Santa Rally stalls even though a December cut from the Fed is a near certainty

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1764588619 Santa Rally stalls even though a December cut from the.jpg

There’s an 88% chance the Fed will cut interest rates by 0.25% on December 10, according to CME FedWatch Futures Market is rarely wrong, but that implied promise of a new round of cheaper money wasn’t enough to boost US stock futures this morning. Standard & Poor’s 500 futures fell 0.64%. Nasdaq 100 futures fell 0.78%.

Pessimism began in Asia, with Japan’s Nikkei 225 down 1.89% and South Korea’s Kospi down 0.16%. Europe was a little better. The STOXX Europe 600 index was down 0.21% in early trading, and Britain’s FTSE 100 index was down 0.14% before lunch.

It was all in stark contrast to Friday’s trading in the US, when the S&P closed higher for the fifth straight session. The talk over the weekend was that this signaled the beginning of the “Santa Rally,” the myth that stocks perform well in December as traders bask in the cheer of the holiday season (and the Q4 corporate revenue picture becomes clearer).

Unfortunately, the tech sector is spoiling the party: Bitcoin fell to $85,000 early this morning before recovering to the $86,000 level. This is well below its record high of $125,000 earlier this year. “It’s starting to look very much like a crypto winter,” RBC’s daily morning email said.

More broadly, although the S&P 500 is up 16.5% year to date, “fears of an AI bubble remain prominent, with the Magnificent 7 losing ground.” [in November] For the first time since March, according to a note from Deutsche Bank this morning.

These concerns have crystallized as Morgan Stanley’s argument that hedge funds are actually reducing Oracle’s AI debt by buying credit default swaps on its bonds (a type of insurance that pays out if a debtor defaults). Traders have become increasingly skeptical of how AI companies are fueling their growth through debt rather than revenue.

There may be good news for stocks on the horizon, especially if the US Federal Reserve implements this cut in December. Traders are now looking ahead to whether the Fed will cut interest rates again in January, emails from ING and Goldman Sachs said this morning. Right now, CME FedWatch shows a 21% chance of this happening. “We believe the market will increasingly focus on pricing subsequent meetings,” George Cole and his colleagues at Goldman wrote. “We think very little was priced in the first quarter.”

Here’s a quick snapshot of the markets before the opening bell in New York this morning:

Standard & Poor’s 500 futures It is down 0.58% this morning. The last session closed at an increase of 0.54%.
Stokes Europe 600 It decreased by 0.21% in early trading.
UK FTSE 100 index It decreased by 0.14% in early trading.
Japan Nikki 225 It decreased by 1.89%.
China CSI 300 It rose by 1.1%.
South Korea Cosby Decreased by 0.16%.
India Stylish 50’s Decreased by 0.1%.
Bitcoin It dropped to $86,000.