Are U.S. equity markets losing their sparkle?

No tax reform may mean no Santa Rally this year

It’s been a rocky few days for U.S. equities and that may be starting to take its toll, with U.S. futures pointing to a weaker open on Wednesday, as Europe and Asia post similar losses.

It would appear some of the sparkle has disappeared from the markets at the start of December after what has been another impressive performance since the middle of November. The prospect of tax reform in the United States, which has made progress, has aided the rally in recent weeks but clearly a number of significant hurdles remain and this is likely to continue to impact investor sentiment this month. A failure to deliver tax reform may well ensure the Santa Rally eludes us this year.

The pound is trading around half a percentage point lower against the dollar and the euro this morning as optimism around Brexit negotiations fades. The DUP’s decision to scupper a deal on phase one of the talks late in the day has raised serious questions regarding whether one can now be achieved by the EU summit next week when progress is expected to be discussed. If the Irish border issue remains unresolved, it’s unlikely that the EU will sign off on negotiations progressing to future trade and transition deal.

GBP stutters as Irish border issue goes unresolved

Sterling had previously rallied to two month highs against the greenback on the prospect of a deal being achieved, as both parties appeared to have closed in on a financial settlement being agreed, at least in theory. As it turns out, what had been touted as being the largest stumbling block has turned out to be nothing in comparison to finding a solution to the border problem that satisfies all involved. The next week could get very tense for Theresa May and questions over her leadership are already once again being asked, providing more downside pressure on the currency.

Bitcoin surges again as CBOE and CME prepare to offer futures

Bitcoin is surging once again on Wednesday in a fashion that has become all too familiar this year. The cryptocurrency was up almost 10% on the day at one stage, reaching a new high above $12,800 in the process, and continues to trade close to these highs at the time of asking. The moves we’ve seen over the last week or so have been quite remarkable even for bitcoin and while there have been fundamental factors supporting the rise this year, the speculative contribution to the rise can’t be overlooked.

Cboe and CME Group are preparing to offer bitcoin futures over the next couple of weeks and perhaps this has played a major role in the surge. That said, the increased media coverage we’ve seen around bitcoin recently may have actually fed the frenzy, with fomo traders piling in to avoid missing out on a rare opportunity to make these kinds of gains. The danger here of course is that this kind of action leaves traders very vulnerable to bubbles bursting and significant losses due to a lack of understanding of what is being traded.

While political stories are dictating market sentiment at the moment, there are a number of key data points still to come this week that will have an influence. Today we’ll get ADP employment numbers for November, ahead of Friday’s official jobs report, as well as unit labor costs and productivity numbers. The Bank of Canada will also make its latest interest rate decision, although no change is expected with the central bank having already raised interest rates twice in recent meetings.