead, despite concerns that any cuts look likely to be unfunded and therefore unpopular with many Republicans. But for now investors appear happy to give President Trump the benefit of any doubt with the overall conviction that he will come through in the end. Once again, any sell-off in equities is soon jumped on as a buying opportunity. Yesterday there was the added catalyst of some decent economic data. Consumer Confidence soared to 125.6 on an expectation of an index reading of 113.9. The Richmond Manufacturing Index was also strong while the S&P/Case Shiller housing index also registered solid year-on-year growth.

The UK will officially invoke Article 50 today when officials deliver a letter from UK Prime Minister Theresa May to European Council President Donald Tusk. Some analysts are blaming this for the sharp pull-back in sterling since Monday. This has seen cable lose over 2 cents over the last two days with the GBPUSD breaking below its 100, 50 and 20-day moving averages overnight. It has recovered somewhat in early trade this morning and traders will now be watching to see if it can hold above support around 1.2400. But much now depends on where the dollar goes from here. The greenback has come under intense selling pressure over the past fortnight following the release of a hawkish outlook from the Fed, tumbling bond yields and a back-up in inflation expectations. The dollar hit a fourteen-year high against the euro at the beginning of the year on expectations of a deluge of fiscal stimulus from the Trump administration.

Meanwhile, crude oil has recovered a touch overnight with WTI back above $48. Last night the latest inventory update from the API showed crude inventories rose less than expected. We’ll get a further update later this afternoon. Crude oil plunged three weeks ago. The sell-off followed an unexpectedly large build in US inventories which suggested that OPEC/non-OPEC production cuts were having little effect.