George Lucas

Traditional Christmas rally in equities has begun with a reversal of the sell-off from two weeks ago, despite the horrific attacks that took place in Paris and subsequent terrorism-related events, says George Lucas, managing director Instreet Investment.

“Equity investors appear relaxed and also increasingly comfortable with the prospect of a US rate rise, which is looking more and more likely to be announced by the US Federal Reserve (Fed) at its mid December meeting.

“Core CPI in the US is up to 1.9% (now very close to the target rate of 2%) and meeting minutes from the Fed released last week have left the door open for a rise.

Another reason for cheer is Asia and Europe, he added.

“Recent surveys show that global fund managers prefer Asia and Europe over US equities.

Expectations are increasing that the European Central Bank (ECB) will step in soon with more economic stimulus measures by loosening monetary policy further. Mario Draghi, ECB President, made what have been his most forceful remarks yet about the prospect for additional stimulus saying the Bank “will do what we must to raise inflation as quickly as possible”.

This talk of aggressive ECB action helped drive European stocks to three-month highs and is one of the reasons fund managers remain overweight to Europe.

As for Asia, focus is on China as it takes steps towards liberalising its economy and evolving monetary policy tools.

“It’s one thing for China to liberalise its capital markets but it also needs to transmit monetary policy signals through its increasingly diverse financial system. The current benchmark lending and deposit rates do not fulfil this role,” said Lucas.

The People’s Bank of China is also expected to keep market interest rates low for some time to come, until there is firm evidence of an economic turnaround.

Currency matters

As fears unwind around Chinese and global growth and sentiment towards emerging markets improve, the Australian Dollar has rallied against the US Dollar ending the week above 72c. The Euro on the other hand is near a recent seven-month low down 0.8%. The firm US dollar combined with higher short-term bond yields also helped push the gold price down to a near five-year low of $1,065 an ounce. The price did recover slightly to trade at $1,076 on Friday.

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