Oil Markets In Limbo, China Russia Playing Havoc?

Key Insights

  • Chinese lockdowns threaten demand.
  • EU sanctions to hit the market soon.
  • Russian oil production down.

Global oil markets are looking for a new direction it seems as WTI crude oil prices fell below $100 per barrel. The impact of Chinese COVID-related lockdowns are worrying traders, as demand of the Asian giant could be hit dramatically. The ongoing COVID-19 outbreak, at least according to Chinese sources, has put major cities under a severe curfew, blocking not only production and manufacturing but also constraining potential demand for oil and gas worldwide. As WTI futures plunged by 5% to below $98 per barrel, all eyes are on the impact of new lockdown moves in and around Beijing.

At present, China, Asia’s largest economy and oil and gas importer, is fighting an uphill battle against COVID, with record daily deaths figures being reported. A potential oil demand shock is on the horizon, if Beijing is not willing to be more flexible in its fight against COVID.  Even that according to most Western standards, China’s COVID figures are still not worrying, the country’s government seems to be looking at it from a totally different angle. The zero-tolerance strategy of Beijing is however now biting not only the Chinese economy in its own foot, but also puts global economic growth at risk.

China’s zero-tolerance bites into demand

The Chinese developments are coming at a moment of already high global turmoil in energy markets, as the OECD sanctions put on Russia, due to its ongoing invasion of Ukraine, are starting to bite. A possible loss of multimillions of barrels of Russian crude oil and gas was already pushing markets to the brink, currently resulting in ever-increasing demand destruction in Europe, Japan and the USA.

China’s zero-tolerance of COVID-19 is not only hitting its own markets, as a shutdown of major economic centers, such as Beijing and Shanghai, are putting pressure on raw materials and energy, but also will severely constraint already fledgling logistics and exports to OECD markets.

Without any doubt China is heading towards an historical oil demand shock, probably at the same level as during the first days of the pandemic in 2020. Total lockdowns are being put in place, which could result in the same situation as is in Shanghai. Beijing residents are already confronted by severe virus testing measures. Lower demand could lead, as some are expecting, to more bearish sentiment in oil and gas.

China’s former high demand, partly even caused by the availability of cheap Russian and Iranian oil, is now being threatened. If real demand destruction comes to play, global oil markets are looking at higher supply volumes, while demand is fledgling. At the same time other supplies is expected to come back on-line, such as Libya’s output. The latter was hit last week by unrest and strikes, but seems now to be reopening its shuttered fields Sharara and El Feel.  If all is stable, around 600,000 bpd could be returning back to the market soon.

Chinese refineries are already reported to have cut operating rates significantly. Reports have indicated that China’s main state-owned refiner Sinopec has cut its operating rates by 18% the last weeks. Lower demand in Asia could be a positive development for other markets, as it will be removing some of the tightness in refining products. Middle distillates are currently still under pressure, as inventories are very tight. When looking at gasoil stock in ARA (Amsterdam-Rotterdam-Antwerp) it is still at the lowest levels since 2008.

Metals and raw materials hit

As already has been seen in major European energy industries, such as metals, steel, aluminum or fertilizers, demand destruction is in place. China’s lockdowns, even if not directly related to energy issues, also will lead to shutdown of production. Prices of base metals and minerals are already showing severe headwind. The Shanghai Metals Market (SMM) reported that operating rates of aluminum semi-fabricators are down. Raw material supplies in China are also being severely disrupted.

Oil markets looking for direction

Demand destruction is making headlines, but the outcome is still unclear. Norwegian energy consultancy Rystad Energy stated that Chinese lockdowns and high oil prices are expected to lead soon to 1.4 million bpd of lower demand. Global inflation and economic unrest are also playing up. China and high prices are not going to be a positive combination most agree.

Still, there are some other factors at play that are not yet being analyzed totally. Potential EU sanctions on Russian oil and gas, as Brussels is discussing it currently, could remove several million barrels from the market. International traders are currently very hesitant to buy Russian volumes, as political and societal pressure, but also a Sword of Damocles called sanctions, are putting up severe obstacles. The impact of a Russian sanction regime is still to be seen, but it could lead to upward price pressure if no clients are being found.

At present, EU sanctions are already biting into Russian oil production. Bloomberg’s Javier Blas stated that overall Russian oil production is down by 10%.  Overall, the latter could be a stabilizing factor for prices in general, as lower Asian demand will be countered by less Russian exports. If however, as American financials are warning, EU sanctions are really going to be bite, crude oil prices could be showing price hikes above $150 per barrel, some even indicate $180.

Markets are in limbo, as long as short-term COVID lockdowns are combined with potential Russian energy sanctions. Demand destruction is in place already, but still in real terms not making a dent  in demand yet. With the holiday season coming, and looking to current surge in air-travel in Europe, lower oil prices are not to be expected yet.

France: Welfare State Faces Fiscal Squeeze in Case of No Policy Change Under the Next French President

France’s social spending is among the highest in the world and is an important source of budget rigidity and cyclicality.

The Covid-19 crisis has further exacerbated vulnerabilities of the social-insurance system as spending on health and unemployment benefits shot up while revenue dropped. In addition, the cost of population ageing, albeit less significant than that of some other advanced economies over the long run, will structurally raise fiscal pressures, while space to increase revenue is limited by an already elevated tax burden.

Indeed, reforming the welfare state post Covid-19 will prove crucial for France’s public finance and credit outlooks (rated AA/Stable Outlook), given the former’s importance for trajectories of the budget balance and public debt (Figure 1). Here, the two presidential candidates have diverging approaches for balancing the social-security budget. Incumbent Emmanuel Macron wants to simplify the welfare payment system. Marine Le Pen believes instead that giving preference to French citizens to access the most important social benefits and cut benefits to immigrants represents a better route.

Looking at different pillars of the social security system, Scope Ratings reviewed those having an important impact on public finances (e.g., pensions, healthcare, unemployment) to highlight the main challenges ahead.

Figure 1. France’s public debt trajectory under various policy scenarios
% of GDP

Note: The different scenarios and associated assumptions are detailed in the report Appendix. Source: OECD Economic Surveys: France 2021

France’s large welfare state shields households and businesses from external shock

The most important observation is that France’s large welfare state shields households and businesses from external shocks such as the Covid-19 pandemic crisis, but also raises crucial fiscal challenges over a long run.

The history of CADES, the state body created to pay down the country’s accumulated social-security debts in 1996, is an appropriate example, with the body’s mandate, originally set to conclude in 2024, now extended to 2033 after transfer of a further EUR 136bn in social-security debt onto its books in year 2020.

France spends more than peer countries across nearly all components of social spending, which results in elevated budgetary rigidity and sensitivity to economic shocks. Social spending totalled 31% of GDP in 2019, well above an OECD average (of 20% of GDP) and indeed the highest of OECD member states.

Social security system has been severely impacted by the Covid-19 crisis

In addition, the social security system has been severely impacted by the Covid-19 crisis. The system’s deficit reached a historic high in 2020 of 1.7% of GDP, mainly due to sudden rise of healthcare expenditure, reversing material reduction in deficits over an earlier 2011-18 period.

Long-run fiscal pressures remain a tangible risk to the trajectory of French public debt

Long-run fiscal pressures from the rise in ageing-related budget costs are lower than those of many peer advanced economies but remain a tangible risk to the trajectory of French public debt given rise of social debt.

France’s pension, healthcare and unemployment insurance systems result in strong social outcomes for the elderly at, however, a significant financial cost. Reforming said systems to address inefficiencies and enhance fiscal sustainability is crucial as regards France’s credit outlook, particularly because the country’s high tax burden curtails government capacity to address budgetary pressure via additional tax revenue.

Read Scope Ratings’ report.

For a look at all of today’s economic events, check out our economic calendar.

Thomas Gillet is an Associate Director in Sovereign and Public Sector ratings at Scope Ratings GmbH. Thibault Vasse, Senior Analyst at Scope Ratings, contributed to writing this commentary.

Global Market Trends Continue To Push US Dollar & US Assets Higher

Global central banks continue to warn that COVID, and other issues, persist. Traders seek some clarity and understanding of what’s going to happen next.

Will The US Stock Market Continue To Rally Higher?

Allow us to help you understand what is happening behind all these data points and news posts. We can understand key market components better by using specialized modeling systems that aim to distill market events into relatable trigger events within our strategies. This, in turn, helps us to better understand what may come next for the US markets.

We’ll focus on some of our Custom Indexes to better illustrate current market trends and conditions. These are examples of our Custom Smart Cash Index (a more global market custom index), our Commodity Price Index, and our Custom US Index (a focused US Custom Index).

Comparing The Global Market Index vs. The US Market Index

Looking at this custom Weekly Smart Cash Index vs. the US Index, it is evident that the Smart Cash Index (in RED) has fallen very sharply over the past 14+ months. We can interpret this downward trend as a sharp shift in inflationary, deleveraging, and economic trends in Asia and much of Europe. We find this shift interesting because it took place after a substantial rally in both US and Global market assets from November 2020 to early February 2021.

After the February/March 2020 COVID-19 event, the global markets entered a period of extensive economic recovery. The rebound in global stock market price levels prompted a strong wave of consumer engagement, rising asset prices, and robust demand for commodities, raw materials, homes, autos, and other core assets. As a result, consumers were flush with cash, and inflation levels were still timid (at best) – resulting in a +56% rally in the NASDAQ from October 2020 to the recent highs.

In February/March 2021, something shifted rather dramatically to push the global markets into this new downward trend – what happened?

Smart cash index vs US index chart

Custom Commodity Price Index Chart Rallied 478% Above Normal Levels In Early 2021

In our opinion, the extended demands relating to the superheated reflation of the post-COVID economy set off an explosive inflation trend. The following chart shows our Custom Commodity Price Index Weekly chart – highlighting the date range from February 2020 to mid-May 2021. You can see from this chart the normal upper price range has historically been near 4.5 to 4.7 for moderately strong commodity and raw material demand.

In late 2020, our Custom Commodity Index chart pushed upward to a level near 8.0 in August 2020. Then, just after the US Presidential Elections, these levels rose even higher – reaching a peak level of 22.50 near early May 2021. That is a massive 478% higher than historical normal inflation levels.

What happened to the Smart Cash Index was multi-faceted. Inflation, deleveraging of a speculative bubble, and consumers pulling away from big-ticket purchases likely prompted a revaluation of assets throughout the globe while these inflation trends continued to elevate.

Commodity price index chart

Debt/Credit Concerns Could Be Driving Investor Sentiment Now – Actively Seeking US Dollar Safety

As we’ve seen, Chinese Real Estate Developers struggle with excessive debts and price levels contracts as consumers pull away from risks throughout the globe. The question becomes, globally are we only starting this new deleveraging event process.

Many months ago, we published an article suggesting a new Depreciation Cycle Phase had started in December 2019 (just before the COVID-19 virus hit). You can read that article here: US DOLLAR BREAKS BELOW 90 – CONTINUE TO CONFIRM DEPRECIATION CYCLE PHASE. We want to highlight the transition that is taking place throughout the globe related to this Depreciation Cycle Phase. Looking at past research can help you better understand the broad-market trends.

The Depreciation Cycle Phase Will Prompt An Asset Revaluation Process

First, as global markets continue to struggle to find support, global assets will naturally migrate to the safest and strongest global assets (which appear to be the US Dollar & US Stocks at this point).

Eventually, assets will shift into “bottom-fishing” while global assets appear to have reached an intermediate base level. This happens as shifting valuation levels drive investors to “fish” for opportunities – trying to pick bottoms in downward trending assets. Stay cautious of this type of activity.

Lastly, continuous deleveraging pressure may prompt even the most vital assets to fall, closing the gap between the US Custom Index and the Smart Cash Index.

I will highlight the potential that a rally in the Smart Cash Index while the US Custom Index trends lower (where both asset bases converge) would also attempt to satisfy a revaluation process.

The Custom Smart Cash Index Weekly Chart shows current price levels are just below the 2019 highs. What this translates to is the global market level has deflated more than -26% from the early 2021 peak level. Much of this is related to what is happening in China/Asia, but it also reflects a broader deleveraging event that continues to unfold.

Global smart cash index chart

Concluding Thoughts

The major global economies (US/UK/Japan) will not likely stay immune from these downward trends. Eventually, the pressures related to deleveraging and inflation will push asset prices into a revaluation process. What that looks like is anyone’s guess at the moment.

The US markets will attempt to hold near recent lows as long as the US Dollar and foreign investors continue to see the safety and security of the US economy. If the US economy falters, capital will quickly move into broader safe-haven or opportunistic global assets (cryptos, Metals, Bonds, or undervalued global markets).

Global markets are still transitioning from a post-COVID speculative event. That means, traders must understand where opportunities exist and how to profit from subtle price trends. Part of what we do at TheTechnicalTraders is to distill price action into technical strategies and modeling systems. These then assist us in understanding when opportunities exist in the US stock market and specific sector ETFs. Our core objective is to protect capital while identifying suitable opportunities for profits in trends.

Knowledge, Wisdom, and Application Are Needed

It is important to understand that we are not saying the market has topped and is headed lower. This article is to shed light on some interesting analyses of which you should be aware. As technical traders, we follow price only, and when a new trend has been confirmed, we will change our positions accordingly. We provide our ETF trades to our subscribers, and in the last six trades we entered in March, all have now been closed at a profit! Our models continually track price action in a multitude of markets, asset classes, and global money flow. As our models generate new information about trends or a change in trends, we will communicate these signals expeditiously to our subscribers and to those on our trading newsletter email list.

Successful trading is not limited to when to buy or sell stocks or commodities. Money and risk management play a critical role in becoming a consistently profitable trader. Correct position sizing utilizing stop-loss orders helps preserve your investment capital and allows traders to manage their portfolios according to their desired risk parameters. Additionally, scaling out of positions by taking profits and moving stop-loss orders to breakeven can complement ones’ success.

What Strategies Can Help You Navigate the Current Market Trends?

Learn how we use specific tools to help us understand price cycles, set-ups, and price target levels in various sectors to identify strategic entry and exit points for trades. Over the next 12 to 24+ months, we expect very large price swings in the US stock market and other asset classes across the globe. We believe the markets have begun to transition away from the continued central bank support rally phase and have started a revaluation phase as global traders attempt to identify the next big trends. Precious Metals will likely start to act as a proper hedge as caution and concern begin to drive traders/investors into Metals and other safe-havens.

Historically, bonds have served as one of these safe-havens, but that is not proving to be the case this time around. So if bonds are off the table, what bond alternatives are there and how can they be deployed in a bond replacement strategy?

We invite you to join our group of active traders and investors to learn and profit from our three ETF Technical Trading Strategies. We can help you protect and grow your wealth in any type of market condition by clicking on the following link: www.TheTechnicalTraders.com

Chris Vermeulen
Chief Market Strategist
Founder of TheTechnicalTraders.com

Oil, Euro and AUD/USD Analysis – One Swallow Doesn’t a Spring Make, but a Volcker Adjustment Is on the Cards

Global Macro Analysis

US equities were weaker Wednesday, S&P down 1.0%. US 2s10s steepened further, with 10yr yields up 5bps to 2.6%, highest in three years, 2yrs down 5bps to 2.47%. Oil fell 4.7%.

I will not dwell on the FED minutes, as Vice-Chair to be Brainard had already set the table.

After a March reprieve, the global bond market resumed its sell-off and is driving a deterioration in cross-asset risk sentiment, with global tech equities bearing the brunt of the follow-through.

Reducing the balance sheet in an environment of high inflation is a significant source of uncertainty for markets. But to a large degree, equity markets were too high despite the build-up of macro and geopolitical headwinds over the last few weeks, so this is essentially a corrective move to a more rational level.

The main concern seems to be about rates, so we could see a systematic bid return if rates manage to settle in. But if rates volatility stays high, equities could remain under pressure.

The move on US transport stocks overnight is the latest in a laundry list of smoke signals the market is sending on recession concerns. No market economist is calling for a recession with too much momentum in the economy, but the counter to that is it does not mean some of its makings cannot start to show up beforehand.

The big picture went from pricing in a definitive mid-cycle environment a month ago or so to now pricing in a late-cycle probability. Since Covid started, I’ve been harping on about the compressed nature of market cycles, and the latest adjustment took weeks versus the last time; it took a year. Another example of the brutal nature of this ticker tape and the velocity with which major pivots are getting priced.

The point is, just like the 2’s10’s inversion, while we can debate the probability of a recession and whether the Transports move is a signal for this, the viciousness of price actions has forced hands whether or not one believes in them or not.

One swallow doesn’t a spring make; still, this is starting to feel like a market fretting the Fed is behind the curve, and something like the Volcker adjustment is on the cards with that caveat in mind.

Oil Fundamental Analysis

Negative catalysts were lining up overnight as oil prices slid to a three-week low. A surprising bearish to consensus build in US inventories, IEA reserve release, Covid concerns in China and a strong US dollar amid global recession fears deepened the recent oil price rout.

At the heart of the strong USD is a hawkish Fed trying to stave off inflation by driving interest rates higher to slow the US economy. In theory, that should hurt oil prices on the margin.

In addition to the enormous global reserves release, demand destruction and recession are currently the only price-lowering mechanism in a world devoid of inventory buffers. Some folks checked one or both of those boxes overnight with recessionary smoke signals dotting the horizon.

China’s omicron outbreak is spreading much faster than previous virus strains, and authorities, not ready to switch to a different strategy, are still trying to contain outbreaks by implementing strict controls. In light of that, Oil traders continue to downgrade their mainland demand forecasts.

Also hurting oil are reports The European Union will not ban Russian oil imports for now and will focus on the far easier task of cutting out less valuable coal instead, despite evidence of apparent war crimes committed by President Vladimir Putin’s forces in Ukraine.

The psychological and critical technical support at Brent Crude ( CO1) $100 could come into focus today.

FOREX Markets Fundamental Analysis

Fed Governor Brainard’s speech on Tuesday, where she mentioned the potential for “rapid” balance sheet run-off, was the catalyst for a broad USD rally.

EURUSD pushed down through the key 1.0940/50 pivot, and USDJPY managed to break up through 123.00/20. Given the current state of US interest rates via the Fed hawkishness channel, the US dollar is more apt to consolidate than correct lower from current levels.

If you look solely at equities, you’d think we were back to the ‘policy mistake’ trade. We’re not seeing that flattening/back-end Eurodollar rally that would accompany that trade. Instead, back-end Eurodollars are under pressure, and 5s30s are noticeably steeper. This US dollar rally is even more entrenched due to the fixed-income market reaction.

Higher US yields are very much to the liking of the greenback.

EUR/USD Fundamental Analysis

On the other side of the pond, there are some concerns about the outcome of the French presidential elections. For now, it looks like EUR/USD will struggle to bounce.

AUD/USD Fundamental Analysis

Down under, the AUD continues to struggle after a less dovish pivot by the RBA.

The hawkish FED has taken the short-term momentum out of the move higher for now. But compounding the AUD issues is China’s very porous risk environment and the market starting to fret about global recession risk. The AUD dive into the plunge pool is exacerbated by the early onset stages of an FOMC trigger taper tantrum where demand for the US dollar could reign supreme.

For a look at all of today’s economic events, check out our economic calendar.

Federal Reserve Meeting, War, New Lockdowns – What Drives Markets Now?

However, they still have a ways to go before being in positive territory for the year with the S&P 500 down -6.4%, the Dow down -4.4%, and the Nasdaq still sitting on a loss of -11.2%.

Federal Reserve meeting

With the long-awaited Federal Reserve March policy meeting out of the way, investors will now be listening closely for any clues regarding future policy moves from individual officials as they hit the speaking circuit this week.

Fed Chair Jerome Powell delivers remarks at the National Association for Business Economics today, then again on Wednesday at a summit hosted by the Bank for International Settlements. I should note, seven other Fed officials are scheduled to speak at various events this week.

Investors also remain focused on Ukraine war headlines where Russia’s assault seems to have stepped up in some areas. In fact, Russia has given Ukrainian forces a deadline of today to surrender control of the besieged port city of Mariupol, the scene of some of the heaviest fighting since Russia launched its invasion of Ukraine more than three weeks ago.

Ukrainian war

The eastern port city has been devastated by relentless shelling, with whole neighborhoods reduced to piles of rubble. Electricity, gas and water have been cut off and many remaining residents are without food. Ukraine’s armed forces said the situation was “difficult: there is famine in the city, street fights, people are trying to leave”. Some officials involved in ceasefire negotiations say the two sides have moved closer to an agreement, though they also said the same thing last week.

China’s top diplomat to Washington said his country is committed to de-escalating the war but global intelligence officials from the U.S. and EU continue to warn that China is considering military support to Russia. Shipments of U.S.-supplied weapons are supposed to be entering Ukraine within days, something Russia has vowed to disrupt and which would likely ratchet up tensions even further.

Obviously, it remains a very volatile and fluid situation and gaining accurate information is difficult as global powers keep their cards close to their chests. Interestingly, the Iran nuclear deal appears to again be a go as Russia has backed off some of its demands that had threatened to derail its revival. Negotiators now say they are “close” to a deal with some speculating it could come as soon as this week.

New lockdowns in China

This could put some nearby pressure on oil prices which have struggled a bit as of late thanks to worries about demand in China amid a wave of fresh Covid lockdowns.

China this weekend began relaxing some of the harshest restrictions in order to “minimize” disruptions but port backlogs are already happening. The Port of Shenzhen is said to have over +35 ships waiting to dock while outbound freight heading to the U.S. and other countries has slowed considerably due to numerous factory closures as well as a lack of trucks arriving as drivers face extreme travel restrictions.

Shenzhen includes the Yantian terminal, which handles about a quarter of all U.S.-bound shipments. Similar issues are being reported at other key ports, including Shanghai, the world’s largest. While this is likely to create more disruptions to the availability of some raw materials and other supplies, the upside is that it could allow U.S. ports to work through their own backlogs, particularly on the West coast.

ES ##-## (Daily) 2022_03_21 (2_22_07 AM)

SP500 overview

The accumulation and ADL are looking very good. With cyclical and seasonal bottoms coming soon, short-term sell-offs should be considered as buying opportunities. More strength should be expected if SP500 holds above 4600 – 4650 levels.

In conclusion

Today, there is nothing much of note on the economic data front but investors are anxious to hear from Nike, which announces earnings after markets close. The company’s fiscal third-quarter results will include the first two months of 2022 and provide some insights into how fallout from Russia’s war in Ukraine and the Covid lockdowns in China might be impacting multinationals. Nike’s forward guidance likely holds the most interest with investors particularly anxious about inventory flows for Nike as well as other companies with manufacturing operations in China.

For a look at all of today’s economic events, check out our economic calendar.

No Buyers Ahead of Moderna Report

Moderna Inc. (MRNA) reports Q4 2021 results in Thursday’s pre-market, with analysts looking for a profit of $9.81 per-share on $6.73 billion in revenue. If met, earnings-per-share (EPS) will compare favorably with the $0.60 loss booked during the same quarter in 2020.  The stock fell 17.9% in November after missing Q3 estimates by wide margins and lowering 2021 guidance. It has relinquished another 38% through February and has now fallen more than 70% since posting an all-time high just six months ago.

Spikevax adaptation has slowed dramatically in first world countries while Moderna has been forced to reduce profit margins before shipping to Africa and South America. The company has other drugs in the pipeline but none will overtake the historic success of the COVID compound, raising questions about long-term valuation. Worse yet, new variants are unlikely to have a dramatic effect on vaccination rates, with millions now choosing natural immunity, committed to returning to a normal life regardless of the costs.

Deutsche Bank analyst Emmanuel Papadakis upgraded Moderna to ‘Hold’ in January, noting “key for the recovery of sentiment will be a clearer path to additional durable long-term revenue streams of significance. With RSV/CMV P3 likely 2023 read outs and EBV still early, the question is then what may drive that re-appraisal in 2022. We can see several datapoints of note, though at this stage we are not clear whether these are likely to be sufficient ahead of those key 2023 datapoints”.

Wall Street consensus has improved to an ‘Overweight’ rating in the last three months, based upon 7 ‘Buy’, 2 ‘Overweight’, 11 ‘Hold’, 0 ‘Underweight’, and 1 ‘Sell’ recommendations. Price targets currently range from a low of $85 to a Street high $506 while the stock is set to open Wednesday’s session halfway between the low and $221 median target. This placement suggests that Moderna is rapidly approaching ‘fair value’ after two years of intense volatility.

Moderna broke out to a new high in the first quarter of 2020, entering an historic uptrend that unfolded through three rally waves before topping out near 500 in August 2021. It’s now sold off in three waves, piercing support at the .618 Fibonacci rally retracement at 200 in January. The stock is deeply oversold on a weekly and monthly basis but it will still take a 50+ point bounce to generate longer-term buy signals.

Catch up on the latest price action with our new ETF performance breakdown.

Disclosure: the author held no positions in aforementioned securities at the time of publication.

Here’s What The January Barometer Says About S&P 500’s Performance in 2022

In January 2022, S&P 500 (SPX) fell more than 5%, which was the worst January since 2009. According to Stock Trader’s Almanac 2022, a down January is not a bullish signal for the stock market. Since 1950, every down January was followed by increasing of volatility with an average of -2.1% return for the year. The performance of S&P 500 from the close of January to the low of the year is -13% on average since 1950 (except for 2021).

January Barometer vs. SPX Price Structure

In order to better interpret the effect of the January Barometer on S&P 500 (SPX), take a look at the monthly chart of SPX below.

Since the January Barometer is a measure based on the statistics, it makes more sense to interpret together with the price structure to better predict the price performance of S&P 500 in 2022.

Since 2000, there are 13 down January (as highlighted in orange). The down January in 2022 potentially represents a change of character, which essentially stops the uptrend since the COVID-19 low in March 2020. This could suggest a consolidation via a trading range with the directional bias to be determined at the later stage using price action analysis or a reversal.

Out of these 13 down January since 2000, the context of the current market environment is very similar to 2010’s. In 2010 and 2022, the background of the SPX was an uptrend and the down January acted as a change of character bar stopping the uptrend. The trading range in 2010 came with increasing of volatility on both sides together with expansion of volume. SPX only left the trading range in September 2010 and emerged into another up trend.

S&P 500 Price Prediction with Wyckoff Method

Let’s analyze the S&P 500 E-mini Futures to predict how the price will unfold base on the volume and the characteristics of the price movement.

At the beginning of January 2022, S&P 500 had a false breakout followed by a sharp selloff formed a selling climax (SC) on 24 January 2022. The next 4 days showed no follow through to the downside despite exceptionally high volume suggested presence of demand. These were the tell-tale signs to anticipate the automatic rally (AR) started last week, as illustrated in my live session video where you will find out how to interpret the volume as supply and demand in conjunction with the price action before the rally starts.

The rally stalled at the resistance area 4480-4600 with shortening of the thrust to the upside suggested exhaustion of the demand. This was confirmed by a pullback on 3 February 2022. The hammer bar on 4 February 2022 with increasing of volume suggested a test of the swing high near 4600.

Based on the short-term price action, I anticipate an attempt to test 4600. On a longer-term perspective based on Wyckoff phase analysis, a down wave is likely to test the selling climax’s low near 4200. A trading range between 4200-4600 is likely the case for S&P 500 in 2022.

Despite the directional bias is to the downside based on the market breadth and the price action, volatility is expected to remain high on both sides hence it is not uncommon to experience whipsaw in both directions.

Majority of the laggards hit the 52-weeks low are way oversold and overextended. It will offer better reward to risk ratio to wait for a weak rally to test of the resistance before initiating new short positions. Oil related stocks still outperform while riding the strength in crude oil, there is likely upside continuation ahead after a consolidation or a pullback. Visit TradePrecise.com to get more market insights in email for free.

It’s Up and Away for Ryanair as Shares Head for the Skies

Ever since the ‘bus with wings’ concept began in the 1990s spearheaded by brilliant businessman Stelios Haji-Ioannou with his bright orange easyJet fleet which suddenly made it possible for the good working people of Britain to spend their spare time in Sorrento rather than Skegness for the same price, budget airlines have been so popular that they are a huge challenge to flag carriers, and the bugbear of the men in suits who would rather the public had less freedom.

Preceding easyJet was Ryanair, Ireland’s ubiquitous budget airline whose fares have been constantly cheaper than a full tank of fuel for the car or a train ticket ever since establishment in 1984. However, it was the 1990s when this market really got competitive.

The profligate national flag carrying airlines have had very little chance of competing with the budget airlines, and given that operating an airline is one of the most cost and resource hungry businesses in the world, governments with vested interests and partial or full ownership of national carriers have taken a dim view of the budget carriers which represent a bastion of freedom in a difficult sector.

There have been several attempts to curtail the success of budget airlines, including climate rhetoric, increased regulations which put a cost burden on the airlines which have to adhere to it, high landing fees, the moving of budget carriers to smaller terminals in main airports or to lesser used airports, and more recently the lockdowns and travel restrictions.

Such travel restrictions hit the budget carriers the hardest. Many passengers on budget airlines are not traveling for work, therefore would not have been able to show contracts or essential need to travel, giving rise to the possible opinion that the restrictions were aimed at curbing freedom of movement for a vast section of society.

However, as with many business sectors that are massively popular, the budget airlines are bouncing back and Ryanair, led by the outspoken and highly successful Michael O’Leary whose no-nonsense, direct approach has made him an industry figure, is on the up, in a big way.

Ryanair stock closed a remarkable 3.92% up yesterday compared with Monday’s performance, which itself was a considerable rise over the close of business on Friday last week.

February has begun with a huge bang for Ryanair, and in keeping with the company’s ultra-competitive ethos, Ryanair began the month by launching a price war in order to bring as many customers back on board as possible, which should not be too difficult at all given that the Omicron saga was no more than a media push by the governments of the West and in Britain at least, common sense defeated the over-hyped common cold and the nation, and its skies are wide open for business.

Ryanair has a long way to go, however. It is up to its cockpit in losses, with £375 million having been lost as a result of the state-imposed flight bans, but investor confidence is high because people can see past that and Michael O’Leary’s unwavering optimism and business spirit is shining through.

As the nation watches headline after headline on how the government in Britain – the only one which got caught out – carried on as normal whilst forcing business to shut their doors for months and policing people on their everyday movements, the wheels have finally fallen off the whole narrative around Covid and even the most devout believers have had the reality displayed candidly to them, hence mass non-compliance would be a likely outcome if the government ever attempted to curtail the movements of the public ever again.

This is very good news for Ryanair, and the markets certainly think so. With the price war underway, there is more than a degree of optimism that the firm will pull back from its losses.

Who’d have thought? Whilst truck drivers blockade the highways and over a million people assemble outside the parliament buildings in Canada, a nation which once was a hot destination for immigrants from Europe and the United Kingdom because of its freedom and possibilities, Britain is as free as a bird.

And the big silver bird is what will now be seen over the skies of Luton, Manchester, Gatwick, Bristol and Birmingham!

CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 70.80% of retail investor accounts lose money when trading CFDs with this provider. You should consider whether you understand how CFDs work, and whether you can afford to take the high risk of losing your money.

 

A Strong 4th Quarter GDP is the Driving Force That Took Gold Sharply Lower Today

A report released today by the government indicated tremendous growth in GDP Q4, coupled with the change of market sentiment for gold from yesterday’s release of the Fed’s updated monetary policy resulted in gold trading sharply lower.

Gold Chart 01.27.2022

As of 3:43 PM EST gold futures basis the February 2022 Comex contract is trading $36 lower or -1.97% and fixed at $1793.70. The April Comex contract which will soon become the most active contract month lost $36.50 and is currently fixed at $1795.50.

Today the Bureau of Economic Analysis part of the US Department of Commerce released its advance estimate of the Gross Domestic Product for the fourth quarter of 2021. It revealed extremely strong growth during the last quarter of 2021.

GDP Q4

According to the BEA, “Real gross domestic product (GDP) increased at an annual rate of 6.9 percent in the fourth quarter of 2021, following an increase of 2.3 percent in the third quarter. The acceleration in the fourth quarter was led by an upturn in exports as well as accelerations in inventory investment and consumer spending. In the fourth quarter, COVID-19 cases resulted in continued restrictions and disruptions in the operations of establishments in some parts of the country.

Government assistance payments in the form of forgivable loans to businesses, grants to state and local governments, and social benefits to households all decreased as provisions of several federal programs expired or tapered off.”

This is an advance estimate with the final numbers to be released on February 24, 2022. This is a huge leap from the third quarter GDP which came in at a tepid 2.3%.

The current GDP in terms of dollars increased by 14.3% at an annual rate of $790 billion, taking the fourth-quarter GDP to a level of 23.99 trillion. The GDP in the third quarter increased by 8.4% or 461 billion.

Concurrently the report indicated that personal income had increased $106 billion in the fourth quarter compared with an increase of $127 billion in the third quarter. Collectively in 2021 real GDP increased by 5.7%. Real GDP in 2020 indicated a decrease of 3.4%. An exceedingly strong indication of the strong economic recovery currently at play in the United States.

When added to yesterday’s Federal Reserve monetary policy statement and chairman Powell’s press conference in which the Federal Reserve for the first time since the onset of the recession in early 2020 signaled the date when interest rate normalization or liftoff would begin. Chairman Powell first said “soon, but clarified the statement indicating that the first-rate hike would occur in March. He also said that the process of tapering their monthly asset purchases of 120 billion to zero would be completed in March.

The only caveat is concerning reducing inflation quickly. The Fed’s intention to begin to hike interest rates to reduce inflation in the next year will be difficult and improbable at best. The Consumer Price Index for December 2020 came in at 7%, a level not seen since 1982. He also mentioned that they anticipated that the inflationary numbers vis-à-vis the CPI will most likely increase when January’s numbers are released creating a dire scenario in terms of reducing inflationary pressures.

Simply put, a rate hike of 1% or even 1 ½% this year will most certainly not curtail current inflation rate. The reduction of inflation above 6% is a multiyear process and many analysts including myself believe that it will take a minimum of 2 to 4 years to effectively reduce inflation to the Fed’s preferred target level of 2%.

Wishing you as always good trading and good health,

For those who would like more information simply use this link.

Gary S. Wagner

What the Year of the Tiger Will Bring for the Asian Markets – A Conversation with Finalto’s Alex Yap

From a major rebranding exercise to upheavals in the Asian markets throughout the year, it was busy 2021 for Finalto. Who would know better about this than Alex Yap, Head of Institutional Sales for Asia at Finalto? Today, we are in conversation with Alex about how last year treated the leading fintech company and what his expectations are for 2022, the Chinese Year of the Tiger.

How has 2021 treated you and Finalto?

In general, we’ve done pretty well this year, despite the spread of the Delta variant during the first half of 2021. Without the luxury of travelling and meeting clients face-to-face, we’ve had to adapt quickly to new ways to connect with our clients. Our strong customer relationships and Finalto’s branding helped us grow even during this difficult year. I think it has been a good test for all of us, teaching us to respond to changes with agility and innovation. At this point, we’re more equipped than ever to continue on our growth path.

A lot of business in Asia is done face to face, how has this changed during these times?

Yes, Asia is known for its love of in-person conversations, which meant that we used to travel extensively. But now we and our clients have had to adapt to the new normal, relying on online interactions. Even simple Zoom calls have helped us stay in touch with our clients. It has only been thanks to tech innovations that we were able to effortlessly continue our services.

When the pandemic began in 2020, a lot of our clients were not initially comfortable with a completely digital approach. But people are resilient, and they have become much more comfortable over time with the new way of communicating, which is completely online. I can safely say that the pandemic has transformed the industry in Asia.

The Asian markets went through a lot last year, with the raging Delta variant in the first half and the energy crisis in China in the second. What’s your take on the Asian markets in 2021?

Yes, it was an eventful and extremely busy year for us. The Delta variant brought massive volatility back to the financial markets. But after the volatility of 2020, the markets adjusted quickly and settled down much faster in 2021. In fact, there were several months of low volatility last year, unlike in 2020. Even the news of the Omicron variant led to only a couple of weeks of higher volatility, after which the markets seem to have taken this fresh spread of Covid-19 in its stride. On the whole, volatility was lower than in 2020 and did not last as long. The markets adapted quickly.

Again, if you see the downgrade of the Asian markets by the IMF, it was much better than in 2020. They cut their outlook for Asia by about 1% to 6.5% in October. With economies reopening, demand grew but supply constraints continued, with OPEC deciding to continue with its production restrictions. As a result contracts for natural gas for November delivery rose to $6.466/MMBtu on October 5, the highest since December 2008. Natural gas prices in Europe rose fivefold, while in Asia, they were up 1.5 times. WTI rose to $80/bbl by the end of the first week of October, its highest since November 2014, while Brent was at its highest since 2018.

Global energy prices have normalised since then and had little to do with the energy crisis in China. China is aiming at becoming carbon neutral by 2060 and has set a challenging carbon dioxide emissions peak target to be met by 2030. The nation has been investing significantly in renewable energy. Plus, it has immense nuclear power capabilities. However, although it is the world’s third-largest user of nuclear power, this energy source accounts for only 5% of its energy mix as of 2020. Compare this to the 70% in France. So, the energy crisis can be averted by raising nuclear power consumption.

Where does Finalto see itself in the financial markets of the Asia-Pacific region?

Asia is a very diverse market. Not only does the level of sophistication differ from country to country, the needs and preferences also vary significantly. But, Finalto is a very strong brand, with a revolutionary 360 suite or what we like to call a “solution in a box.” It is highly customisable, offering multi-asset capabilities to our clients. Despite our marketing not being too aggressive last year, we were able to garner clients through our flexible pay-as-you-go subscription model, with customised pricing and product delivery.

This is a solution we have tailored specifically to offer powerful features, that our clients in Asia have yet to fully discover. So, for 2022, it is key for us to communicate the advantages we offer. This includes a complete end-to-end platform, with front-end and back-office administration capabilities, robust trading and pricing tools and cutting-edge connectivity. With our pay-as-you-go model, clients can either choose the full suite or select from individual components to enhance their current capabilities.

For instance, ClearVision is a leading tech solution for institutional investors worldwide and is gaining popularity among proprietary trading firms and brokers focused on global growth. Its various components include the ClearPro trading platform for professional traders, the ClearWeb cloud-based trading platform, the ClearMobile mobile trading platform and FIX Connectivity for custom needs.

How are the needs of fintech firms and traders in Asia different from the other regions where you offer your services?

As I mentioned before, this is a very diversified market. The level of tech sophistication in the region ranges from novice to very advanced levels. So, Finalto 360 is the ideal tool to cater to such diverse needs. Fintech is still in its nascent stages in many parts of Asia and the sector is still trying to establish a strong footing.

Then we have the huge cultural and language differences. To serve clients from Singapore as efficiently as those from Thailand or Indonesia, we need to provide localised services. With a pan-Asian team, we understand the way they run their business across these different nations and what they need. We can offer services and support in the language they prefer through Finalto 360. This is where we have an edge in the market.

With Finalto 360, we offer our clients a turnkey trading system based on a set of 5 cutting-edge modules developed by highly experienced industry experts, which offers complete support and scales with the client’s business.

What are your predictions for the Asian financial markets for 2022?

The markets across Asia will see economic recovery through 2022, although the pace will differ across nations. South Asia is expected to grow at the fastest rate in the region, with East Asia coming in a close second. This could be due to the regulatory reset in China, which could impact the 2022 GDP.

The Hang Seng contracted about 17% in 2021, while most key indices in Asia saw positive growth. In fact, it is the only one that has been on a downward spiral through last year, reaching a low of 23,192.63 on December 17. But I won’t be surprised if it bounces back strongly in 2022, so investors should keep a close watch.

The People’s Bank of China is unlikely to revise its interest rate policy anytime soon. On the other hand, it set a significantly weaker-than-expected midpoint for the yuan exchange rate in early December. The central bank indicated that this was in response to the high levels of foreign exchange reserves. This move could lead to greater liquidity in the economy, which will need to find outlets. In which case, we might see more interest in the stock markets from investors, especially true of Hong Kong, which is a key financial centre in the region.

On the other hand, inflation is likely to continue to be a key challenge in Asia in 2022. With the economies in recovery mode, demand could well outstrip supply, which will drive inflation up. And this is against the backdrop of supply chain disruptions.

Central banks, including the US Fed, are unlikely to moderate their policy tightening any time soon, which will also put pressure on assets. Central banks in Asia will, therefore, be keeping their eye on the Fed. Core prices have remained fairly flat so far, but this could change depending on how the interest rates are revised. In fact, if the Fed makes a drastic shift in its stance, we could see a rise in volatility in the financial markets.

Given the current inflation scenario in the US, I believe the FOMC could decide to make 2, 3 or even 4 rate hikes through 2022. We are likely to see some hikes very soon and I won’t be surprised if we see larger than expected rise. So, investors should also keep an eye on the Fed’s decisions, since it would affect markets globally.

Gold Has Gained Value During 4 of the Last 5 Weeks

Gold daily chart

Gold continues to trade in a range-bound manner, but over the last five weeks, gold prices have gained value during four of those weeks. Although gold has traded lower yesterday and today, ending the week with a moderate gain of 0.6%. For the most part, we have seen gold trade through the eyes of the weekly chart with a succession of higher lows. What has been lacking is a series of higher highs based upon the high achieved in June 2022 when gold topped out at $1920.

KGX Index

U.S. equities had mild to moderate gains, with both the Standard & Poor’s 500 and the NASDAQ composite closing higher on the day. However, the Dow Jones industrial average did close lower by 0.56%.

For the most part, market participants and analysts have factored in a much more aggressive Federal Reserve with the anticipation of three or four interest rate hikes this year. The current assumption based on information released from the Federal Reserve is that each rate hike will be ¼%. That means that if they move forward with this more aggressive monetary policy, they will raise rates only 1% this entire year which would take the Fed fund rate from its current fix of zero to ¼%. This means that by the end of 2022 fed funds rate would be fixed between 1% and 1 ¼%.

With recently released data in regards to current inflationary pressures, the Bureau of Economic Statistics has confirmed what analysts and Americans have known for quite some time, and that is that inflationary pressures continue to spiral to higher levels with the CPI (consumer price index) now fixed at 7% in December year over year.

This brings us to the current dilemma faced by the Federal Reserve. The Federal Reserve’s more hawkish or aggressive monetary policy cannot curtail the current rise of inflationary pressures to any great degree. Many analysts, including myself, acknowledge that the Federal Reserve’s Monetary Policy as it stands with a more hawkish demeanor cannot have any dramatic effect on the cost of goods and services by themselves. Any real hope of seeing inflationary pressures diminish must be accomplished through a combination of actions by the administration as well as the monetary policy of the Federal Reserve.

As the data has clearly illustrated, the current level of inflation is based upon the high pent-up demand during the first year and ½ of the recession which in essence began in March 2020. As we approach the second anniversary of the onset of the recession, which is a direct result of a global pandemic in many ways, we are much closer to understanding the new Covid-19 virus.

However, that understanding has indicated that we are far from having any real handle on eradicating the virus. What is happening is that the virus has had a global impact as new waves created by mutations or variants of the original virus strain continue to wreak havoc on economies worldwide. It seems as though the question of what a new normal will look like at the end of the pandemic contains the real possibility that there will not be a conclusion or a point in time when the Covid-19 virus simply does not exist. Rather it is beginning to seem likely that global citizens health organizations and countries will learn more effective measures to deal with the rapid spreading of variants as they emerge.

This might mean that we are currently experiencing the new “normal,” and life, as we know it from the pre-pandemic days, will never completely return. As such people will continue their daily lives with this issue and learn to adapt to it.

Wishing you as always good trading and good health,

For those who would like more information simply use this link.

Gary S. Wagner

 

Stock Bulls Remain on Unstable Footing. Here Is Why

The US Consumer Price Inflation Index (CPI) rose 7% over the past year before seasonal adjustments, the steepest climb in prices since June 1982. Stripping out food and energy costs, which tend to be more volatile even in non-pandemic times, inflation rose to 5.5% between December 2020 and December 2021 — the biggest annual jump since February 1991.

Inflation issue

Interestingly, excluding gas and used cars, December inflation was 3.7%. The prices of cars and trucks surged +37% in December, furniture prices hiked +17%, and 49% of small businesses surveyed in December said they will increase the prices of goods and or services sold in 2022.

One thing that is worrisome is the fact protein prices (meat, poultry, fish, and egg prices) have surged +18% since December 2019. Food inflation along with fuel inflation could cause the US consumer to pull back so we need to be paying close attention. But even though prices went through the roof last year, they are still nowhere near the historic highs from the 1980s. Inflation peaked in the spring of 1980 at +14.8%.

Remember, however, then-Fed Chair in the early 80s, Paul Volcker, made it his mission to squash inflation. Volcker raised interest rates to +19% in 1981, prompting a recession, however, in 1982. I’m not looking for any type of crazy rates like back in the early-80’s but if the Fed has to raise rates fast and far enough to stop inflation the economy could certainly feel some negative ripple effects.

Covid influence

I know the second major Covid variant Delta extended the inflationary shock waves and this recent resurgence from Omicron is causing even more supply-side complications. I know many bulls are saying that we are again at peak inflation and we will soon start to ease back but who would have ever thought we would be two years in and still peaking with new daily reported Covid cases at over +1.5 million. If new variants of Covid continue to come in waves who know when inflation peaks…

The government injecting billions of dollars into the economy and paying Americans to stay home via stimulus checks when Covid case numbers started to push past 10,000 daily, and now that we are exceeding one million new cases per day all the talk is about the Fed removing stimulus and the need for Americans to get back to some type of normalcy. Now here we are full-circle… In the famous words of the Grateful Dead, “What a long strange trip it’s been.”

The December Producers Price Index is out today and expected to show an annual inflation rate of +9.8% after hitting +9.6% in November, the fastest pace on record. Higher prices for energy, wholesale food, and transportation and warehousing have been the biggest contributors to the pickup in producer inflation.

Bulls believe that once the current Covid wave subsides, consumers will once again dedicate a higher percentage of their spending to services. That will in turn alleviate the crushing demand being placed on manufacturers and the transportation sector, ultimately helping to bring down prices for both raw materials and labor.

That’s the theory at least. It’s worth noting that that exact pattern was starting to develop late last year as the Delta-driven wave was subsiding and consumers were starting to feel more comfortable doing things like go to restaurants, travel, and visit the gym. As we know, that was totally derailed by the rise of the Omicron variant that is currently roiling nearly every aspect of the global supply chain.

Bulls are cautiously optimistic that the Omicron wave will be short-lived with most experts predicting it will peak by the end of January. The big question is what kind of damage will it do to already overly stressed supply chains in the interim? Inflation trends may also depend on how things shake out in the labor market. If workers remain in short supply and wages continue moving higher, it will likely limit how much inflation eases.

Today, investors will be listening closely to several Federal Reserve members that are scheduled to deliver comments, including Fed Governor Lael Brainard who will testify before the Senate Banking Committee as part of her nomination for Fed Vice Chair.

On the earnings front, the key highlights will be Delta Air Lines and Sanderson Farms.

Is The “don’t fight the Fed” Approach Still Good for Traders?

Just as experienced traders and investors were on board with the Fed easing and propping up the economy, they are now not wanting to stand in the way as the Fed tries to slow things down a bit.

Wall Street insiders are hoping to get more clues as to just how “hawkish” the U.S. central bank might be leaning when Fed Chair Jerome Powell delivers testimony before the Senate Banking Committee today as part of his renomination process.

In very brief pre-prepared comments that were released yesterday, Powell pledged “to prevent higher inflation from becoming entrenched,” but didn’t mention any details in regard to interest rates or the Fed’s asset holdings.

Supply and demand issues

Powell noted that the economy was facing “persistent supply and demand imbalances” as a result of the pandemic reopening. Wall Street veterans are thinking the Fed will make three or four increases this year. Goldman is now forecasting four rate hikes with some insiders thinking five or six rate hikes might now be in the mix, i.e. perhaps a couple of half-point moves in rates might happen rather than the smaller quarter-point bumps.

A growing number also expect that the central bank will begin reducing its $8.8 trillion balance sheet as soon as this summer.

Anticipation of a more hawkish Fed saw 10-year Treasury yields climb to their highest levels of the pandemic last week, though they did ease a bit yesterday. In and of itself, the rise in bond yields is not surprising as investors have been anticipating this would happen in 2022 as the Fed begins lifting interest rates.

However, the climb has started sooner than many expected. The speed at which yields soared last week – +25 basis points – in particular, is tripping up the bulls, with some on Wall Street anticipating the benchmark 10-year could test +2% by the end of the first quarter. Bears are warning that investors may still be underestimating how far the Fed will need to lift its benchmark rate this year to keep inflation under control.

On the other hand, Bulls still expect current higher prices will find relief as supply chain dislocations and labor shortages normalize.

The road to both resolutions is proving longer and more complicated than most hoped, though, with the current Covid wave again threatening global supply chains and sidelining workers.

Transportation in China and US

A suspension of trucking services in several parts of China’s Zhejiang province has slowed the transportation of manufactured goods and commodities through the port of Ningbo, one of the world’s most important ports.

Some Chinese factories have had to stop work due to the trucking snags, too, as they can’t receive raw materials or ship out goods.

U.S. ports on both coasts are also reporting a build-up in ships waiting to unload due to dockworkers calling in sick. Cargo backups are also once again building as transportation and warehousing staff levels suffer.

The only economic data due today is the NFIB Small Business Optimism Index. It’s the Consumer Price Index tomorrow, and the Producer Price Index on Thursday that investors are really anxious to see, with worries growing that big jumps could spur even more hawkish policy moves from the Fed. On the earnings front, Albertsons is the main highlight.

For High-Growth Tech Lovers, the Trend Indicates That it is Time to Consider Value-Oriented ETFs

Also, subtracting 2% due to “positive sentiment” induced by the Santa Claus rally, it can be inferred that the index actually fell by more than 8%. At the same time, a look at the S&P 500 (in orange) which holds more than 28% of technology assets exhibits a more neutral position, while the Dow Jones Industrial average (in blue), up by 1.52% indicates that the more cyclical names are being prioritized by investors, as potential beneficiaries of the economic recovery.

https://static.seekingalpha.com/uploads/2022/1/9/49663886-16417501192287376.png

Source: Trading View

Going further in the past, the weakness in tech started from the second quarter of 2021 when it became evident that the Fed was adopting a more hawkish tone and bond yields were on the rise. However, the adverse market conditions for technology were masked by the gains from these six most popular stocks, namely, Tesla (TSLA), Apple (AAPL), Microsoft (MSFT), NVIDIA (NVDA), Meta Labs (FB), and Google (GOOGL). Now, with the Nasdaq bearing a P/E ratio of 28, tech valuations remain high compared to the broader market, and the weakness in richly-valued high-growth names in the technology sector should continue, perhaps in the same way as during the Internet bubble of 1999-2000.

Growth to value rotation

Now, moving away from high-growth tech names to lower-valued cyclical names reminds us that the “rotation from growth to value”, which some analysts were invoking in 2021, has gained momentum. For investors, rapidly growing tech stocks with their high R&D and sales expenses primarily focus on growth while value names are more conservative in spending and lay more emphasis on profitability.

To further verify whether the growth to value shift is really happening, I make a comparison between growth and value ETFs as per the chart below. In this case, the iShares Edge MSCI USA Value Factor ETF (VLUE) and the Vanguard Value ETF (VTV) are both up by 5.6% and 3.9% respectively, while the Schwab U.S. Large-Cap Growth ETF (SCHG) and the Technology Select Sector SPDR ETF (XLK) are down by more than 3% each. This one-month performance confirms that value is up, while growth/technology is down.

https://static.seekingalpha.com/uploads/2022/1/9/49663886-16417501193779671.png

Source: Trading View

Looking ahead, in view of the uncertainty associated with Covid variants, supply chain issues, and inflationary concerns in the first half of 2022, there is no guarantee that the current trend favoring value will continue, but, at the same time, we cannot remain insensible to the new market regime. Moreover, for those who have been used to investing in growth made relatively easy due to the momentum induced by the mighty Nasdaq, it may prove difficult to screen the market for high-quality value stocks with appropriate free-cash-flow, balance-sheet, and valuations metrics.

The value-oriented ETF rationale

Hence, it is precisely for these tech investors that investing in value-oriented ETFs where the fund managers select the best stocks, makes sense.

In this respect, VTV with an expense ratio of 0.04% and paying dividends at a yield of 2.15% holds mostly Financials (22%), Healthcare (18.5%), and Industrials (14%) stocks as part of total assets. Finally, for tech lovers, better performing VLUE, with 30.85% of IT exposure, and paying a 2.41% dividend yield at an expense ratio of 0.15% is a better choice.

Disclosure: I am long XLK.

 

Will 2022~23 Require Different Strategies For Traders/Investors Part II

Is The Lazy-Bull Strategy Worth Considering? Part II

I started this article by highlighting how difficult some 2021 strategies seemed for many Hedge Funds and Professional Traders. It appears the extreme market volatility throughout 2021 took a toll on many systems and strategies. I wouldn’t be surprised to see various sector ETFs and Sector Mutual Funds up 15% to 20% or more for 2021 while various Hedge Funds struggle with annual returns between 7% and -5% for 2021.

After many years in this industry and having built many of my own strategies over the past decade, I’ve learned one very important facet of trading strategy development – expect the unexpected. A friend always told me to “focus on failure” when we developed strategies together. His approach to strategy design was “you develop it do too well in certain types of market trends and volatility. By focusing on where it fails, you’ll learn more about the potential draw-downs and risks of a strategy than ignoring these points of failure”. I tend to agree with him.

In the first part of this research article, the other concept I started discussing was how traders/investors might consider moving away from strategies that struggled in 2022. What if the markets continue trending with extreme volatility throughout 2022 and into 2023? Suppose your system or strategy has taken some losses in 2022, and you have not stopped to consider volatility or other system boundaries as a potential issue. In that case, you may be looking forward to a very difficult 12 to 14+ months of trading in 2022 and 2023.

Volatility Explodes After 2017

Current market volatility/ATR levels are 300% to 500% above those of 2014/2015. These are the highest volatility levels the US markets have ever experienced in the past 20+ years. The current ATR level is above 23.20 – more than 35% higher than the DOT COM Peak volatility of 17.15.

As long as the Volatility/ATR levels stay near these elevated levels, traders and investors will likely find the markets very difficult to trade with strategies that cannot properly adapt to the increased risks and price rotations in trends. Simply put, these huge increases in price volatility may chew up profits by getting stopped out on pullbacks or by risking too much in terms of price range/volatility.

The increased volatility over the past 5+ years directly reflects global monetary policies and the COVID-19 global response to the crisis. Not only have we attempted to keep easy money policies for far too long in the US and foreign markets, but we’ve also been pushed into a hyperbolic price trend that started after 2017/18, which has increased global debt consumption/levels to the extreme.

2022 and 2023 will likely reflect a very strong revaluation trend which I continue to call a longer-term “transition” within the global markets. This transition will probably take many forms over the next 24+ months – but mostly, it will be about deleveraging debt levels and the destruction of excess risk in the markets. In my opinion, that means the strongest global economies may see some strength over the next 24+ months – but may also see extreme price volatility and extreme price rotation as this transition takes place.

Chart Description automatically generated

Expect The Unexpected in 2022 & 2023

The US major indexes had an incredible 2021 – rallying across all fears and COVID variants. The NASDAQ and S&P500 saw the biggest gains in 2021 – which may continue into early 2022. Yet I feel the US markets will continue to transition as the global markets continue to navigate the process of unwinding excess debt levels and potentially deleveraging at a more severe rate than many people expect.

Because of this, I feel the US markets may continue to strengthen as global traders pile into the US Dollar based assets in early 2022. Until global pressures of deleveraging and transitioning away from excesses put enough pressure on the US stock market, the perceived safety of US assets and the US Dollar will continue as it is now.

Graphical user interface, chart, bar chart Description automatically generated

(Source: www.StockCharts.com)

Watch For Sector Strength In Early 2022 As Price-Pressure & Supply-Side Issues Create A Unique Opportunity For Extended Revenues/Profits

I believe the US markets will see a continued rally phase in early 2022 as Q4:2021 revenues, earnings, and economic data pour in. I can’t see how any global economic concerns will disrupt the US markets if Q4:2021 data stays stronger than expected for US stocks and the US economy.

That being said, I do believe certain sectors will be high-fliers in Q1:2022 and Q2:2022 – at least until the supply-side issues across the globe settle down and return to more normal delivery expectations. This means sectors like Automakers, Healthcare, Real Estate, Consumer Staples & Discretionary, Technology, Chip manufacturers, and some Retail segments (Construction, Raw Materials, certain consumer products sellers, and specialty sellers) will drive a new bullish trend in 2022.

The US major indexes may continue to move higher in 2022. They may also be hampered by sectors struggling to find support or over-weighted in symbols that were over-hyped through the end of 2020 and in early 2021.

I have been concerned about this type of transition throughout most of 2021 (particularly after the MEME/Reddit rally phase in early 2021). That type of extreme trending usually leads to an unwinding process. I still don’t believe the US and global markets have completed the unwinding process after the post-COVID extreme rally phase.

Graphical user interface, chart Description automatically generated

(Source: www.StockCharts.com)

Will The Lazy-Bull Strategy Continue To Outperform In 2022 & 2023?

This is a tricky question to answer simply because I can’t predict the future any better than you can. But I do believe moving towards a higher-level analysis of global market trends when the proposed “transitioning” is starting to take place allows traders to move away from “chasing price spikes.” It also allows them to position for momentum strength in various broader market sectors and indexes.

I suspect we’ll start to see annual reports from some of the biggest institutional trading firms on the planet that show feeble performance in 2021. This recent article caught my attention related to Quant Funds in China.

I believe we will see 2022 and 2023 stay equally distressing for certain styles of trading strategies while price volatility and an extreme deleveraging/transitioning trend occur. Trying to navigate this type of choppy global market trending on a short-term basis can be very dangerous. I believe it is better to move above all this global market chop and trade the bigger momentum trends in various sectors and indexes.

Chart Description automatically generated

Part III of this research article will focus on Q1 through Q4 expectations for 2022 and 2023. I will highlight broader sector/index trends that may play out well for investors and traders who can move above the low-level choppiness in the US and global markets.

WANT TO LEARN MORE ABOUT THE TECHNICAL INVESTOR AND THE TECHNICAL INDEX & BOND TRADING STRATEGIES?

Learn how I use specific tools to help me understand price cycles, set-ups, and price target levels in various sectors to identify strategic entry and exit points for trades. Over the next 12 to 24+ months, I expect very large price swings in the US stock market and other asset classes across the globe. I believe the markets are starting to transition away from the continued central bank support rally phase and may begin a revaluation phase as global traders attempt to identify the next big trends. Precious Metals will likely start to act as a proper hedge as caution and concern start to drive traders/investors into Metals.

I invite you to take a few minutes to visit the Technical Traders website to learn about our Technical Investor and Technical Index and Bond Trading strategies and how they can help you protect and grow your wealth.

Have a great day!

Chris Vermeulen
Chief Market Strategist

 

Encouraging Signs the Worst of the Economic Dysfunctions May Be Behind Us

There are encouraging signs that the worst of the pandemic-induced economic dysfunctions may be behind us. Factory surveys released for the U.S., Europe, and Asia this week have shown a further easing of supply chain problems as well as a slowdown in cost increases during December.

What drives the market today?

Some on Wall Street, however, remain concerned that the latest Omicron-driven wave will derail those improvements and possibly deepen the ongoing labor and supply shortages.

Bulls want to believe that any fallout from the current wave will only be short-term as the Omicron variant is expected to burn itself out fairly quickly. In fact, much of the current commentary from the bull camp anticipates that Covid, supply chain dislocations, and inflation will all peak in the early part of 2022.

Data from the Labor Department yesterday showing that job openings fell in November further supports the bull’s view that the economy is starting to “normalize,” although the number of unfilled jobs remains far above both last year and pre-pandemic levels.

Still, it’s a move in the right direction for the very tight labor market that has been driving wages higher, another factor that is feeding inflation. The Labor Department’s latest employment report, to be released Friday, is projected to show employers added 405,000 jobs in December with the unemployment rate ticking down to 4.1% and wage growth seeing another +0.3% gain.

Investors got a preview of Friday’s report with ADP’s private payroll report today, which showed 807.000 new jobs added last month.

FOMC Minutes

Today also brings “minutes” from the Federal Reserve’s December meeting that saw the central bank make a decidedly hawkish shift with plans to more quickly wrap up its asset purchase “taper” and projections for as many as three interest rates in 2022.

Debate about when and by how much the Fed will shrink its $8.76 trillion asset portfolio is already starting to hit headlines. There are growing concerns that the Fed will start offloading its holdings sooner and faster than most anticipate, which Wall Street has mostly been anticipating will begin in 2024, at the earliest.

Keep in mind that the new year brings the annual rotation in voting members of the Federal Open Market Committee (FOMC). The FOMC consists of the seven members (currently only four seats filled) of the Board of Governors; the president of the New York Fed; and four of the remaining eleven Reserve Bank presidents Rotating onto the FOMC in 2022 are St. Louis Fed President James Bullard, Kansas City Fed President Esther George, Boston Fed President Eric Rosengren, and Cleveland Fed President Loretta Mester, all of which tend to lean more hawkish than their predecessors.

There are three vacant Board of Governors seats to fill so investors will be closely monitoring developments on that front.

Bulls could start to get more nervous if those are also filled with officials that are viewed as more hawkish-leaning. The Fed’s next policy meeting is on January 25-26.

 

Gold Finds Support at $1798 and Moves Higher as Omicron Variant Surges

According to the CDC, the new variant “omicron” represents 95% of all new cases in the U.S.

According to Reuters, “The United States set a global record of almost 1 million new coronavirus infections reported on Monday, according to a Reuters tally, nearly double the country’s peak of 505,109 hit just a week ago as the highly contagious Omicron variant shows no sign of slowing. The number of hospitalized COVID-19 patients has risen nearly 50% in the last week and now exceeds 100,000, a Reuters analysis showed, the first time that threshold has been reached since the winter surge a year ago.”

According to the World Health Organization, the good news is “evidence thus far suggests Omicron is causing less severe illness. Nevertheless, public health officials have warned that the sheer volume of Omicron cases threatens to overwhelm hospitals, some of which are already struggling to handle a wave of COVID-19 patients, primarily among the unvaccinated.”

The surge in new infections coupled with a weaker than expected U.S. manufacturing report was the primary component that took gold higher today. The ISM manufacturing index was forecasted to come in at 60.0%. However, the actual number came in below that at 58.7%. The ISM report clearly showed that growth amongst U.S. manufacturers is slowing faster than expected. The concern is that inflationary pressures will continue to grow and stifle economic recovery.

As of 4:23 PM EST gold futures basis, the most active February contract is fixed at $1814.90 after factoring in today’s gain of 0.82%, or $14.80. Silver also had strong advances today with the most active March 2022 contract currently up $0.28 and fixed at $23.09.

Gold January chart

On Friday, the U.S. Labor Department will release the jobs report for December 2021. This will certainly be the most important report that comes out this week. Current forecasts from economists polled by various new sources are indicating that the unemployment rate will decline to 4.1% and that the United States will have filled an additional 410,000 jobs. This is after a tepid jobs report last month which showed that only 210,000 new jobs were added in November.

The forecasted numbers for Friday’s jobs report are currently being baked into the current pricing of the financial markets, including the precious metals. If the actual numbers come in well under the forecasted predictions, we could see a continuation of solid bullish market sentiment for gold and silver. However, if they come in at or above the forecasted projections, it could certainly diminish the bullish market sentiment that currently exists in both metals.

Wishing you as always good trading and good health,

For those who would like more information simply use this link.

Gary S. Wagner

 

Should Investors Trust Today’s Stock Market Rise?

Stock bulls seem ready to move beyond the lingering concerns about the latest Omicron-driven coronavirus surge with many insiders expecting little if any lasting economic damage.

Coronavirus surge

The biggest concern remains the possibility of more supply chain disruptions with companies around the world reporting major staffing shortages as a result of so many workers being out sick and or testing positive. That’s in addition to the generally tight labor supply that is currently plaguing many Western countries, including the United States.

Health officials expect the current U.S. wave will start to subside in just a few short weeks. Investors are also closely monitoring the situation in China where millions of people are under lockdowns, creating shortages of workers at key factories as well as disrupting cargo movement to and from the Ningbo-Zhoushan port, the world’s largest by container volume.

China is the only major country in the world that is still trying to maintain a “zero-Covid” policy, even as the resulting lockdowns and other severe restrictions have consistently been a source of major supply-chain disruptions.

The policy has been flagged as one of the biggest risks to global growth in 2022 by numerous analysts and risk consultants, particularly if future mutations continue to jump immunity protections like the Omicron variant seems to do.

A continuation of the policy likely means ongoing supply constraints for global importers and further fanning of inflation flames. Personally, I think China is trying to keep a lid on Covid until they get past the Winter Olympics which start in February.

Inflation issue

Here at home, inflation remains the key economic headline in the spotlight with the Prices Paid component of the ISM Manufacturing Index out today and expected to tick slightly lower again this month, which would mark two months of price gain slowdowns.

Several Wall Street insiders are saying inflation has peaked but may take a while to slowdown and this data might help confirm that opinion. The Labor Department’s Job Openings and Labor Turnover Survey (JOLTS) is also due out today with most expecting job openings to come in near record levels.

Keep in mind, the survey data is for November which is when many companies were trying to hire seasonal help for the holidays, so it’s not the most relevant and up-to-date data.

The December Employment Report due on Friday is the labor data investors are most anxious to see this week. Investors this morning will also be digesting manufacturing data for China, which was released overnight. Also on the calendar today is the monthly OPEC meeting with the group expected to stick to its planned +400,000 barrel per month production increase.

It’s worth noting that the group has failed to meet production targets with several members suffering from capacity constraints and other disruptions. OPEC oil producers fell short of their targets by -650,000 barrels per day in November and -730,000 barrels per day in October, according to International Energy Agency (IEA). Don’t forget, we have the Fed’s latest FOMC minutes scheduled for release tomorrow. The market seems to now be forecasting 63% odds of the Federal Reserve increasing rates at the March 16th meeting which is well above the 27% odds the market was forecasting about a month ago. It will be interesting to see how aggressive the Fed wants to be in battling inflation.

 

XLV: Confidence in Medical Science at Containing Covid Is Highly Beneficial

The year 2020 was so hard for most of us as the pandemic struck bringing an unprecedented level of disruption to our lives. It’s now more than two years that the world is affected by the deadly and invisible virus with millions being infected and millions more have lost their jobs as the economies of many countries were devastated and governments were challenged into putting into place tough social distancing measures.

However, while infection rates have reached a new peak with the Omicron strain (as per the chart below in blue), the number of people who have actually lost the battle against the invisible enemy continues to fall as depicted by the death rate in the grey chart below trending lower.

https://static.seekingalpha.com/uploads/2022/1/3/49663886-16411948064843268.png

Source: Google

There are many reasons for the decrease in death rate with the most important ones being the rise in vaccination among populations worldwide as well as the provision of better hospital-level care to patients infected with Covid. This has been made possible by new antibodies treatments. For this purpose, the Health Care Select Sector SPDR Fund (XLV) includes key plays like Johnson and Johnson (JNJ) with its Janssen vaccine as well as Pfizer (PFE) with its Covid pill, as longer-term solutions to countering Covid.

Apparently trivial, but equally important, there is the important role played by diagnostics companies in early detection of the coronavirus so that infected people can be isolated. This separation act has been critical in order to contain the infection, in turn reducing hospitalization rates. Here, companies like Thermo Fisher (TMO) and Abbott (ABT) who were quick to develop relatively cheap Covid tests come to mind. In this respect, for those wondering about the role of these medical devices and tool plays in the future where Covid becomes more analogous to “normal” seasonal flu, there is the stark reality of the coronavirus mutating rapidly into Alpha, Delta, and Omicron strains. Thus, the market for Covid testing should become a constant in the new normal.

https://static.seekingalpha.com/uploads/2022/1/3/49663886-16411948065317018.png

Source: ssga.com

Moreover, XLV is not just about Covid as seen with health insurance plays like United Healthcare (UNH). The company makes the system work better for everyone by simplifying the health care experience through the use of advanced data and technologies, breakthrough treatments, and consumer choice. Talking diversification, with normalization in health care, there are a number of sectors including ophthalmology and dentistry as well as clinical trials activities in areas like biotech research which should prove beneficial for XLV’s holdings.

The market seems to already have realized this, rewarding XLV with 7.36% during the last month against only 2.69% for the S&P 500.

Source: Trading View

I believe that this outperformance should continue in 2022, as the role of medical science, especially through sequencers in rapidly understanding the DNA of the coronavirus as well as its mutants has been established. There may be periods of doubt as for example when investors’ high expectations of Merck’s Covid pills were dashed when some clinical trial data suggested that Molnupiravir was less effective than originally thought. This resulted in volatility in the State Street fund around December 13. Subsequently, XLV rapidly overcome this “volatility episode” and is now at the $140-141 range.

Looking at the sector, XLV comes with an expense ratio of just 0.12% and a dividend yield of 1.32%. Another peer, the Vanguard Health Care ETF (XHT) does offer lower fees of just 0.10%, but, it is the State Street fund that has outperformed both on a one-year and one-month basis, by 600 and 110 basis points respectively.

Finally, in line with its five-year performance, XLV should continue with its uptrend and reach the $150-155 level by the middle of 2022.

 

2021: A Year Defined by Soaring Inflation, Covid Variants & Market Resilience

After an extremely chaotic 2020, the world pinned hopes on stability and normality returning this year.

Indeed, 2021 kicked off on a positive note as the mass vaccinations against Covid-19 and confirmation of Joe Biden’s victory in the presidential election boosted investor confidence.

Renewed stimulus hopes from Biden’s $1.9 trillion economic rescue plan fuelled the risk-on mood, propelling US stocks to record highs during the first month of 2021. Console retailer GameStop also hijacked the headlines by surging over 1600% in January as a group of investors on Reddit fuelled a short squeeze in the company’s shares.

In February, a sense of caution enveloped global markets as investors mulled over the possibility of rising inflation becoming a major theme. Signs of inflation were already spotted across the globe amid supply-chain disruptions, while prices pressures were expected to return amid an economic boom powered by vaccines and pent-up consumer demand. Taking a look at commodities, gold tumbled to an 8-month low under $1720 thanks to rising yields, dollar strength, and growing global risk appetite.

Things started getting sticky in March as coronavirus variants appeared across the globe. In the United Kingdom, the B.1.1.7 strain was initially considered more lethal than earlier variants. Different variants of the novel coronavirus were also reported in Brazil and even India which saw a spike in cases despite vaccine rollouts. On the currency front, the dollar appreciated against almost every single G10 currency as investors speculated that the massive fiscal stimulus and aggressive vaccinations would help the US economy recover.

Q2 kicked off on a positive note despite global economic uncertainty caused by the ongoing pandemic. Equity bulls remained in the driving seat amid robust Q1 earnings, the Fed’s pledge to keep rates lower for longer, and China’s eye-popping 18.3% growth in the first quarter.

In other news, Coinbase made its debut on Nasdaq on April 14th which was seen as a watershed moment for the cryptocurrency industry.

Everyone was talking about copper in May as the commodity surged to a record high of $4.9. The rally was triggered by the reopening of major economies and the robust demand for minerals needed for the green energy agenda. Given how copper is used in everything from electric vehicles to home appliances like washing machines, the outlook was heavily bullish – especially amid the bigger global focus on green energy. The commodities boom, fuelled by rising global demand and supply shortages fuelled fears around inflation across the globe.

In the United Kingdom, the Delta variant of Covid-19 clouded economic recovery hopes in June. As the third wave of Covid-19 cast doubt on more lockdown easing before July, the British Pound tumbled against every single G10 currency, sinking as low as 1.3790 against the dollar.

It was not only the UK affected by the Delta variant, it swept across Europe and started gaining ground in the United States. Hotspots were also found in Asia and Africa.

A sense of unease gripped markets in July as Covid-19 cases across the globe surged. The International Monetary Fund (IMF) warned that unequal access to Covid vaccines risked derailing the global recovery. Global stocks displayed resilience despite the Delta variant fuelling the surge in coronavirus cases worldwide. Infact, the S&P500 concluded the month of July almost 2% higher despite the growing uncertainty. Down under, the Australian dollar collapsed like a house of cards due to a surge in virus infections and lockdown restrictions in Australia.

Hong Kong stocks stole the spotlight in August as the tech-heavy Hang-Seng Index briefly tumbled into bear market territory, dropping more than 20% from its mid-February peak. The descent was driven by China’s regulatory crackdown on sectors ranging from financial technology to education and gaming.

Risk-off was the name of the game during the final month of Q3 thanks to inflation fears, growth concerns, and mounting uncertainty over Covid-19. As inflation made itself at home in the United States, Federal Reserve policymakers were forced to accept that inflation proved to be larger and more long-lasting than expected. The terrible combination of growth doubts, turmoil surrounding China’s Evergrande and Fed taper fears saw the S&P500 fall 4.8% in September.

Oil prices exploded higher in October, with WTI rising beyond $80 for the first time since 2014 as surging natural gas prices spurred greater demand for crude ahead of winter.

Tight global supply and robust fuel demand in the United States and beyond energized oil bulls. WTI concluded the first month of Q4 roughly 10% higher while Brent was not too far behind gaining 6%. Interestingly, the IMF and World Bank both issued warnings over rising inflation.

After “talking about talking about” tapering for many months, the Federal Reserve finally made a move in November.

This marked a crucial turning point as it stepped away from its emergency policy. In a process known as tapering, the Fed was set to reduce $120 billion in monthly purchases of Treasuries and mortgage-backed securities. The mighty dollar appreciated across the board, boosted by increased expectations for a reduction in the Fed’s asset purchase and interest rate hike, possibly in late 2022. During this month, the World Health Organization (WHO) also declared a new coronavirus variant to be “of concern” and named it Omicron. It was first reported to the WHO from South Africa on 24 November.

Growing uncertainty over the Omicron variant weighed heavily on market sentiment in December. With the new variant in town spreading faster than the more prevalent Delta, this clouded the global growth outlook as countries across the globe announced tighter restrictions.

The end of 2021 saw major central banks turning hawkish in the face of rising inflation.

As one of the largest central banks in the world embarked on the path to policy normalization, other banks wasted no time to tighten. We saw the Reserve Bank of New Zealand (RBNZ) raise interest rates in November, the Fed doubling down on its stimulus taper in December, and the Bank of England (BoE) also surprising markets by hiking rates. Indeed, with US inflation skyrocketing 6.8% in the year through November and consumer prices soaring across the globe, this offers a taster of what to expect in 2022.

One key thing to keep in mind is that the S&P500 closed at record highs 69 times this year despite the global growth fears and covid related uncertainty.

US equity bulls were certainly in the driving seat throughout 2021 with the S&P500 up over 27% year-to-date, marking its third straight annual increase.

There is no doubt that 2021 was a historic year defined by runaway inflation, coronavirus variants, and resilient stock markets.

With persistent inflation likely to remain a major theme in 2022, it will be interesting to see whether this forces more central banks to tighten monetary policy. Let’s not forget about the current Omicron menace and risks of new variants potentially clouding the global economic outlook. Equity bulls dominated the scene this year but will we see the same in 2022? Or will the combination of rising inflation and tighter monetary policy end the bull run?

We saw some extreme events throughout 2021 with the show set to continue in 2022. It may be wise to fasten your seatbelts in preparation for another eventful and potentially volatile year for financial markets as 2021 slowly comes to an end.

By Lukman Otunuga Senior Research Analyst

Disclaimer: The content in this article comprises personal opinions and should not be construed as containing personal and/or other investment advice and/or an offer of and/or solicitation for any transactions in financial instruments and/or a guarantee and/or prediction of future performance. ForexTime (FXTM), its affiliates, agents, directors, officers or employees do not guarantee the accuracy, validity, timeliness or completeness, of any information or data made available and assume no liability as to any loss arising from any investment based on the same.