Market Analysis: stocks unbothered by politics ahead of US CPI

It’s been a busy week on the global politics front with South Korea’s government declaring martial law, France ousting its government and now Syria’s dictator, Bashar al-Assad, being forced from power. However, markets have remained strong throughout, with European and US equities reaching all-time highs. Even oil has remained calm this morning. 

DAX 40 & S&P 500 daily charts

Past performance is not a reliable indicator of future results.

The reason seems to be down to impact. Realistically, neither South Korea nor Syria has a direct impact on the performance of European and US economies, meaning the impact is low. The fact that Syria is not an oil producer is the key to the calmness in oil prices. France’s political turmoil does strike closer to home, but the main companies listed in the French CAC 40 have limited exposure to the domestic economy.

I do get the feeling that if all these event shad happened earlier this year, we could have seen some downside in global equites as investors seemed jumpier back then, but right now it seems like it will have to take something greater to topple the bullish sentiment. Investors have their focus on the US, and it seems like this US exceptionalism will continue to drive market momentum into the new year. The immediate focus will be the US CPI data released this week as this could determine the course of action from the Federal Reserve at their December meeting next week. Forecasts show headline CPI could have risen slightly in November from 2.6% to 2.7% but core CPI is expected to remain unchanged at 3.3%. Whilst this could fear concerns of further upside in prices, inflation remains too high regardless, which has been limiting the central bank’s ability to loosen monetary policy. 

The current odds show an 87% chance of a 25-bps cut next week, but this could quickly change if the CPI data does not come in as expected. A higher reading could push the odds toward no rate cut, likely moving the dollar and yields higher, whilst equities stumble slightly. If, however, the reading is smaller than expected, then the recent bullishness in US equities could be in for another leg higher, whilst the dollar may face some selling pressure as expectations for rate differentials weaken.