Stocks Look Intent On Stretching Fed-Driven Santa Rally

U.S. stocks were trying for a fourth straight day of gains on Thursday, energized by clarity from the Federal Reserve’s first interest rate increase in nearly a decade. Asian equity markets, which have lagged the rest of the globe in the lead-up to the Fed’s decision, rallied, as did Europe’s major stock indexes.

The much-debated move to nudge the Fed funds rate up from essentially zero to a range of 0.25% to 0.5% has implications for most personal and corporate lending. And it confirms that the Fed is moving in an opposite direction than other slower-growth areas of the world, where central bankers are leaving easy borrowing conditions in place long after the globe emerged from recession. There are wide market implications from the Fed’s largely as-expected move. Higher U.S. interest rates usually strengthen the dollar (the dollar index rose over 1% to 98.91 on Thursday morning), making dollar-denominated commodity prices, including crude oil, more expensive for foreign purchasers. In fact, continued weakness for oil prices is one major factor limiting the stock market’s upside potential. Read the Fed’s full statement.

Outside of energy-related sectors, stock gains are widespread. The S&P 500 (SPX), charted in figure 1, logged gains for nine of its 10 sectors in reaction to the Wednesday Fed move.

Crude Stock Shock. Surprise. Another build—this one unexpected—in crude oil supplies. The number was enough to drive crude prices briefly below $35 a barrel on Thursday and they remain near that level. Industry analysts say the 4.8 million-barrel increase in the U.S. crude inventories last week took the market by surprise as most looked for slower expansion or a decrease. “At 490.7 million barrels, U.S. crude oil inventories remain near levels not seen for this time of the year in at least 80 years,” said the Energy Information Administration. U.S.-traded January crude futures were at $35.22 a barrel, down 33 cents, or 0.8%, near the stock market open, after briefly hitting below $35 a barrel. London-traded Brent is near $37.09. Both grades are down some 75% from a record high hit in June 2008 when oil was around $145 per barrel.

Outlier or Warning Sign? The Philadelphia Federal Reserve said on Thursday that its manufacturing index in December fell to negative 5.9, the third month in the last four with readings below zero. It’s always dangerous to put too much stock in one months’ reading. Still, most Street economists remind us to watch the implications of a stronger dollar; that brawny buck does tend to hurt U.S. manufacturing.

And in Company News…The macro picture is dwarfing micro developments but there has been some individual stock news worth mentioning this morning. Shares of Pandora Media (P) shot higher after a ruling says rates for non-subscription services will rise to 17 cents per 100 plays from a current rate of 14 cents, which is a lot lower than predicted by Street analysts. Oracle (ORCL) is an early gainer after Street-beating earnings issued late Wednesday. And, FedEx (FDX) gains after its quarterly results topped Street expectations.

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