Has the Santa Claus Rally arrived?

Has the Santa Claus Rally arrived?

Last week markets were up 7.4%, clocking their best weekly gains in the past two years. Can we say that the year-end rally has arrived?

If you look at the past ten year’s data, the BSE Sensex has gone up nine out of ten times in the month of December except in 2001 when the markets fell 1%. This trend is mainly because of the foreign institutional fund flows.

Last week markets were up because of short covering owing to the positive global developments. This was after several central banks led by the US Federal Reserve cut the lending cost for the European banks to 50 bps from 100 bps, making it cheaper for cash trapped European banks to borrow; this helped dilute the risk from the Euro-zone. Also, economic data from the US, starting with Black Friday, when sales were up 16% year-on-year and the unemployment rate which also dropped to its lowest level since early 2009 to 8.6% as the private sector added jobs, improved investor sentiment.

One factor which may boost markets is the expectation of a cut in the Cash Reserve Ratio by the Reserve Bank of India. There is a buzz that India’s Central Bank may emulate China and cut the reserve requirement by 50 bps on the 16th December monetary policy review, besides pressing the pause button on the tightening cycle. Moses Harding, Head of Market and Economic Research at Indusind Bank said, “We expect delivery of 50 bps CRR cut while leaving policy rates unchanged as the RBI’s main agenda is managing liquidity and inflation."

Also another event which is very crucial for the markets is the Euro-zone summit which kick-starts on December 9. It is yet to be seen if the European Union summit will be a game changer, but expectations are rising that the next five days will be a “make or break" week for the Euro, reports the Wall Street Journal. This was after Italian government bond yields fell sharply as investors reacted positively to the new austerity measures. “A lot of negativity is already getting discounted and the Euro-zone problems seem to reaching the climax," said Dhiraj Sachdev, Fund Manager at HSBC Global Asset Management.

While there are expectations of a year-end rally, analysts advise investors to remain cautious. This is because the fundamentals of the Indian economy continue to remain weak as there is high inflation, low growth, a burgeoning fiscal deficit and policy paralysis after the finance minister put the much awaited foreign direct investment in retail on hold. These factors may cause Santa Claus to say good-bye even before Christmas.