U.S. equity investors have decided to pull out some profits on Monday, after Wall Street’s major indices posted new intraday records at the opening. The S&P 500 ended 0.4% lower, while Nasdaq composite and Dow Jones Industrial average declined 0.6% and 0.2% respectively. Although markets seem to be relatively quiet, the CBOE’s Volatility Index (VIX) logged largest one day gain in nearly 7-weeks, closing above 11 -an indication that option premiums on S&P 500 are rising, which could be an early sign that investors are protecting their portfolios from a possible pullback. 

Earnings should continue to be the major driver this week, with more than third of S&P 500 companies due to report their third-quarter results. Many investors have joined the rally on tax reform hopes; this is evident in the small-cap Russell 2000, which rallied more than 10% since mid-August. How much further the rally persists on such pro-growth policy hopes remains to be seen, especially since a considerable amount has been priced in since the beginning of the year.

Investors are also in wait and see mode, as President Trump may announce his nominee for the Fed Chair this week.  In an interview yesterday, he said he would name the new chair "very shortly.” I think his decision will not be just based on who’s the biggest dove, but of greater importance, is finding someone who is willing to de-regulate the financial sector. So far, Jerome Powell seems to be the best fit, but in the Trump era, we should always be prepared for surprises.

Currency markets are moving in very tight ranges early Tuesday, with the Euro trading within a 27 pips range. Although we heard some voices saying that the crisis in Spain could lead to the break up the EU, the reaction in the Euro and EU fixed income markets are not supporting this theory. The main risk event for the single currency remains to be Thursday’s ECB meeting, and I don’t expect significant moves until then.

On the data front preliminary PMI’s from Germany and France, are expected to show continued strength in the manufacturing and service sectors, despite a slight pullback in German manufacturing. However, with only tier 2 economic data on the agenda, currency moves are likely to remain within tight ranges. 

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