US stock markets staged a pullback on Friday and overnight the US futures markets posted further losses. Last week's pullback was among the steepest on Wall Street since the financial crisis and comes after a record breaking year for the Dow Jones.
Aidan Donnelly, senior equity analyst with Davy, said the gains last year came on the back of strong returns in the US. "There were 15 consecutive months of gains on the S&P500 with January the strongest month of the 15. Given the length of that period, it wasn't a big surprise to see a pullback of some sort," he said.
Mr Donnelly said the tax changes introduced late last year by the Trump administration had been the primary driver of markets into the new year coupled with strong corporate earnings. "The numbers are slightly better than expected. The main focus now is to get to grips with what the tax changes will mean for 2018. We've seen substantial improvements in guidance for some companies as a result of the changes."
Aidan Donnelly attributed some of the pullback witnessed on Friday to a change in sentiment on the bond market. "Economic numbers released on Friday pointed to average wage inflation starting to pick up. Some were surprised at how strong it was. We've seen US inflation creep up slowly. That has seen bond yields drift higher. The bond market is now moving to a level where it's a credible alternative to equities. It's a credible alternative that hasn't been there for a long time," he said.
Ultimately the pullback on Friday wasn't a big surprise and had to be put in context, the analyst said. "After such a long period of little pullback, a 2% change seems like a massive move. It used to be the case that a pullback like that wouldn't ruffle any feathers," he concluded.
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*** Jerome Powell will be sworn in as the new governor of the US Federal Reserve later today. The former investment banker succeeds Janet Yellen at the head of the Fed and he the first non-economist to take up the position since the 1970s.