After weathering the "AI sell-off," U.S. stocks appear to have rebounded, with the long-awaited "Santa Rally" finally materializing. Global traders seem poised to welcome a bullish start to 2026.
The rebound began last Thursday, with Wall Street trading desks reporting that Friday nearly became one of the highest-volume trading days in U.S. market history. So far this month, the S&P 500 has largely stabilized after last week’s recovery, suggesting the market may be shifting toward "profit-taking on winners" to fuel the year-end rally. For instance, previously hard-hit AI-related stocks like Coreweave and Oracle have posted double-digit rebounds.
The macro backdrop has set the tone—Fed rate cuts and the Bank of Japan’s dovish rate hike have jointly boosted year-end market confidence, while a weaker dollar has lifted global equities and commodities. Beyond U.S. stocks, many Asian markets stand to benefit. Goldman Sachs noted in a recent report that as the yuan approaches the 7-per-dollar mark, Chinese equities tend to perform well when the currency strengthens—a pattern consistent with most emerging Asian markets.
**Year-End Rally Gains Momentum** On Monday (22nd), major asset prices rose in sync, driven by the Fed’s dovish pivot and the BOJ’s cautious tightening.
The three major U.S. indices started the week higher, though trading volumes remained below the 30-day average. Big Tech stocks broadly advanced, with Nvidia gaining 1.5%.
The dollar index continued its decline, breaking below 99, while non-U.S. currencies rallied. The weaker greenback not only fueled global stock rebounds but also ignited a surge in precious metals. Gold jumped 2.4% to $4,443, and silver soared 2.8% past $69—both hitting record highs. Palladium and platinum surged over 3% and 7%, respectively, with the latter logging an eight-day winning streak.
Jerry Chen, senior analyst at GAIN Capital, noted that the BOJ’s less-hawkish-than-expected statement eased liquidity concerns, setting the stage for the Santa Rally—a historical pattern where U.S. stocks tend to outperform in the last five trading days of the year and the first two of the new year. Since 1950, the S&P 500 has averaged a 1.3% gain during this period, which begins this Wednesday.
However, the S&P 500 and Nasdaq 100 remain in the red for December, and AI-related trades still pose risks. Historically, the S&P 500 has averaged a mere 0.5% gain in December over the past 25 years (0.2% in the last five), making it one of the year’s weaker months. Wall Street banks project the S&P 500 to trade between 7,100 and 7,800 in 2026.
Yet traders remain optimistic. A prime brokerage trader at a U.S. bank noted that while hedge fund deleveraging drove the AI sell-off, buying interest has re-emerged in semiconductors, broad tech, and growth factors. Consumer discretionary stocks saw the most net buying (first in three weeks), while hedge funds sold U.S. healthcare stocks (all shorts) for the first time in 14 weeks—previously seen as an AI sell-off hedge.
Chen added, "After breaking key resistance at 25,200, the Nasdaq 100 could extend gains toward 25,670 and 25,800, potentially retesting October’s all-time high. In this optimistic climate, dip-buying remains viable."
**Countdown to a Dovish Fed Chair** Market mantras like "Don’t fight the Fed" and "Stocks thrive in a rate-cut, earnings-growth environment" underscore the central bank’s outsized influence.
A key 2026 catalyst will be the new Fed chair, likely a dove. Former White House economist Kevin Hassett initially led nomination odds, but ex-Fed Governor Kevin Warsh has gained traction.
Nomura’s David Seif noted both are dovish, but a Hassett-led Fed would mark a sharper pivot from the Powell era. Hassett, a staunch Trump loyalist, aligns closely with the administration’s policy demands, whereas Warsh’s dovishness is more measured.
However, Seif cautioned that even Hassett lacks unanimous Trump-circle support, leaving his nomination uncertain. Trump typically delays major appointments—he’s deferred the Fed chair decision to 2026, possibly beyond early January. A Hassett chair could mean deeper cuts than the expected 50 bps, aligning with Trump’s easing agenda.
**Asia’s Bright Spot** Amid U.S. rate cuts and a soft landing, Asia stands to benefit. Institutions expect a weaker dollar and stronger yuan to buoy the region.
UBS noted that while the dollar index fell 8% this year, APAC currencies rose just 2% on average, held back by China’s FX management, Japan’s political turbulence, and idiosyncratic pressures on the IDR, INR, and PHP. Next year, APAC currencies could gain another 2-3% against the dollar.
Goldman Sachs forecasts the yuan reaching 7 per dollar within a year, a tailwind for Chinese stocks—particularly consumer discretionary, real estate, and brokerages, while defensives lag.
For Hong Kong, CCB International’s Zhao Wenli expects modest 2026 valuation and earnings expansion, with Fed cuts likely front-loaded in H1. The firm’s liquidity indicators suggest HSI may peak in H1 before retreating. "Institutions seem to be buying dips ahead of a 2026 spring rally," Zhao said.
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