Is the Trump Rally back on

US stock markets have showed renewed signs of life this week, and the Nasdaq made a fresh record high on Tuesday as the market toyed with the idea of reigniting the ‘Trump rally’ that we saw in the aftermath of the presidential election last November.

One sign that the Trump rally is back is the strong performance of the materials sector in the Dow Jones industrial Average and the S&P 500. The Dow’s materials sector rallied more than 4% on Monday, while materials in the S&P 500 rose by more than 2.5%, closely followed by the financial sector, which was up more than 1%. This is significant, as both materials and financial stocks have been sensitive to market expectations around the Trump administration’s ability to deliver growth. Based on Tuesday’s performance, it looks like the market is happy with the first flourish of Trump’s executive orders.

History suggests that there could be further upside for stocks:

Interestingly, some analysis by Bloomberg researchers finds that, typically, the stock market rallies at the start of a Republican Presidency, but six months in the markets start to reverse course. Thus, we may see another few months’ of gains for the US stock markets before the inevitable sell-off happens.

For now, the outlook is positive, and the S&P 500 has not moved more than 1% in 70 trading days. Low volatility has been the trademark of the post-election rally, and with the Vix index having fallen back to 11 this week, it suggests that the market is comfortable with Trump’s first few days in office, and further upside could be on the cards.

Corporate news and earnings have also played their part. The US financial sector has, broadly, published stellar earnings so far, and the tech sector is expected to do well with Google and Microsoft reporting results later this week. The materials sector was also given a boost after comments from the CEO of Du Pont suggested that the company’s mega merger with Dow Chemicals is unlikely to be derailed by anti-trust regulatory concerns. The new political administration could also help this deal get through, with Trump’s pledge to cut US regulation and red tape.

Trump puts business first as he takes over Oval Office

Trump also advanced the Keystone Pipeline project on Tuesday, something that President Obama slapped down. These first steps may not please climate change activists, but, as expected, they suggest that President Trump is ‘business friendly’ and the markets are greeting this with approval. Thus, stocks are in a strong position as we move to the middle of the week.

Can stocks lead the dollar higher?

But will the Trump rally help the beleaguered dollar, which has been the worst performer of the G10 so far this year? There are signs that the dollar could be bottoming out, and may follow the stock market higher in the coming days. The dollar index fell below 100.00, a key support level, at one stage on Tuesday, before bouncing back and extending gains early on Wednesday. This sets up the market for fresh gains in the coming days.

Why Scottish Independence fears aren’t spooking the pound

The UK’s Supreme Court decision that will force the government to hold a Parliamentary vote before triggering Article 50, but will not force the government to put a vote to the devolved Parliaments of Wales, Scotland and Northern Ireland, caused some volatility in the pound on Tuesday.   Sterling rallied on the news, even though the Scottish National Party touted the prospect of a second referendum on independence on the back of the decision.

Scotland is on course for a clash with the government when it comes to triggering Article 50, as Scotland voted to remain part of the EU. The problem for Nicola Sturgeon, and one reason why the pound was relatively stable on the back of the Scottish news, is that it is not clear that the EU would welcome an independent Scotland into its ranks, in case it encouraged states like Catalonia to push for independence from Spain. Thus, a second independence referendum may not be a valid consideration, and at this stage, the market is not pricing it in as a major risk for the pound.

Brexit still a key risk

With this court case out of the way, Brexit is going to become a reality in a few months’ time. We believe it is too soon to say that the pound has become immune to Brexit concerns, and we may see sharp drops in the pound if the market starts to get jittery that negotiations with our EU neighbours do not go well, particularly if this hits growth. Q4 GDP, released on Thursday, will be a key test.

Lira likely to remain under pressure

Elsewhere, the Turkish lira may not have fallen through the floor after its central bank failed to hike rates to the level expected on Tuesday. However, we still think that this currency is extremely vulnerable to sell offs ahead of the Constitutional Referendum on April 2^nd.

Wednesday’s key theme for us is the return of the ‘Trump trade’, and whether this can have a positive impact on the European stock markets. We are also hopeful that the dollar can recover, and that recent equity market gains will be a lead indicator for the greenback to return as the King of FX for the last week of January.