Historically, December is one of the quietest months of the calendar year in terms of both volume and volatility. At the same time, benchmarks like global equities indices typically drift higher in what is often dubbed the 'Santa Claus' rally in the Western world. And yet, there are years in which this assumption does not hold true. There is an extreme exposure to 'risk' in all its forms across the financial system and a comparable level of complacency that has sustained the stretch. With that exposure however has come a considerable amount of skepticism and anxiety.
Will this be one of the 'exception to the rule' years? We only need to look back to December 2014 and 2015 to see the last time the month closed lower for a benchmark like the United States' S&P 500. And, if were were to hold firm, what is the potential for return? Each trader should establish their own conviction on what the risk and reward would be for holding onto their long speculative exposure through next week's high profile event risk and further the holidays. Opportunity and transaction costs seem far smaller for those that would happily jump back in when liquidity returned.
1. Wall Street: The US major indices were on pace to close Thursday higher, but there was little enthusiasm to the bounce. For the S&P 500, a close in the green would be very welcome as it calls to a close the longest string of a declines (4 consecutive) since March 21st and prevents a fresh record of five or greater daily losses which hasn't been experienced since before the US election - specifically the remarkably 9 day string through November 4th.
With the 'sector rotation' theory being used by perma-bulls as one of the justifications for why markets can continue to climb through year's end, the outperformers through this past session were not the same top standing over the past week. Top performance late into the session was the industrials group which rose 0.8% while consumer staples dropped 0.8% and the closely watch tech area rose 0.5%. Over the week, those performances are 1.3%, 2.5% and -3.4% respectively.
2. Bitcoin: Already sporting a proclivity for the extreme, Bitcoin was outdoing itself for volatility through the afternoon hours of Thursday's New York session. All the attention was afforded to the most liquid cryptocurrency's performance versus the Dollar and measured on Coinbase as it capitalized on the otherwise remarkable breach above $14,000 just at the open of the day (in Asia). When European trade transitioned into US, the market accelerated to the point of running from $15,000 to just shy of $19,700 in the span of just 15 minutes. On the day (starting in Tokyo), that tallies to an incredible 40% rally to the intraday high. And yet, that peak would not hold. Another extreme move would result in an equally dramatic correction with a near 20% retreat from the new high through the close of normal New York hours.
We've similar violent swings in just the past few weeks, and the market has still pushed higher. That said, this is clearly still a speculatively motivated market with its deep financial integration still a long ways off. If risk aversion were to kick in, this market would be ravaged as readily as the S&P 500 - probably moreso given its volatility. And with that, we should also consider abnormalities such as the different in highs reported between Coinbase ($19,697) and Bitfinex ($15,820). That is a systemic issue, not a mere quibble.
3. Top events next week: It seems as if the economic docket is attempting to cram in all the major event risk it can into the coming week of trade. That isn't surprising given the rapid reduction in liquidity expected in the subsequent and final two weeks of 2017. While there is plenty of scheduled data and general events to keep tabs on, there are two general themes global traders should keep tabs on for volatility and opportunity: moentary policy decisions and the EU Summit.
There are four major central banks due to deliberate policy next week: the Federal Resreve, European Central Bank, Bank of England and Swiss National Bank. Of those four, the Fed's call will carry the most punch as there is heavy anticipation that the third 25bp hike of the year will be announced. That said, the true market impact will arise from their forecast for pacing into 2018. The other three could surprise with their tone regarding forecasts, but the markets clearly are not anticipating it. As for the EU Summit, this is clearly being billed as the EU 27 versus UK meeting. Brexit is at the top of the mind and progress is still up in the air.
4. US Dollar and NFPS: The US Dollar is trading at two-week highs and is up for the fourth day ahead of US Non-Farm Payrolls that are released at 08:30 PM New York time today. Expectations are for 195k thousand jobs added compared to +261k last month.
The US Economy's bright spot of late has been consumer confidence, which is coming at a good time as retailers tend to leverage the seasonal festivities as a reason to encourage consumers to over-spend. The US Dollar has also benefited from sluggishness in commodity currencies as a whole, which can look to a handful of reasons why buyers are failing to prop up the prices.
5. ASX 200: Cash shares rose by the most since November 9 by gaining 0.54% or 23 points to 5977.7, and back closer to 6,000. For the year, the ASX is ~10% above the 52-week low but lagged the global rally in 2017. Tech and utilities led Yesterday's move, but all 11 subgroups were higher with NIB Holdings (NHF) climbing +3.6% to a record high and Tassal (TGR) falling -6.5% to the lowest since April 2016.
6. Commodities: The commodity market has gone from hot to not as investors the world over find reasons to doubt China growth will continue at the same pace as previous years. While extraction and supply have been aggressive, views that demand would draw down the supply are waning.
Commodities are often seen as a leading indicator of demand and the recent selloff of ~4% in the last month of the Bloomberg Commodities Index raises doubts on the persistence of global economic growth. If growth in China slows down the breadth of commodity demand is likely to drop as well. The likely drop in demand has been seen clearest in the copper market with rising stockpiles and sharp drops in spot prices that have taken prices to a two-month low.
Another recent darling of the commodity sector, energy, has also taken a breather as traders took profits after OPEC's decision to extend production curbs alongside strategic alliances like Russia until the end of 2018. Last year, after OPEC initially agreed to reduce production, the price fell for one-month until rebounding in January.
7. Aussie Dollar: The Australian Dollar is finishing a week that was not kind to Australian Dollar bulls and touched six-month lows. After opening the week with a Reserve Bank of Australia where Philip Lowe declared there was no rush to raise rates, the economic data oscillate lower finishing with a trade balance that missed economists' expectations. Australian exports fell 3% from a month earlier while Imports rose 2% from a month earlier and the September trade balance was revised to A$1.6b surplus from originally the reported an A$1.75b surplus. Across the pond, the New Zealand Dollar also dropped by as much as 0.7%.
8. Market Update:
SPI futures up 18 points or 0.3% to 5999
AUD/USD moved 0 or 0% to 0.7526 - Session High: 0.7529 Session Low: 0.7515
On Wall Street: Dow Jones 0.19%, S&P 500 0.23%, Nasdaq 0.66%.
In New York: BHP -0.36%, Rio -0.95%.
In Europe: Stoxx 50 0.24%, FTSE 100 -0.2%, CAC 40 0.14%, DAX 30 0.27%.
Spot Gold moved -0.28% to US$1252.5 an ounce.
Brent Crude moved 1.01% to US$61.84 a barrel.
US Crude Oil moved 0.82% to US$56.42 a barrel.
Dalian Iron Ore moved -2.93% to CNY497.5 a tonne.
LME Aluminum moved -1.61% to US$2019 a tonne.
LME Copper moved 0.11% to US$6550 a tonne.
10-Year Bond Yield: US 2.33%, Germany 0.29%, Australia 2.51%.
This column was produced in commercial partnership
between Fairfax Media and IG