Just when you got the sense that investors and traders had thrown in the towel on a pre Christmas rally, equity markets bounce sharply. The FTSE 100 jumped 1.28%, recovering a large portion of last week's losses, the European indexes gained a similar amount, but for a change US equities were the laggard. The rise was a sharp turn around as equity markets opened weaker initially after some slightly disappointing data from China overnight. In yesterday's blog I pointed to the raft of data coming out over the next couple of days, and that data seemed to be the catalyst for the rally. In Europe the Markit's Flash Eurozone Composite Purchasing Managers' Index (PMI), which gauges business activity across thousands of companies large and small, rose to 52.1 in December from 51.7 last month. This news seemed to give equities the boost they needed. The survey did go on to point out that whilst Germany economy is booming, France continues to struggle.
The positive data was not confined to Europe, in the US factory output data showed a rise of 1.1% for November against a gain of 0.1% in October. The other element that is always needed for a rally is a good old-fashioned bear story. One that has been doing the rounds over the last 24 hours came in the US equity options market. Apparently a bearish signal was flashed when the price of the benchmark volatility index traded at a premium to its own futures, a sign demand is increasing for protection against stock losses. I would imagine this was traders and portfolio managers preparing in case the Fed moved this week, looking to protect profits at the end of the year.
One has to bear in mind that if economies are recovery interest rates will normalise and in the end this is positive, but these adjustments are going to take time. Despite the positive data, most experts do not believe the FED will now move on Wednesday, mainly due to the timing of the year. The one thing is for certain as each day passes we get a day closer to the day the FED will move. I personally welcome the move as it will remove some uncertainty and demonstrate the FED believes the recovery is well under way. Today we get US inflation data, I still think inflation expectations will have a big impact on the FED's next move.