It’s starting to feel a lot like Christmas in equity markets – Episode 131 of Damien’s Midweek Markets

The 131st episode of my weekly YouTube show where I discuss what is happening in investment markets and what to look out for. This week I explain the factors that are impacting equity markets leading up to Christmas.

Each show lasts between 5-10 minutes and is aimed at DIY investors (including novices) seeking contemporary analysis to help them understand how investment markets work.

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Abridged transcript - Midweek Markets episode 131

It’s great when you highlight something in a show and it proves to be prophetic. Following the market jitters surrounding Omicron and a US Federal Reserve seemingly set on tapering its quantitative easing programme even faster, despite the arrival of a new Covid variant, I highlighted that the market was primed for a potential rebound.

I explained how certain momentum indicators suggested that equity markets were oversold and how history suggested that we were due a rebound. I explained this in detail to 80-20 Investor subscribers last week in a bespoke piece of research but I also discussed how the Relative Strength Index (RSI) can be used to identify potential market turning points. Having identified such a point the market did indeed stage a rebound.

We can look for a catalyst, perhaps it was more favourable news on the danger posed by Omicron, or hope that global central banks may be forced to rethink their plans to tighten monetary policies (that is to rethink raising interest rates and/or tapering QE). Also Chinese authorities moved to manage the decline of ailing property developer Evergrande and support the housing market - all of which have cheered global investors.

The net result is that we’ve seen an incredible three day rally from the market lows of a week ago. The biggest winners were understandably the biggest losers in recent weeks. The NASDAQ 100 for example has rallied almost 4% as has the German DAX. The S&P 500 is up 3.27%, the FTSE 100 is up 3.05%, the Dow Jones is up 2.91% and had its best day in a year.

The MSCI All Countries World Index is up 2.89%. Even Asian and emerging market equities have rallied, but typically by less than 1%. Ironically so strong has the rally been that some markets are creeping towards overbought territory, but they aren’t there quite yet. But many indices are either fast approaching or almost at recent or all-time highs, by that I mean less than 1% below in many cases. That even includes the tech-heavy NASDAQ 100 which has had a tough time of late, as you might have noticed within your own portfolio. But the rebound has brought a swagger back to tech stocks and in the coming days it will be interesting to see whether global equity market indices can push above their November highs.

UK investors have also been given a boost by a weakening pound. The pound has now fallen to a 2021 low over concerns of new Covid measures being introduced in the UK. The pound is now at $1.32 and has also slumped against the euro. In fact the pound was already under pressure before one of the BoE’s more hawkish member of the Monetary Policy Committee (who set the UK base rate) suggested there were advantages of waiting before raising interest rates following the emergence of Omicron.

In fact, next week will answer a lot of questions for investment markets as the Fed and the Bank of England announce their latest monetary policy decisions. It had been expected that the BOE would raise interest rates next week, but that is less certain now. Both meetings have the potential to be market moving. In addition, we are likely to find out more about the dangers of Omicron and whether new restrictions will be applied in the UK or elsewhere.

It’s one of the reasons that bond yields remain subdued (the 10 year US treasury yield is hovering below 1.5%). While the stage seems set for an end of year Santa rally there are still a number of uncertainties, including geopolitical tensions after the US warned Russia that new sanctions could be imposed, as well as support provided for the Ukrainian military, if Russia invades Ukraine.

Perhaps the volatility of the last couple of weeks should be seen as a dress rehearsal of what to expect as we approach 2022. But for now, the market is back in risk on mode and bearing in mind the seasonal tailwind it’s starting to feel a lot like Christmas.