Prospects for a “Santa Claus rally” are decreasing by reassessment of global bank policy tightening

The outlook for economic activity, financial conditions, and investment appetite is rather limited at the moment. The search for a recovery in risk assets over the past few weeks has been more of a course of investor complacency than a turnaround in fundamentals. Assumptions about seasonal trends are likely to play a bigger role in market developments over the next few weeks than any significant change in issues such as interest rate expectations.

In Europe, the tension between Italy and the ECB is growing. Three high-ranking Italian politicians criticized the European Central Bank’s increase in borrowing costs, pointing to rising tensions between Giorgio Meloni’s government and Frankfurt officials. Italy’s defense minister, a close ally of Meloni, tweeted Thursday that the ECB’s interest rate hike and President Christine Lagarde’s hawkish tone are an unwelcome “gift” to the country. The yield spread between German and Italian 10-year bonds, considered a key indicator of risk in the region, widened 13 basis points to more than 200 basis points Thursday after the ECB’s decision. And on Friday, the spread rose another 10 basis points to 215 basis points. The European Central Bank expects to implement at least two more successive rate hikes of 50 basis points.

Oil recovery last week was stifled by renewed recession fears and long-term interest rate hikes by global central banks. Rising rates have a negative impact on the demand for “black” gold, which translates into lower quotes. Also, the growth of infections in China (one of the largest importers of oil in the world) may further reduce the demand for fuel. On the other hand, the US Department of Energy announced on Friday that from February, it would begin to replenish depleted national strategic oil reserves (SPR) with an initial purchase of 3 million barrels. This news may push oil bulls to buy oil.

Asian markets traded flat last week. Japan’s Nikkei 225 (JP225) decreased by 0.77% for the week, China’s FTSE China A50 (CHA50) lost 0.71%, Hong Kong’s Hang Seng (HK50) decreased by 0.73%, India’s NIFTY 50 (IND50) fell by 0.47%, and Australia’s S&P/ASX 200 (AU200) was down by 0.78% for the week.

China’s economic activity weakened in November before the government abruptly abandoned its Covid Zero policy, with a surge in infections in the coming months likely to cause more turmoil and push policymakers to increase stimulus. Key data released Thursday showed that business and consumer activity fell to its lowest level since the spring quarantine in Shanghai.

In the commodities market, futures on natural gas (+5.86%), WTI oil (+5.14%), coffee (+4.55%), BRENT oil (+4.15%), gasoline (+4.1%), wheat (+3.23%) and sugar (+2.5%) showed the biggest gains by the end of the week. Futures on palladium (-13.37%), lumber (-5.48%), platinum (-3.58%), copper (-2.8%), and orange juice (-2.44%) showed the biggest drop.