As the Santa Rally begins to come into sharp focus, retailers help push the SPX to new heights, oil reaches a two year high, whilst safe havens recede

Nov 27 • Morning Roll Call • 1706 Views • Comments Off on As the Santa Rally begins to come into sharp focus, retailers help push the SPX to new heights, oil reaches a two year high, whilst safe havens recede

A Santa Claus rally used to be classed as a surge in the price of equities that often occurs in the last week of December, lasting through to the first opening trading days in January. However, over recent years the rally has enjoyed a far longer period, often beginning early December and lasting approximately a month. Many theories exist for the phenomena; from seasonal optimism and irrational exuberance, or buy and hold fund managers (who operate on a longer term time frame), not wishing to sell at a loss, which could therefore negatively affect their annual bonuses.

As USA equity markets took a breather on Thursday (as markets were closed) due to the thanksgiving holiday, many analysts began to ponder just when this record rally, inspired due to the Trump administration’s promise of massive tax cuts, will eventually fizzle out. Many mainstream economists suspected that once earnings season ended in November, we’d see a retrace of the recent market highs. But with the potential for the traditional Santa Rally over the coming weeks to push equity prices even higher, all bets are off where the SPX, DJIA and NASDAQ could close out 2017, with the SPX already up circa 20% YoY.

With physical retailers reporting strong sales during Black Friday, investors will be of the opinion that not only have consumers regained their swagger and confidence, but they have enough disposable income, or ability to raise modest amounts of credit, to continue supporting an economy approximately 80% dependent on consumer spending. Similarly, watching commodity prices increase; WTI reached a two year high last week with Brent crude also close to such an increase, suggests that the engines of manufacturing growth in: Europe, Asia and North America are firing on all cylinders.

Gold experienced a week in which the precious metal’s price whipsawed quite dramatically through a wide bullish and bearish range, as to how price develops this coming week will be a fascinating observation. Price continually breached the critical 100 DMA to the downside (which appears to be acting like long term technical support), to then recover. At one stage price (XAU/USD) reached 1296 last week, with many analysts predicting the 1300 critical psyche handle was in sight. However, if the “risk on” investor appetite remains in place, then the safe haven appeal of precious metals and indeed currencies, such as yen and the Swiss franc, could recede over the coming weeks.

The U.S. dollar recently recovered some of its significant 2017 losses versus its main peers: yen, sterling and the euro, as the FOMC December meeting begins to come into focus. From early September to early November the dollar made significant gains versus the euro; EUR/USD fell from 1.21 to 1.15. But analysts and investors quickly crunched the numbers and odds, calculating that with a rate rise looking odds on to be announced in the final meeting of the Fed chairs in 2017, the dollar rise may have already been done for the year. Consequently EUR/USD has recently risen to 1.92 and similar patterns of price behavior has been witnessed in USD/JPY and GBP/USD.

Janet Yellen resigning early as chair of the Fed, handing over her duties to the more dovish Powell (who’s Trump’s man), suggests that any December rate rise is unlikely to be followed by an aggressive hawkish policy in 2018. 2-3 rate rises to normalize rates to circa 3% and quantitative tightening to divest of the $4.5 trillion Fed balance sheet, now look highly unlikely.

Whilst USA economic calendar news over December will be dominated by Trump’s intended tax rises potentially being voted into existence by USA lawmakers, Europe’s political and economic landscape will be heavily influenced by the continual saga of Brexit and the current power vacuum existing in Germany. However, despite the German main DAX equity index experiencing sudden whipsaws during last week, as a consequence of Angela Merkel not being able to form a coalition government, the euro brushed off the impact, investors translating the impasse as no more than an inconvenience as opposed to a full blown crisis. Indeed the euro rose strongly versus its peers on Friday as negotiations between Merkel’s former partners the SDP took place, a union that would satisfy investors and presumably the majority of German population, given that the parties in the previous coalition (prior to this year’s federal elections), are still the two most popular German political parties.

There’s hardly any significant economic calendar releases to become excited over during Monday’s trading sessions; German retail sales are forecast to come in at 2.8% for October YoY, a fall from 4.1% previously. From the USA we’ll receive the latest new home sales, the prediction is for a fall by -6.3%, from the 18.9% YoY rise registered in September. The home sales fall will be explained away by a seasonal drop off in sales.

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