Santa Claus seemed to have arrived early in 2016 and already deliver his gifts to investors. The Dow Jones industrial average rallied by more than 8% since November 9 elections, and the S&P 500 jumped 6%. However, Santa wasn’t very kind to fixed income investors as U.S. yields rose across the curve, with 10-year and 2-year yields 45% higher since November 9. Meanwhile the U.S. dollar was by no doubt the king of currencies, and currently sitting at 14-year high. This makes us wonder if there are any more gifts to be delivered the week ahead.
Investors that have decided not to go for holidays yet are looking forward for the Dow to break above 20,000, which in percentage terms only requires 0.8% gains from Friday’s close, and yes, it’s easily achievable. Although I believe that the market has run a little ahead of itself, as long as there’s no bad news, this momentum trade can record new tops. But for the rally to be justifiable on the longer run we require earning expectations to overshoot, and this is still missing from the equation. Wall Street analysts will have tough times to include Trump’s fiscal plans in their earnings expectations models and probably the new president needs to over deliver on his promises to keep driving the rally, otherwise the strong dollar will start eating from multinational profits and the higher yields will begin to attract investors attention.
There’s little in terms of market moving events the week ahead. We’ll have the chance to hear again from Fed’s Chair Janet Yellen who will be delivering a speech at the University of Baltimore on the state of the job market, but we don’t expect her to add any significant clues on monetary policy after last week’s announcement.
Meanwhile Bank of Japan will steal the show on December 20 although monetary policy is likely to remain unchanged. Earlier this year many had expected that the BoJ will announce a fresh round of QE, but now it seems unrequired after the Yen declined significantly against the dollar. Officials at central bank had always criticized the Yen strength and in August, Japan’s finance minister commented that “My understanding is that there have been movements that are quite biased, one-sided and speculator-driven,” but since then the Yen depreciated by about 18%. Is this going to be considered a biased one-sided move? Or its only considered to be on the upside?