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World Week Ahead: Fed-inspired cheer

Monday 22nd December 2014

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US Federal Reserve policy makers have helped renew optimism in global equities with their promise to be patient on raising interest rates, triggering a late Santa rally as Christmas approaches. 

Fed Chair Janet Yellen suggested the central bank will keep key rates near zero at least through the first quarter of 2015.

That timetable helped lift Wall Street last week: the Dow Jones Industrial Average climbed 3 percent, while the Standard & Poor’s 500 Index rallied 3.4 percent, and the Nasdaq Composite Index added 2.4 percent. 

In Europe, the Stoxx 600 Index jumped 3 percent last week, while the UK’s FTSE 100 Index gained 3.9 percent.

“The Fed set the tone and that what’s fuelling the market right now,” Stephen Carl, principal and head equity trader at New York-based Williams Capital Group, told Bloomberg News.

So far in 2014, the Dow has gained 9.9 percent, while the S&P 500 has strengthened 14.3 percent.

The Fed’s message also underpinned the greenback. The US dollar is on track to end the year ahead all except one of its 31 major counterparts, which would be the first time since 1997. And the outlook for the greenback is solid. 

“The US dollar looks like the safest currency,” Geoffrey Yu, a senior currency strategist at UBS Group in London, told Bloomberg News. “If you look at price action, if you look at positioning, it looks like people don’t want to own anything else.”

The Canadian dollar, meanwhile, neared a five-year low against the greenback after a report on Friday showed the country’s inflation eased more than expected last month, while the slump in oil prices has raised concern about the impact on economic growth.

Oil posted its biggest advance in more than two years on Friday—still, it came after fresh five-year lows earlier in the week. And the outlook remains shaky.

"If the market keeps going higher, it'll be a sign for me to sell into the strength,” Tariq Zahir, managing member at Tyche Capital Advisors, told Reuters. He said lower volume over the holidays is likely to exaggerate moves.

Saudi Arabia said on Sunday it would not cut output even if non-OPEC nations did so.

"If they [countries outside of OPEC] want to cut production they are welcome: We are not going to cut, certainly Saudi Arabia is not going to cut,” Saudi Oil Minister Ali al-Naimi told reporters.

Mining and energy stocks have recouped some of their recent losses—though the rebound could prove temporary. 

On Friday, the S&P energy index rallied 3.1 per cent, bringing its advance for the week to 9.7 percent, while in London Rio Tinto added 2.1 per cent, BP gained 2.6 percent, Royal Dutch Shell increased 3.1 percent, and BHP Billiton rose 3.6 percent.

“The commodities sector has been punished sharply for quite a while,” Pierre Mouton, who helps oversee US$8 billion at Notz, Stucki & Cie in Geneva, told Bloomberg News. “I don’t believe it is a good long-term investment as commodities will remain under pressure in my view. But at these prices, there are some pockets of value in specific companies.”

US economic data have consistently offered signs of strength. Today, the Chicago Fed will release its national activity index, with existing home sales data to follow. On Tuesday, ICSC-Goldman store sales, durable goods orders, GDP, consumer sentiment, new home sales and the Richmond Fed's manufacturing index are to be released. On Christmas Eve, there will be jobless claims. 

The New York Stock Exchange will close early, at 1pm, on Christmas Eve and it will be closed on Christmas Day. Trading will resume, normal hours, on Friday. 

Investors will watch a report on euro-zone consumer confidence, scheduled for release today. 

Russia is continuing to add to its stockpile of gold. Holdings of the world’s fifth-biggest gold holder rose to 38.2 million ounces as of December 1, up from 37.6 million ounces a month earlier, the country’s central bank said on Friday. 

The country has been desperately trying to shore up its currency, including with an interest rate hike last week, as the ruble hit a record low against the US dollar on December 16.

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