Will markets continue the early Santa Clause Rally?

Global equity markets, commodities and crypto pairs trading with a positive bias Friday Morning fuelled by the Federal Reserve's indication it will cut interest rates next year. The US stock market turned in another bullish performance Thursday, with the Dow Jones industrial average hitting new record highs and the S&P 500 rallied to cross 4,700 for the first time since January 2022. Similar to stocks, precious metals and crude oil prices regained momentum following the FED decision and registered significant gains.

The Santa Claus Rally is a term that refers to a sustained increase in the stock market. The rally usually begins in the last five trading days in December and then the first two trading days in January. With the market showing signs of an upward trend since November's first week, investors and market participants wonder whether the Santa Claus Rally came early this year.

Reasons why Santa Claus brought a rally to Wall Street early this year？

• The Fed signaled the end of the rate-hike cycle and the central bank projected that it would cut rates by 75bps in 2024. The US Federal Reserve left interest rates unchanged on Wednesday and the central bank chief Jerome Powell said its historic tightening of monetary policy is likely over with inflation falling faster than expected. Markets now price in a March Fed rate cut with an 80% probability. Inflation is falling faster than initially thought.

• Inflation in the US steadily declined in recent months to 3.1% in November and Eurozone inflation has recently surprised by falling more sharply than expected. In the eurozone, inflation fell to 2.4% in November, not far off the ECB's 2% target. The decline in inflation raised expectations that US and European interest rates could be cut as early as the spring of 2024.

• Strong rebound in U.S. gross domestic product (GDP) in the third quarter. The previous GDP data, which were released last month revealed the economy grew faster than initially projected in the third quarter. A positive US GDP report signals a strong economy which boosts overall investor confidence.

• Robust earnings also lifted market sentiment. Tech giants like Salesforce and Snowflake lead the charge with better-than-expected Q4 earnings.

Conclusion

In the past, December has consistently shown robust performance in the stock market. As we approach the end of the year, investors will likely closely monitor significant economic updates in the US and the upcoming BOJ meeting on December 19. The release of the US Gross Domestic Product (GDP) and PCE inflation data next week is expected to contribute to increased market volatility on Wall Street. However, as the week progresses and the Christmas and New Year holidays commence, we anticipate lower trading volumes, reduced market volatility, and narrower trading ranges during the final week.