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Contents
- Asset Performance
- Themes for 2022
- Chart of the Year
- 5 Events to Watch in 2022
- Investment bank predictions
Asset Performance (1-year)
1-year performance as of December 20, 2021. 11:00 GMT
Source: finviz.com
Megatrends for 2022
These trends are already in place and set to continue through 2022 and beyond
1. ESG
Carbon emission ratings are becoming an increasingly important decision for whether institutional investors will invest in an asset class.
2. Artificial intelligence
New firms continue to grow and old industries will be disrupted by AI.
3. CBDCs
China is testing its ‘digital yuan’ now and other central bank digital currencies (CBDCs) look to be on the way in 2022.
4. Wealth inequality
The idea of universal basic income (UBI) got greater traction in 2021 after the US government sent stimulus checks in response to the pandemic.
5. Debt
According to the IMF, global debt increased by a massive 28% – surging to an all-time high of 256% of global GDP and reaching an incredible $226 trillion.
Chart of the Year
Source: Reuters / Refinitiv
If you’re wondering how the US stock market has continued to defy gravity in 2021, here is probably the biggest underlying reason – liquidity. This chart shows the expansion of the Federal Reserve’s balance sheet moving in sync with the bull market in the Nasdaq.
The previous mild episode of tapering from about $4.5 trillion to $4 trillion was generally accompanied by a rising market but also included the two major market sell-offs of 2018 and 2020. At that time the Fed was under no particular pressure to sell the bonds on its books because inflation was very low.
The dual risk moving forwards is that the Fed’s balance sheet is much larger than the last time it started (but didn’t finish) tapering and inflation is much higher- requiring a faster pace of tapering and higher interest rates to control it.
Events to Watch in 2022
1) US Midterm elections
Taking place on November 8 (the same day the Presidential election takes place).
2) The first Fed rate hike
If tapering goes as scheduled, the first Fed rate hike should come around June but could get pushed back to later in Q£ or even Q4.
3) The first ECB rate hike?
ECB President Lagarde has twice said she would be ‘surprised’ if there was a rate hike in the Eurozone in 2022. If inflation stays high, then she may get less and less surprised as time goes by.
4) Apple reaches a $3 trillion market cap?
The company came close before a sell-off in the 2nd half of December to become the first ever company to be worth $3 trillion.
5) Football World Cup
Taking place later than usual to account for the hot temperatures in Qatar, the FIFA football world cup takes place Nov 21- Dec 18.
Also…
6) Portugal legislative election (January 30)
7) Winter Olympic Games in China (February 4-20)
8) The Queen’s platinum jubilee (February 6)
9) French Presidential election (April 10)
10) Australian Federal election (before May 21)
11) Swedish General election (September 11)
12) India to surpass China as most populous country in the world
Investment bank predictions
(source: FX Street)
EUR/USD
A break of 1.10 is possible early in 2022 – Nomura
“Rising COVID-19 cases, lockdowns, a declining euro area trade surplus, fixed income outflows and lacklustre equity inflows in the euro area explain why we expect continued EUR/USD weakness, expecting a move through Q1 2022 towards 1.10.”
To race higher towards 1.20 in the second half of 2022 – Deutsche Bank
“We think that USD strength could be maintained into the first half of 2022. But later in the year, we think that the EUR will strengthen, taking EUR vs. USD to 1.20 by end-December 2022.”
EUR/USD to edge lower towards 1.05 by end-2022 – ABN Amro
“We believe that the ECB is facing a different set of macroeconomic circumstances than faced by the US central bank. The ECB has also explicitly ruled out a rate hike in 2022 and has hinted that it could well be ‘on hold’ for much longer.” “Our forecast for EUR/USD at year-end 2021 is 1.10 and 1.05 for year-end 2022.”
GBP/USD
GBP/USD to edge lower before rebounding later in 2022 – MUFG
“A BoE rate hike in December will provide GBP with limited support, and higher yields in the US with the BoE refraining from tightening again in February will keep GBP/USD under downward pressure initially. Later in 2022, the reality of a more dovish Fed coupled with further BoE rate hikes will prompt GBP/USD to move higher.”
GBP/USD to strengthen considerably towards 1.50 throughout much of 2022 – ANZ
Market pricing that three-month money will rise to 1.25% [in the UK] by the end of next year looks stretched. Such a sharp rise in the bank rate could have serious implications for financing conditions for both corporates and households and could risk an abrupt end to the expansion. We are therefore not convinced that the current degree of tightening priced into markets is warranted.”
“We continue to forecast GBP appreciation versus USD. We project a move back into the 1.40s vs USD in coming months, with progress towards 1.50 throughout much of 2022.”
USD/JPY
Scope for USD/JPY to skyrocket as high as 120 – ING
“In a world where the European and Japanese central banks are late to tighten – or have the biggest cause to pause – dollar gains should largely come at the expense of the low-yielding currencies. Here EUR/USD can trade to 1.10 through the year and USD/JPY potentially as high as 120.”
Gold
XAU/USD points to downside, seen around $1,685 in 2022 – Citibank
“We forecast average gold prices around ~$1,685/oz in 2022, declining to $1,500/oz in 2023, versus 2020/2021 annual mean prices near ~$1,800/oz.” “We hold a 60% conviction for our bearish base case gold price outlook and concedes that prices could spike again to $1,825-1,850 this winter. But on balance, macro and micro factors tilt negative for the yellow metal next year.”
XAU/USD to sink towards $1,600 by end-2022 – ANZ
“We believe that, despite reversing US break-even inflation, negative real interest rates could keep the gold price near $1,800/oz in H1 2022. More downward pressure is likely to build after the Fed starts hiking interest rates in mid-2022. We target gold prices to end the year at $1,600/oz.”
Oil
Brent Oil to hover around $80 as demand returns to pre-COVID levels by mid-2022 – SocGen
“Oil at $80/bbl. Only a few restrictions are implemented and global oil demand returns to close to pre-COVID levels by mid-2022. The demand outlook seems bullish and the US SPR release is only a $1/bbl drop in the ocean. However, we expect OPEC+ to manage supply efficiently in 1H22 despite Iran supply not returning before mid-2022. This would keep the market in a slight 1mbd surplus in 1H22 and the OECD industry stock at 3 days of global consumption coverage below its 5-year average. Once uncertainties brought by Omicron dissipate, the relative market tightness and low inventories should keep prices at around $80/bbl in 1H22.”
S&P 500
Seen at 5,100 amid two Fed rate hikes in 2022 – Goldman Sachs
“The median historical experience of equity valuations around initial Fed hikes shows stable P/E multiples.”
“Specifically, during the 12-month period starting six months before and ending six months after a tightening cycle begins, the valuation of the S&P 500 has remained remarkably steady on average.”
“Target S&P 500 at 5,100 at end-2022.”
Thank you very much for reading – Happy New Year and have a great YEAR trading!
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