Santa Rally

In a more Christmasy spirit, the end of November closes with a positive tone across risk assets. Is this momentum going to continue in December going into an FOMC meeting triggering the so called “Santa Rally”? Views can vary as the market this year has been anything less but surprising in terms of price action.

But let’s start with what has been going on through the other side of the pond. We are still waiting for the decision by the Supreme Court regarding the tariff validation. What we have seen in the last couple of weeks is a few political administrators pointing out that other US tax acts can be used to revalidate tariffs in case the Supreme Court nulls them. Moreover, we saw President Trump re engaging with President Xi on a phone call and re iterating that the relationship between the 2 trade partners is evolving towards a better future and understanding. There was speculation that President Trump would allow NVIDIA chip sales into China, but nothing has been substantiated yet. On the FED side, White House National Economic Council Director Kevin Hassett has been announced as the front runner to replace FED Chair Jerome Powell, and this was taken with a dovish tone by the market. Furthermore, we saw FED committee members Williams and Daly posting that they would encourage a 25bps rate cut in the upcoming December meeting. Market expectations in terms of rate cuts moved from 30% to 89.7% in a week’s time (see table below), which gave a boost in risk assets and namely equity, post the short-term drawdown during the first 2 weeks of November.

On the geopolitical side, there has been some progress in the Ukraine-Russia front. President Putin has said that the US peace plan can be a basis for a future deal with Ukraine and that he is open for discussion. The US administration will be visiting Moscow next week to start further talks. In the UK, Chancellor Rachel Reeves presented the UK Autumn budget with a positive tone in sterling assets and a relief rally in long end gilts.

In terms of market moves, we saw a sharp reversal of the early month’s losses across equity indices. US equity indices are closing 0.5 to 2% lower with tech companies under performing. In Europe, European Banks are trading 4.25% higher in the month with another set of stellar results from Q3 earnings. Gold retraced last month’s losses, trading 4.25% higher at $4175 per ounce. EURUSD remains intact in a very narrow range wrapped around the 1.1550/1.1650 context. On the rates side, US 10yr government bonds are trading at 4% and German 10yr government bonds are wrapped around 2.69%.

Looking ahead…

The most important event of the month is the FOMC meeting on the 12^th of December. Market expectations are pricing a 25bps cut which might alleviate any further uncertainty on the state of the labor market. Post the meeting, we will be receiving official CPI and unemployment data from the BLS department which I believe will define the risk mood in the last few days of the year. It must be said that on a seasonal basis, the market tends to rally in the very last few days of the year, nonetheless this year has been anything than seasonal so let’s see what happens. My gut feel points out towards an optimistic close of the year. Have a good weekend!

Written by: Michael Konstantinou, Senior Portfolio Manager