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Record-high stocks offset lingering uncertainty

January 05,2022 18:46:38

Overnight Headlines

*Third dose of Astra Zeneca jab increases antibody levels against Omicron

*US and Russia to hold talks in early January, says Putin

*German import prices rise at fastest pace in nearly 50 years

*US data suggests the economy remains resilient as infections hit record levels

USD fell for a fourth day near a one-week low around 96. The dollar slipped 0.1% reflecting the slightly more upbeat mood among investors. GBP surged north to a new four-week high at 1.3437 before falling back to the figure. EUR/GBP dropped sharply to 0.8415, its lowest point since late-November. Commodity, risk-sensitive currencies also outperformed with AUD touching 0.7251 and USD/CAD briefly falling below 1.28.

US equities closed at record highs marking the third straight advance. Promising data helped offset fears surrounding the record number of Omicron infections across the globe. The S&P500 added 0.6%, following two days of more than 1% increases. The tech-laden Nasdaq closed 0.8% higher, meaning the index is up more than 3% for the week. Asian markets are mixed amid early closes. US markets are closed today for the Christmas holiday.

Market Thoughts – US economy remains strong

US data yesterday suggested American consumers are still spending at a rapid rate. The core PCE index leapt 4.7% on the year in November. US durable goods increased 2.5% from the previous month, beating the 1.6% analyst forecast, while first-time jobless claims were unchanged from a week earlier in a sign that lay-offs remained at low levels.

The hawkish shift in the Fed’s tapering plans and dot plot projections shows the marked policy divergence with the ECB, even if the ECB were slightly less dovish than expected at its recent meeting. The FOMC is consumed with the inflation debate while it’s hard to look past the Omicron impact in Europe. The dollar tends to soften in late December but should reassert itself in the medium-term.

Chart of the Day – Santa rally

There is much hope that we are now seeing the famous “Santa rally” where stock markets have traditionally moved higher during the second half of the month. In fact, historically it is the final five trading days of the year (and the first two into the following year) that are the main trading days when this historic outperformance normally kicks in.

We highlighted the S&P500 at the start of the month and it has certainly been a volatile time over the past few weeks. The steep falls in late November/early December found support near the September high and the 100-day SMA around 4500/45. Prices moved up to 4700 before falling back close to the 100-day SMA at 4529. This again provided support and three strong days have seen a new record high close. Thin liquidity and news around Omicron could see the index push on as the Santa rally kicks in. The 50-day SMA is initial support at 4630.

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