Wednesday , December 19 2018
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Cool Video: Santa Claus Rally and Trade

Summary:
I was on Fox Business today. Stuart Varney introduced me by asking me about my forecast for a Santa Claus rally–a year-end recovery in equities. From a technical perspective, I liked the fact that the S&P 500 successfully retested last month’s lows last week. I liked that the price action made last Friday’s price action into an island bottom, with a gap lower opening followed by Monday’s gap higher opening. In terms of sentiment, many investors were waiting for a pullback, and while the broader market did, a few high profile names kept the many of the benchmarks elevated. Those have corrected, and the sell-off uncovered new value opportunities. From a macro point of view, with the Leading Economic Indicators still

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I was on Fox Business today. Stuart Varney introduced me by asking me about my forecast for a Santa Claus rally–a year-end recovery in equities. From a technical perspective, I liked the fact that the S&P 500 successfully retested last month’s lows last week. I liked that the price action made last Friday’s price action into an island bottom, with a gap lower opening followed by Monday’s gap higher opening.

In terms of sentiment, many investors were waiting for a pullback, and while the broader market did, a few high profile names kept the many of the benchmarks elevated. Those have corrected, and the sell-off uncovered new value opportunities. From a macro point of view, with the Leading Economic Indicators still rising, fiscal stimulus not yet run its course, and the real (adjusted for inflation) fed funds rate below zero, it is too soon to be looking for a recession, even though late-cycle evidence is accumulating.

Cool Video: Santa Claus Rally and Trade

Marc Chandler in Fox Business - Click to enlarge

The S&P 500 gapped higher today but pared the gains after an unexpected and large drop (-8.9%) in new home sales. The sharp upward revision in September series (to +1% from -5.5%) was helpful, but the annual pace of 544k is the lowest since early 2016.  It was then that Varney and I chatted. A two-minute clip can be found here. The stock market took off –biggest advance in eight months–on what many saw as a dovish speech by Fed Chairman Powell.

I offer a review of Powell’s comments later but suffice for the moment to suggest that while stocks rallied and the dollar sold off, one of the most direct measures of Fed policy the fed funds futures strip had a considerably more benign reaction than the 2.3% rally in the S&P 500 and the 600 point advance in the Dow Jones Industrials. The implied yield of the December 2019 fed funds futures contract slipped half a basis point below last week’s low.

Varney and I briefly talked about trade and Trump and Xi’s dinner Saturday. I reiterated my cynical pessimistic view that the most likely outcome is a resumption of structured talks like the last two US Presidents had. On trade, I simply do not see how China will make the concessions that the US demands. I do not see how Made in China is different from the import-substitution strategy that Trump folds into Make America Great Again. If the US were only interested in reducing the bilateral trade deficit, the agreement Mnuchin had previously negotiated would have formed the basis of a deal. In any event, the most likely scenario still seems to be increased trade tensions between the world’s two biggest economies.


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Marc Chandler
Marc Chandler is Global Head of Currency Strategy of Brown Brothers Harriman (BBH). Previously he was the Chief Currency Strategist for HSBC Bank USA and Mellon Bank. He has been covering the global capital markets in one fashion or another for 25 years, working at economic consulting firms and global investment banks. A prolific writer and speaker he appears regularly on CNBC and has spoken for the Foreign Policy Association. In addition to being quoted in the financial press daily, Chandler has been published in the Financial Times, Foreign Affairs, and the Washington Post. BBH provides specialist services and innovative solutions to many Swiss asset managers that include a global custody network of close to 100 markets, accounting, administration, securities lending, foreign exchange, cash management and brokerage services. Feel free to contact the Zurich office of BBH

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