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Santa Rally?  

Stocks are higher in early trade in Europe after a solid bounce yesterday for the major bourses and a pop on Wall Street after some good earnings and consumer confidence figures from the US allowed some short covering and a bit of unclenching in the wake of last week’s central bank pressure. Oil rose again to take spot Brent north of $83 on the broadly more positive risk outlook. After a sharp decline yesterday for the pound versus the dollar, sterling trades firmer this morning despite the UK economy contracting by more than expected in the third quarter. The dollar (DXY) is generally a bit lower today but off the lows after rejecting Tuesday’s low. USDJPY holds just under 132, largely holding the gains from the BoJ surprise. Yields were back down a touch with the US 10yr at 3.64%. 

Festive cheer 

Earnings from FedEx and Nike boosted sentiment on Wall Street, helping the major US indices rally to the tune of 1.5% or more. There is something of the seasonality here in anticipation of a Santa Rally, and we’d maybe seen the indices get a little short-term oversold. This looks like a short-term countertrend rally rather than the start of a sustained move higher, however seasonality is a factor to watch here. Data was kind of mixed yesterday – home sales fell for a tenth straight month but consumer confidence rose to an eight-month amid signs of inflation receding. Today sees the final GDP reading for the US and the key weekly unemployment claims figures – the labour market now key to how long the Fed keeps raising rates.  

The question is whether the bounce off the Tuesday lows means the seasonal Santa rally is taking shape. It’s always a bit of a guess at this time of year…you could easily see 4,000 retested on the S&P 500 before the resumption of the downtrend, which is still in charge overall. Bulls would require a breach of 4,100 to consider a more sustained rally was taking shape. Ultimately the inflation/recession/tightening narrative cannot be ignored and I believe firmly there is at least one more major flush – the big one, way bigger than we have seen in 2022 - to wipe out the bulls – there is just too much bullishness still. The market has not yet priced the depth of the earnings recession, PEs are still too high and 3,200 will be in play in 2023; 2,600 could be seen again before this is over. 

2022 recap 

Year-to-date the Dow Jones is down 8%, the S&P 500 is 18% lower, and the Nasdaq Composite has shed more than 31%. But it’s been a tale of many twists and divergent performances across various sectors. Energy (XLE) is up 50% for the year, tech (XLK) is down 27%, consumer discretionary (XLY) is 37% lower and materials (XLB) down 12%. Speculative tech (ARKK, Tesla) is down 66% and mega-cap tech (FANG+) is 39% lower for the year. 2022 was the year the old economy roared back; the year that people realised they need to keep warm and feed their families more than anything else. 

The FTSE 100 has enjoyed a much better 2022 than most, rising by around 2% over the course of the year. If 2022 was the year the old economy came back, the UK’s blue chips – 19th century economy stocks – were always in a good place to benefit. This is all about its make-up – many more defensive names, guns, tobacco and alcohol - and  lots of oil; hardly any tech or growth. A 10% decline for sterling against the dollar has arguably provided some currency tailwinds for many of the dollar earners.  Over the last couple of sessions, the FTSE 100 has seen a sharp reversal after last week’s central bank inspired lows. It’s recovered about two-thirds of the roughly 4% decline notched over the first two weeks or so of December. Trading around 7,530 this morning the year high at 7,687 is not too far off and lifetime high at 7,903 from May 2018 is also not a million miles away.  

Top performers this year include BAE Systems, which is up more than 56% YTD. It’s benefitted from new orders and no doubt the Ukraine war has focused investor attention on the longer term prospects for the defence sector. A three per cent dividend yield looks attractive too. Pearson has risen 53% this year thanks to a big turnaround and push towards digital with a new subscription service that places it as a Netflix for education. A takeover offer from Apollo and stake building by activist Cevian highlighted the fundamental merits of the business. Soaring commodity prices and coal’s comeback helped lift Glencore 52% YTD, whilst Shell and BP are both 45%, largely on higher oil prices throughout the year. The worst performer – Ocado, which has been consistently bid up way beyond what it will ever deliver. 

Elsewhere, the DAX is 11% lower for the year as Europe’s largest economy was rocked by the war in Ukraine on its doorstep, an ongoing energy crisis, higher inflation and collapsing consumer confidence, and at the last moment a central bank in the ECB that turned more hawkish than most had thought it would. Commodities have gone full circle. Gold is almost unchanged for the year despite trading in a $400 range; silver up just 3%. Brent and WTI are up 5-6% YTD, having wiped all of the war-induced rally. Copper is down 13% this year as the global economy spluttered towards recession. Heating oil and natural gas have both soared, up 36% and 45% respectively. Despite the recent reversal, the yen has declined almost 15% against the dollar this year, whilst sterling is down 10% and the euro 6% lower. The Aussie and Kiwi currencies are down by about 7%. 

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