The S&P 500 bounced off 2600 for the third time in succession, this appeared to offer comfort to traders to chase equities at the start of Tuesday. This will once again raise the question if this is the start of the Santa Rally? Brexit is likely to come off the headlines, at least for a few days, as the vote has now been postponed. There can be no doubt Brexit fears have affected sentiment towards the global economy. The equity market seemed happy to ignore the various topics that have haunted investors for the past couple of months, at least for a day. One piece of news that helped support investor sentiment on Tuesday was the news that China had reduced the tariff on imported cars from the US from 40% to 15%.
The latest leg in the downturn in equity markets was excused by the arrest of the daughter of the founder of Huawei, as this was considered an act that could further damage trade relations. The tariff reduction suggests investors may take comfort that the two issues will be dealt with independently.
As we reported earlier in the week December is traditionally a good month for equity markets. Fund managers are paid based on the value of assets at the year-end. It is not in their best interests for equities to fall into the year end. We saw that US equities had one of their worst weeks last week for 10 years. Equity markets have been reacting to slower growth based on a tightening of monetary conditions. This has led to a widening of credit spreads between investment and non-investment grade credit. It has also led to the flattening of the US yield curve.
Post the correction we have had; global equities are down over 6% this year. German equities over 20% from their high earlier in the year. This has led to equity markets coming much closer to historic averages. It may well be as the economy slows that equities need to get even cheaper to tempt fund managers back. Whether we have seen enough pain over the past few weeks to set the base for the Santa rally, is difficult to tell. It is probably fair to say we may be a little closer.