Bernanke kicks of the Santa rally

The Santa rally in the sharemarket has arrived right on cue, a gift from the outgoing US Federal Reserve chairman Ben Bernanke.David Potts: A Christmas boost for the market
Nanjing Night Net

Even our Reserve Bank will be celebrating – the dollar is already starting to crack. It dipped below US89 cents this morning.

But this also makes the prospect of another rate cut next year remote.

After months of hinting, which had kept markets on edge, the Fed has finally begun the taper.

It’s winding down by $US10 billion ($A11.2 billion) a month of its $US85 billion a month buy back of mainly government bonds which has had the effect of printing money and unintentionally flooded global financial markets with liquidity.

Although Wall Street has gone on to a record high since the taper was first mooted six months ago, it has hit commodity price dependent markets such as ours hard.

That’s because less money printing would pull the rug from under US dollar denominated commodity prices.

The taper will strengthen the US dollar and so drag down the value of the Australian dollar which will be music to the Reserve Bank’s ears.

But it had been feared that a more attractive US dollar backed by higher bond yields from the reduced monetary stimulus would create large outflows of capital from emerging markets.

Compounded by falling commodity prices this would also hurt our market.

But the unexpected twist in Bernanke’s statement was that near zero official interest rates would remain well beyond unemployment falling below 6.5 per cent.

It’s currently 7 per cent and on the Fed’s forecasts a drop below 6.5 per cent won’t happen until 2015.

This will continue to underpin Wall Street where the biggest threat would be a sudden rise in bond yields as the taper continues.

The decision was just the spark needed to get the Santa rally going.

This is a well known, but never satisfactorily explained, tendency for the sharemarket to rise in the five trading days before Christmas and first two of the new year.

As a result December has on average been the best single month for the sharemarket for 70 years.

In the past 50 years the market has risen in December 39 times in 50 years.

This story Administrator ready to work first appeared on Nanjing Night Net.

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