Santa rally stalls as the world focuses on Omicron

The traditional Santa rally is looking less likely this year as global markets fall at the start of Christmas week. Volatility is higher and European markets have fallen heavily. The FTSE 100 and the Cac 40 are holding up the best so far, with the Dax and Italian FTSE MIB struggling, the latter is down some 2%. US futures markets are also pointing to a lower open for the major US indices. There is some hope, however, with everyone getting so negative, it could be a good time to start buying. Also, according to data collated by the Stock Trader’s Almanac, the Santa rally usually occurs on the last 5 trading sessions of the year and lasts until the second trading session of January. Thus, stocks could still rally into year end, you just need to hold your nerve, and remember that lower volume during this holiday-shortened week could lead to swings to the downside. 

Market anxiety is high this week as we deal with record numbers of people infected with Covid in the UK, a growing number of lockdowns and flight restrictions across Europe and rising infection rates in the US. It is no wonder that traders are gloomy, especially if stock market bulls also have to cope with tightening monetary policy from the world’s major central banks. While gloom descends on the market, it is worth remembering that there are still fundamental factors to consider that could lead to trading opportunities. Below we take a look at four events that could translate to decent trading opportunities this week.

1, Sterling in focus 

GBP/USD has fallen below $1.32 this morning as Brexit fears, Omicron and the threat of more lockdown measures before Christmas weigh on the pound. GBP/USD is now at its lowest level since November 2020, which does feel a bit unfair since the BOE was the first of the major central banks to hike interest rates last week and the UK is powering ahead with its Covid booster vaccination programme. The resignation of Lord Frost as Brexit minister at the weekend is a sign that the government is in disarray, however, our view at Minerva Analysis is that Foreign Secretary Liz Truss could take a more balanced standpoint when it comes to talks with Europe, which may benefit Britain in the end, thus his resignation is actually no bad thing for the pound due to the pound’s sensitivity to Brexit developments. Regardless of this, we think that momentum remains on the downside for GBP in the short term, and GBP/USD could be heading for $1.3160, before the psychologically important $1.31 level. The UK PM has called for a cabinet meeting later on Monday when further restrictions could be discussed. Any new lockdowns could see GBP fall back to the $1.31 level, however there was encouraging news about booster shots and their effectiveness against Omicron, which could mean that any decline back to $1.31 is potentially a good entry point to a long position in GBP/USD.  

2, US: PCE in focus 

The Fed’s preferred measure of inflation, the core PCE index is released on Thursday and the market is expecting to see this measure of inflation rise 0.4% in November to a 4.5% annual rate, up from an annual rate of 4.1% in October. We expect inflation to come in around this rate or higher, however, we already know that the Fed is focused on inflation, thus it may not trigger too much of a price response in the dollar or in US stocks. On the positive side, durable goods orders are expected to bounce back in November, with the headline rate rising 1.5%, and the ex-transport rate rising 0.6% on the month. Q3 GDP is also expected to be confirmed at 2.1%, new home sales are expected to tick up a touch to 0.77mn for November. It also worth watching consumer confidence, which is released on Thursday. If the US consumer can remain resilient even in the face of Omicron and the prospect of higher interest rates next year, then that could be the Christmas miracle needed to get the Santa rally going. 

3, China to the rescue? 

In contrast to the rest of the world, China cut its key loan rate on Monday, for the first time since April 2020 in response to a weaker economic outlook. The 1-year prime loan rate, or LPR was cut to 3.8% down from 3.85%. Asian markets did not take kindly to this very small cut, and were sent reeling, as it suggests that Beijing is truly worried about the economic risks in the world’s second largest economy. This move is seen as an attempt by the PBOC to relieve lending pressure at commercial banks and increase liquidity amid slumping home prices and continued financial woe for large real estate developers like Evergrande. The fact that China is experiencing a different economic cycle from the rest of the world is also unnerving the financial community. Risk sentiment is struggling to recover with this troika of fears: Omicron, tighter central bank policy and a weakened Chinese economy. If China wants to do more to boost sentiment in the region, then it will need to cut the LPR more aggressively in the coming months.  

4, More woe for the Turkish lira 

The Turkish lira has taken another slump on Monday and USD/TRY has risen by more than 20% in the last 5 days, after the Turkish central bank cut interest rates further last week. They have now cut rates by 500 basis points since September even though inflation is at 21%. The unorthodox monetary policy is supported at the top of the Turkish political establishment, with President Erdogan a fan of lowering rates, saying that it will lead to lower inflation, when, typically, the opposite is true. On Monday, the President said that there was no going back on rate cuts, even though the central bank said last week that it would pause cutting rates for 3 months to assess the economic impact. It is worth pointing out that the central bank was forced to intervene to stabilise the TRY for the fifth time in December at the end of last week. The state-sponsored economic mismanagement in Turkey has caused terrible consequences for businesses and individuals as they are left to watch their savings and earnings erode on a daily basis. Inflation is expected to rise to 30% in the spring on the back of ballooning import costs and a 50% rise in the minimum wage that will take effect in the new year. The trouble for Erdogan is that tumult in the FX market, the lira is down by 55% vs. the USD this year, is spreading to the stock market, which had mostly been unscathed. The Turkish stock market had to be shut on Friday due to extreme downside movement. If the lira’s collapse causes a domino effect into other markets, then we could see economic devastation. There are elections coming up in June next year, already the opposition parties have been speaking out against Erdogan, and the Istanbul Chamber of Commerce said last week that it was astonished by the latest rate cut. However, until there is a change at the top of political power in Turkey, then we do not see a recovery for the lira. USD/TRY at 20 looks realistic in the coming days. If Erdogan does lose office next year, only then may a lira recovery be on the cards, however June is a long time and there could be more pain for the lira to come between now and then. 

Wishing all of our clients a very happy and healthy Christmas and a prosperous 2022. 

Please look out for our 2022 multi-market outlook that will be released on Wednesday 29/12.