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The Christmas holiday week is normally a low volatility one. But the Omicron variant and thin liquidity may upset the historical precedent. We wrote recently about the traditional Santa rally in stocks which actually commences in the final five trading days of the year and the first two of the new year. That means we could get more all-time highs next week.
Banks generally square up their books, while optimism over the coming new year could help the bulls take on more risk. But the obvious threat of new restrictions may also loom as the markets continue to digest the last few weeks’ central bank meetings.
The dollar tends to struggle to find a bid into the first week of January. Oil-sensitive currencies have been well supported while GBP has been the surprise outperformer into the holiday period. Bets on more BoE rate hikes have seen the terminal rate pushed to 1.25% by the end of next year. This means four more 25bp rate hikes, a punchy scenario at this point in time.
The week has few economic releases of note with many markets closed for holidays. The UK markets, for example, are closed both Monday and Tuesday.
Risk of events of the week
27 December 2021, Monday:
–Japan Industrial Production: Consensus sees factory output rising 4.4% in November, extending the 1.8% gain in October. The easing of supply chain disruptions means car manufacturing is normalising. On an annual basis, output likely rose 3.2% after falling 4.1% in October.
30 December 2021, Thursday:
–US Initial Jobless Claims: Last week’s first-time claims registered 205,000, unchanged from the week earlier and near historic lows. This is potentially a sign that lay-offs remained at low levels despite concerns over the resurgence of the pandemic.
31 December 2021, Friday:
–China PMIs: Focus will be on both the services and manufacturing PMIs after Chinese industry minister Xiao’s comments that the economy will be under pressure in the first few months of the year. After the recent modest but surprise rate cut by the PboC, the authorities sent a signal about how they view the current risks.
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