The start of the Santa rally as US equities have their best week in seven years?

The best week in seven years for American stocks, according to the Financial Times, as the S&P 500 rose almost 5%. This euphoric sentiment was not reflected in the UK as Brexit continues to weigh on domestic stocks, despite the continuing weakness of sterling. We pointed out at the start of the week that this past five days had the potential to kick start the Santa rally. Italy watered down its budget deficit target, the Fed Chairman becoming less hawkish and the possibility that a truce in the Chinese American trade war could be found at the meeting of the G20. And so all three have come to pass. Brexit, particularly for the UK remains the swing factor for UK stocks. Parliament will begin five days of debating on Tuesday ahead of the vote on December 11th , whether to adopt the Brexit deal proposed by the EU. There, does at present at least, seem little chance that Parliament will pass the bill. If it does not, will Theresa May be able to go back to the European Union, win a few further minor concessions and manage to squeeze the bill pass at a second go?

The Federal Reserve Chairman, Jerome Powell, is back in the public eye as he scheduled to testify on “The Economic Outlook” before Congress’s Joint Economic Committee on Wednesday. After, what were considered a slightly more dovish tone last week, investors will want to see if he maintains that tone.

The week ahead will be dominated by the monthly release of the Purchasing Manager Surveys for the month of November. Having seen deterioration from the summer months in the JP Morgan composite global index reading, there was something of a modest pickup in November. Equity markets should take further confidence if the November trend continues. Other events during the week will be the final reading of the euro area GDP for the third quarter. The German economy appears to have been negatively affected by the trade war with America in the past months, German factory orders and industrial production data this week will also be of interest.

As trade with China has been making the headlines so will China’s trade balance, inflation and Caixin PMI’s. All indications of the strength of the Chinese and possibly the global economy on the whole. Assuming there are not unexpected shocks one would like to believe the equity markets will now focus on the year end, and the path of little resistance maybe higher. When investors come back after the Christmas break, they may then start to take a fresh look at what the drivers for the global economy will be in the coming year.

Posted on December 2, 2018 .