Twas The Week Before Christmas, Amidst Powerful Trends

The capital markets have been buffeted by political developments and central bank policies. The direct influence of high frequency data seems to have diminished in recent weeks.  With less participation in the year-end markets, this is likely to continue to be the case over the next two weeks.  

There are several powerful trends in the global capital markets. The trends appear to have begun at the start of the fourth quarter. Three trends have been particularly robust. The dollar’s climb against the yen, the rise in US 10-year yields, and the rise in Japanese stocks. The three have risen in nine of the past 11 weeks and six in a row.  

The Dollar Index has risen, as have two-year US Treasury yields, and gold has fallen in eight of the past 11 weeks.  The euro has risen, alongside the Dow Jones Stoxx 600 in seven of the past 11 weeks. What may surprise many is that the FTSE All-Shares Italian Banks Index has also risen eight of the past 11 weeks, including the past three weeks.  MSCI’s Emerging Market equity index and its Asian Pacific Index has fallen in seven of the past 11 weeks. The light sweet crude oil futures price has risen in seven of 11 weeks, but Brent only rose in six weeks.  

Due to the China’s national holiday, its markets were opened a week less this quarter. However, powerful trends are also in place. China’s 10-year yield has risen in seven of the past 10 weeks. Although the Shanghai Composite has risen in six of ten weeks, it has fallen three in a row now and four of the past five weeks. The dollar has risen against the yuan in eight of the past ten weeks and 24 of the past 32 weeks.  

A key issue now is whether the trends are extended or a profit-taking phase is seen into the year-end. It is a question of psychology, and perhaps a subject for game theory. Arguments that things have gone too far too fast are several weeks old, though it is true, of course, that technical readings are even more stretched.  And if the market was exaggerating the likelihood of the kind and magnitude fiscal stimulus that is likely to pass a more conservative Congress, then it similarly overreacted to what appears to be relatively modest changes in the average (rather than the median) Fed’s forecast.  The average for next year, for example, increased by nine basis points, though the median is increased by 25 bp.