US President Donald Trump's move to scale back Dodd-Frank financial regulations lit a fire under US bank stocks on Friday, and Wall St was further boosted by strong jobs numbers, both of which signal a resumption of the Trump trade that is expected to push the Australian market higher this week.
In the weeks after the US election, overseas investors piled into Australian financial stocks, boosting the sector 5.5 per cent in December. But the financial index fell in January, helping drag the ASX200 lower.
The ASX is set to open higher on Monday - ASX200 futures were up 0.4 per cent on Sunday - marking a shift from last week's pessimism, which saw the ASX200 decline 1.6 per cent. The index declined 0.8 per cent in January - a bad omen for those who hold the market's January returns to be a good indicator of its full-year run.
In the wake of the global financial crisis, many of the features of Dodd-Frank were put in place in Australia's financial regulations, said AMP chief economist and head of investment strategy Shane Oliver. "I suspect the debate now will be around financial deregulation in other parts of the world, including here," he said.
Mr Trump's executive order on Friday, to give Treasury the power to review and change financial regulations, was vague in wording and does not mention Dodd-Frank by name. But it lays out "core principles" for financial regulation aimed at enhancing American competitiveness. Another memorandum also issued on Friday directs Treasury to review whether the fiduciary rule - which requires financial advisers to act in their clients' best interests - adversely affects the ability of investors to access financial markets.
While the full effects of both the executive order and the memorandum is in the hands of the US Treasury - and will rely on Democrat approval through the US Senate - the changes nonetheless caused the S&P500; to surge 0.7 per cent on Friday, ending the week higher after a lacklustre run through Thursday. The gains were even larger in financial stocks, led by Goldman Sachs which added 4.6 per cent.
Signs of a growing US economy were also evident in the Department of Labor's jobs figures, which on Friday showed the US added 227,000 new jobs in January, a strong gain that caps off 76 months of increases.
"The orders provide a reminder that Donald Trump is - despite the noise - still very much focused on deregulation," Mr Oliver said. Hopes of deregulation and a booming US economy add to the likelihood of interest rate rises by the US Federal Reserve, leading to rises in the US currency, which impacts the local currency and the fortunes of many global Australian businesses.
This should give the Reserve Bank board plenty to think about on Tuesday, even if it is unlikely to sway the members' cash rate decision.
With almost unanimous consensus that the central bank will hold rates steady, attention has turned instead to its releases later in the week. On Thursday, RBA governor Philip Lowe will give his second major speech at the A50 Economic Forum dinner in Sydney, and on Friday, the RBA will release its quarterly statement on monetary policy.
"Of most interest will be any revisions to the RBA's forecasts, where we expect a downwards revision to the growth forecasts following the September quarter growth contraction and a possible pushing out in the return of inflation to target," Mr Oliver.
"The Melbourne and Sydney property markets remain too hot for comfort, so it'll be interesting to see if the RBA makes any comment on that. And to see if it says anything on the Australian dollar." Some economists believe the RBA last cut rates out of concern that the Australian dollar was getting too high - it twice hit US 76.95c over the weekend, after breaking through US76c on Thursday.
"Our assessment remains that – with record low wages growth, ongoing spare capacity, an increasing risk that low inflation will feed on itself and the Australian dollar remaining too high – the RBA will cut rates again around May," Mr Oliver said.
Citi's Paul Brennan said there was unlikely to be any movement until the May board meeting, which will come after another inflation result and three more sets of unemployment figures.
"Our central case remains no change in rates this year, but that the market is underpricing the risk of easing," he said.
All but one of the 29 economists polled by Bloomberg expect the RBA to keep rates steady at 1.5 per cent on Tuesday.
