LAST WEEK (all times GMT)

Monday December 17
The rout from last week continued unabated today, with all indices down, for the usual reasons (trade war, bond yield inversion curve, falling oil) and a new one, the Fed on Wednesday, with SPX down 2.1%, hitting a new 13-month low. All three major indices are in correction territory (over 10% down from the last high) and the small-cap Russell is in bear territory (over 20% down), as is DAX, although FTSE and NKY are not there yet.

DXY was down 0.3% from the 16-month high reached on Friday, after the Empire State business index hi a 19-month low. All currencies (and Gold) advanced, except for risk currency AUD, which was flat and oil proxy CAD which retreated as Oil fell 3.8% in line with general sentiment. (Business requires transport, transport requires Oil. Effectively Dow theory taken one step further). 10-year note yields were down 4bp, either in line with USD or because of stock to bond rotation, take your pick.

Tuesday December 18
Markets were down again today although the action was less severe, and SPX ended the flat (giving up pre-market/futures gains). Other indices were similarly down, for the same reasons as yesterday. It was similar for the dollar, a quieter day than Monday, but in the same direction. DXY was down 0.15%, Once again, CAD followed Oil down (Oil lost 6.65%, its worst day for four weeks) and AUD was flat. Yields were three more basis points down, and the 2/10 curve actually widened to its highest level for two weeks.

Wednesday December 19
Today was the day everyone had been waiting for, and the Fed duly hiked by 25bp to 2.5%. Fed Chair Powell made some dovish remarks, but not dovish enough for the markets. He explicitly rejected [President Trump’s] political interference, confirmed the Fed was economic data (and by implication not equity pricing) driven, and suggested two rate rises (not three) next year. Equity markets nosedived immediately. DJIA which had put on 410 (1.7%) points before the release at 1900 instantly plunged 455 points (1.89%). After recovering half of that, the 1930 press conference caused a further collapse, and by 2000, the index was 900 points (3.74%) lower. Foreign markets followed suit across the board.

DXY, which had been falling all day, spiked up 0.5% on the rate release, but not immediately, which meant it finished the day flat. EUR was flat. Other currencies and Gold fell. The yellow metal initially ramped as a response to the equity drop, then fell sharply in line with USD. As you know from previous reports, Gold’s risk off reaction these days is weaker than its reaction to USD moves. CAD made an early recovery but fell again after the CPI miss at 1330. Notably AUD and NZD were particularly weak, with the latter falling further after the GDP miss at 2245. JPY rose on risk off, matching USD and the pair ended flat by the close. Yields fell sharply in line paying more attention to equities (rotation) than USD, as the latter’s move was less severe. Oil rebounded 2.1% today despite the EIA miss at 1530, probably due to entering an oversold (daily RSI(14)<30) condition on Tuesday.

Thursday December 20
There was no let up as Asian and European markets digested the Fed message, and equities fell again, with SPX down another 1.6% and NDX briefly slipping into bear territory (off the high by 20%). China and tariffs were hardly mentioned in the news, and we are possibly seeing a political narrative that this correction is entirely the Fed’s fault. Certainly President Trump thinks so and he controls the agenda. The issue of course is that the Fed’s dual mandate is employment and inflation, not equity prices. Perhaps we might see more of the controversial view that the Fed was responsible for the 1929 crash and Great Depression. DAX, FTSE and NKY moved almost in tandem with SPX, although FTSE futures managed a last minute rally to close slightly up, possibly on the Gold rally, and some relief to retail from the NKE earnings report and beat (which included strong Europe sales).

After the initial ramp—which was counterintuitive anyway, as yields fell instantly, and two rate hikes is less than three—markets started selling USD. EUR, GBP, JPY and Gold were strongly up, the latter two in a straight line reflecting the strong risk off mood. Gold added $17, and JPY had its strongest day since January, with USDJPY falling 1.06% to touch the 200-day moving average for the first time since August. The GBP 9-0 rate hold was widely expected, and erased a 0.6% ramp after the very strong (core 3.8% vs 2.3%) UK Retail Sales beat at 0930. However, the USD weakness dragged the pound back up. Even AUD and CAD briefly rose, although these commodity currencies ended down on the day. In a rare move, SEK (4.2% of DXY) advanced 1.4% after the world’s oldest central bank surprised with 25bp rate hike. Even MXN added 1.2%. DXY had shed 0.61% by the close and so was well below the rate hike level. Yields had been flat all day but had a late 2bp spurt to return to the pre-Fed level.

Friday December 21
Government shutdown day came and went without resolution, and at the time of writing, funding for many parts of government expired midnight Friday/Saturday and Congress is in session over the weekend to work out a deal. This bizarre quirk of US politics rarely affects the market, as it is quickly resolved, and of course many Federal employees will have taken next week off. We now have a Democrat house but they have (surprisingly) passed Trump’s wall-funding bill, only the Senate remain.

Markets drifted in Asia/Europe and then there was a brief but notable rally in the early US session after Fed Williams (hawkish, 2018 and 2019 voter) made a conciliatory speech saying that “The markets are telling us [the Fed] something pretty clearly — that there are at least downside risks that we need to be attuned to”, and that “material” deterioration in the outlook would cause them to reconsider rate hike policy. He added “We are going to go into the new year with eyes wide open, willing to read the data, listen to what we are hearing, reassess our economic outlook and take the right policy decisions that will keep the economy strong, keep the expansion going, and keep inflation near 2 per cent.”  DJIA shot up 250 points in minutes, but the rally was short-lived.  From that high point, the index then fell and fell, down 860 points (3.7%) to close at a 14-month low.

It was of course quad witching day, when daily, weekly, monthly and quarterly options all expire together. Calls would largely expire worthless and therefore not be exercised. Other the other hand, any puts where shares had been bought to cover would push the market further down. Note that total volume on Friday, at 12 billion shares, was the largest in two years.

At this point, the equity markets have had their worst December since 1931. Even if a post-Christmas Santa Rally appears in the four remaining trading days of the year (three and two halves), SPX would have to add 178 handles (7.36%) to even beat 2002 where the bear market at the time was in its final throes.

In currencies, USD rose back up today, with DXY adding 0.58% to end up where it was on Wednesday. Once again, given the risk off, JPY kept pace and ended flat. Other currencies all softened, and again AUD and CAD were hit worst, as Oil gave up another 1.2%, and although Canada beat on GDP, they missed on Retail Sales, both at 1330. Yields were more or less flat. The 2/10 yield curve stabilised this week, but still ended 1bp closer at 14.9bp after dipping below 9bp last week. The 5/3 went positive again this week, and only the 3/2 is still negative.

Please note all figures and percentages given for daily movement on indices cover the entire cash and futures period in that day. Currency moves are stated in relation to the US dollar. Dollar moves are referenced from the DXY basket.
WEEKLY PRICE MOVEMENT

The worst week for SPX and NDX (down 7.98%) since the Euro crisis in August 2011, and the worst three weeks since the 2008 crisis saw VIX hit its highest level since February. NKY was nearly as bad, although notably other indices did better, showing this was a reaction to the rate hike rather than tariffs. We will see if there is a Santa Rally next week, but if not, December 2018 is on course to be the worst month for equities in ten years.

DXY only softened a modest 0.49%, but this was largely due to a collapse in CAD, following Oil. Risk currency AUD fared worst, and buying EURAUD for 2.63% would have been the best forex trade. Oil was marginally worse than the week ending Nov 24 (when it fell 11.51%). Some FAANGs fell even further than NDX, with AMZN having its worst week since Nov 2008. The only bright spot in this gloomy week was cryptos which surged, but even those stellar percentages meant BTC and ETH were still lower than their position two weeks ago.

(Crypto prices are given as at 0000GMT Saturday, after the other markets close.)

AUDUSD 0.7034 (-2.06%)
EURGBP 0.8993 (+0.10%)
EURUSD 1.1383 (+0.65%)
GBPUSD 1.2658 (+0.56%)
NZDUSD 0.6710 (-1.29%)
USDCAD 1.3603 (+1.64%)
USDJPY 111.24 (-1.94%)
DAX     10508 (-2.98%)
FTSE     6638 (-2.67%)
NIFTY   10754 (-0.47%)
NKY     19872 (-6.64%)
SPX    2419.9 (-6.98%)
GOLD  1255.98 (+1.44%)
OIL     45.16 (-11.80%)
BTCUSD   3979 (+21.27%)
ETHUSD 111.48 (+30.85%)
FB     124.95 (-13.27%)
AAPL   150.73 (-8.91%)
AMZN  1377.45 (-13.47%)
NFLX   246.39 (-7.66%)
GOOGL  991.25 (-5.75%)
DXY     96.95 (-0.49%)

NEXT WEEK (all times are GMT)
(Calendar High volatility items are in bold). 

Monday December 24
Obviously a very light week for the holiday. Japan is closed for the Emperor's Birthday, and US markets have a half day. The shutdown may or may not be fixed. The huge volume of Friday’s selloff does not bode well for the markets, although they are, of course, all oversold in technical terms, and it is unlikely there would sufficient volume to make a serious reversal, and there is little economic news to make a difference.

13:30 USD Chicago Fed National Activity Index

Tuesday December 25
Australia, Europe and US are closed for Christmas Day, only Japan is open. Expect a completely flat day.

05:00 JPY Japan Coincident/Leading Economic Indices

Wednesday December 26
Australia, Europe and Canada are closed for Boxing Day. The US is open, but of course with many traders still on vacation, volume and therefore volatility is expected to be very light. The API report is one day late because of the holiday.

14:00 USD US S&P/Case-Shiller Home Price Indices (YoY)
21:30 WTI API Stock
23:50 JPY BoJ Monetary Policy Meeting Minutes

Thursday December 27
Global trading resumes for this very short week today, but in the absence of much news (and surprises are unlikely, the politicians and central bankers take holidays too), we don’t expect much to happen. There might be a bit of final window-dressing of portfolios today and tomorrow to look right for the fiscal year end. The effect of this is to promote strong stocks (possibly averaging down) and remove weaker ones, which accentuates any positive trend, for example this year it would be defensives vs risk stocks. If XLU goes up and NDX goes down, you will know why. There is a lot of talk about the US having peaked and other markets being stronger at the moment. Again this would be reflected in indices. Look at the relatively unusual movements last year, where DAX fell all week, and FTSE rose in this period.

09:00 EUR ECB Economic Bulletin
13:30 USD US Jobless Claims
15:00 USD US Consumer Confidence
15:00 USD US New Home Sales (MoM)
23:30 JPY Tokyo CPI
23:30 Japan Unemployment/Retail Sales

Friday December 28
The timing this year is that the final day is on Monday, but the comments above apply to today as well. If you look at the charts for this week last year, you see all kinds of odd movements, where NKY collapsed a day before SPX, and DAX and FTSE went into opposite directions. The EIA Oil report is two days late because of the holidays.

09:30 GBP UK Mortgage Approvals
13:00 EUR Germany CPI
14:45 USD Chicago PMI
15:00 USD Pending Home Sales (MoM)
15:30 WTI EIA Stock
18:00 WTI Baker Hughes Rig Count