Friday, December 20, 2013
The bulk of this year’s Santa Clause rally may have been what we saw Wednesday afternoon after the Fed came out with its measured Taper announcement. We may get some modest gains on top of that short burst of positive activity in the remaining few, mostly low-volume, trading sessions, but likely not much more.
In fact, if the persistent uptrend in treasury yields continues, the gains could very well stall out. Treasury bonds certainly didn’t show as much enthusiasm for the Fed’s announcement as stocks did and have continued push yields higher. This morning’s positive revision to Q3 GDP will likely further play into the bond market’s skepticism of the Fed’s long-term interest rate guarantees. And therein lies the threat to the stock market. Stocks can’t continue to move higher in the face of a treasury yield complex that has tuned out the Fed. It hasn’t happened yet, but the risk is very real.
One corner of the market that appears to be behaving contrary to pre-Taper-announcement concerns is the emerging markets. These markets were hit hard earlier in the year when the Fed first floated the Taper idea, but haven’t seen as much volatility since the actual announcement. That said, it will be premature to believe that these markets are out of the woods already. In fact, Turkish and Indonesian currencies appear to be in the market’s cross-hairs already and the other big vulnerable economies of India, Brazil and South Africa not expected to escape pain for that much longer either. And what’s happening in emerging markets is a likely a preview of what will happen to other high yield and capital constrained corners of the markets.
In corporate news, BlackBerry (BBRY) came out with weaker than expected results, with the beleaguered smart-phone maker not only coming short of market expectations, but also taking a major inventory write-down. Truck engine maker Navistar (NAV) also missed expectations.
Sheraz Mian
Director of Research
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