No nasty surprises before Christmas

Overall equity markets were encouraged by the comments of central banks over the past few days. The conclusion or message that central bankers continue to transmit is that any monetary tightening will be gradual and only come as they feel the global economy will be able to withstand them. It does feel as if we are in a unique point of time in history, central bankers are continually vigilant to not to make decisions that could cause the global economy to fall into a recession. They would rather risk inflation overshooting targets or excessive risk-taking from there liberal monetary policies than risking an economic slowdown.

Equity and bond investors have been deeply sceptical for many years as to the validation of the policies of central bankers. Some originally voiced the view that pursuing these monetary policies would just replicate what happened in Japan. Others that all would happen would be inflation in commodity prices. Not many seemed to express the view that these policies would work to reinvigorate the global economy. 

The US yield curve continues to flatten after Wednesday's rate decision, this is despite the fact that expectations are rising that the tax reforms will be passed by the year-end. This expectation did, however, strengthen the US dollar. The pound weakened against the US dollar, back to 1.33. This helped boost the FTSE 100 this past week. The central bank comments ensured the Vix index closed the week back close to its record lows.

Markets will now be winding down into the Christmas period. This period can be reminiscent of the month of August as trading liquidity can dry up. “Quadruple witching” on Friday did not create a great deal of volatility that it can do some time, however, it does give traders the chance to square off positions into the year-end.

Brexit and tax reforms are likely to make headlines in the coming week as they have done in the past few weeks. There is a plethora of economic data coming from the US, from consumer sentiment to the final reading of Q3 GDP growth and the latest housing data. With the Christmas break coming up it is unlikely that any of this data will cause a great deal of volatility to asset prices. The focus will soon turn into the new year to earnings once again, as companies report fourth-quarter earnings and their outlook for the year ahead.  

Posted on December 17, 2017 .