Is the “Santa Claus rally” real or what? Nope, that ain’t a jolly old man in a red suit giving away thousands of pips to traders who have been good boys and girls all year (although that would be nice!). The Santa Claus rally refers to the strong surge in prices towards the end of the year, particularly in equities.
Thanks to intermarket correlations, this risk rally can also be observed in the forex market. Of course this phenomenon is more likely to take place if there are catalysts that could spread holiday cheer towards the end of this year. Are there any this December 2013? I’m making a list and checking it twice!
1. Yellen’s commitment to Fed stimulus
Back when incoming Fed Chairperson Janet Yellen had her testimony in front of the Senate Banking Committee last month, she already stressed her commitment to boost inflation and employment by keeping the Fed’s easing programs in place.
While many were disappointed to find out that the U.S. central bank isn’t likely to taper anytime soon, the promise of continued economic support was enough to spur confidence in a sustained recovery. In other words, a prolonged period of easy monetary policy could boost spending and lending, which is good for business activity and overall economic growth. Now if that ain’t enough to spark risk-taking, then I don’t know what will!
2. Rebound in China?
Another factor that could keep risk appetite strong in the last trading stretch of the year is the rebound in Chinese manufacturing activity. At the start of this week, we saw a couple of PMI releases, one from HSBC and another from the Chinese government itself. Both reports came in stronger than expected, with the official government PMI holding steady at 51.4 and the HSBC figure climbing from 50.4 to 50.8.
Aside from that, China’s pledge to implement aggressive economic reforms as detailed in their 3rd Plenum could also ensure that the world’s second largest economy is on track to achieving double-digit growth once more.
3. Strong U.K. fundamentals
Let’s not forget the improvements seen in Europe! While the euro zone seems intent to remain the continent’s problem child, it looks like the United Kingdom is proving to be a wonderkid!
A few days ago, the U.K. boasted of a huge upward revision in its Q3 2013 GDP reading from an initial estimate of 0.8% to a whopping 1.5% growth figure. Aside from that, its November manufacturing PMI surged to 58.4 from an upgraded 56.5 reading for October. And since the BOE already clarified that they’re in no rush to hike rates, there’s a good chance that the U.K. economy could keep performing well in the coming months.
4. Upside breakouts in equities
Last but not least is an early signal from equity indices, which have posted remarkable gains in the past few months and seem ready to go for more. For instance, the Dow Jones Index is currently testing the top of a long-term consolidation pattern and analysts predict that a close above 15,700 could confirm that more gains are in the cards.
Some suspect that a delay in the Fed taper might be enough to push U.S. equities, including the S&P500 and Nasdaq, higher towards the end of the year and possibly even until the first few trading weeks of January 2014. Do you think we’ll see the Santa Claus rally this year? Let us know by voting through the poll below!