Overnight Headlines

*US stocks declined on Biden tax plans, small caps outperformed

*USD rose after hitting a seven-week low, virus concerns linger

*ECB non-event sees EUR still above 1.20, June meeting eyed

US equities were hit by reports that President Biden is planning a dramatic increase in capital gains tax to as high as 43.4% for wealthy Americans. This proposal would hike the rate to 39.6% from 20% currently for those earnings over $1 million. This has spooked investors with the Vix back up again.

USD is mixed today after managing to find a bid yesterday on rising Covid infections in Japan and India encouraged a retreat to the safe-haven greenback. Prices are still pivoting around the mid-March lows at 91.31.

Market Thoughts – ECB tees up June

It was one of those largely forgettable central bank meetings where speculation about when the ECB would rein in their bond buying was seen as “premature”, but at least we were spared some “holistic” analysis by President Lagarde. More importantly the next meeting in June should be more stimulating with upward revisions to growth and inflation forecasts, and better vaccine news meaning a potential gradual exit from the emergency QE program.

Along with the German constitutional court paving the way for ratification of the EU recovery fund, the potential for higher EUR/USD is obvious with upside helped by hoped-for improving eurozone data. Remember too that the dollar hasn’t been reacting at all to decent US economic releases of late.

Chart of the Day – Nasdaq faces pivotal earnings week

We’ve seen nearly a quarter of all companies in the S&P500 report already and nearly 75% of them have beaten on earnings. Most of these have been by a decent margin and yet the indices have struggled to push north. The Biden tax proposals are pretty much in line with his pre-election pledges so perhaps aren’t all that shocking, but when we are near record highs, it probably doesn’t take much to shake off some froth.

Next week sees big tech report (Tesla, Google, Microsoft, Apple and Amazon) so it’s a huge moment for the Nasdaq which is laden with tech companies who may be more exposed to the threat of higher tax bills, as well as the changing economic cycle. The index has been toying with 14,000 but is currently enable to decisively break above this psychological marker, so today’s weekly close could be significant. The February cycle highs are also now resistance at 13,879 and if we drop below here, then the first Fibonacci retrace level is first resistance at 13,658 along with the 20-day SMA around 13,600. Highs are 14,050 for the bulls among us!