'Buy the dip' mentality alive and well, while the tax reform hurdle has passed

Trump tax plans add support to already convincing stock market rally; IBEX lags behind as Madrid moves to impose direct rule over Catalonia; GBP jumps on optimistic May comments after meeting with EU-27.

U.S. equity markets are on course to open higher on the final trading day of the week, having recovered strongly following a tough start on Thursday to end the day in the green.

The buy the dip mentality is alive and well, with traders clearly not willing for markets to drop even a little before pushing them higher once again. The passing of the budget resolution through the Senate late on Thursday is likely helping lift sentiment further today, with final approval in the House being a big step towards Donald Trump’s long-awaited tax reform being enacted.

As Steve Mnuchin made clear this week, a portion of the rally in equity markets since Trump’s election victory in November was driven by the expectation that tax reform will happen and provide a significant boost to the economy and companies. A failure to deliver on this would be a huge blow to Trump and could be damaging for markets as well, although this now looks increasingly less likely.

In Europe, the Spanish IBEX is once again lagging behind its peers and is the only major index to trade in the red. Prime Minister Mariano Rajoy is believed to be planning to convene a special cabinet meeting this weekend to begin the procedure of suspending Catalonia’s autonomy, with the Senate possibly voting on imposing direct rule next week. The unrest that will likely follow could further unsettle investors in Spanish assets.

The pound has been given a minor boost this morning by optimistic comments from Prime Minister Theresa May following her meeting with the EU-27. May’s acknowledgment that the UK will honor its financial commitments to the EU while claiming her counterparts will consider a vision for a future partnership is a small step forward in negotiations that have seemingly failed to be achieved in discussions between David Davis and Michel Barnier.

As we head into the end of the week, there isn’t too much on the agenda. Canadian retail sales and inflation numbers stand out as the key data releases while we’ll also get existing home sales figures from the United States. The Fed’s Loretta Mester is due to speak on regulation but her comments will be followed in case the conversation moves to monetary policy as it sometimes can. The yen is slipping a little as Japan prepares to head to the polls this weekend, with Prime Minister Shinzo Abe looking to solidify his position in the face of weak opposition, something that looks likely but also has the UK feel to it. And we all remember how that worked out.