Market Review 12/2021

In December, developed equity markets saw bears twice trying to spoil the holiday season, but bulls promptly suppressed both attempts. Early in the month, we saw S&P 500 falling to 4490 points, while on the 20th it did not even get below 4500. After that, the Santa Claus rally took us over 4800 points with S&P 500 showing an impressive yearly growth of 27%. The main risks in 2022, according to market participants, are Fed’s monetary policy and Covid-19. Many expect a significant correction to take us to the 4100 levels (and even lower) in the S&P 500. As you know, although we consider this scenario possible, we do not see it as highly probable. We will be glad to see a drop to the 4450-4500 area, where we plan to return to the market with our “shopping list”.

EUR/USD and interest rates

We yet to see a clear long-term picture in euro-dollar pair. Last month we mentioned an intention to go short should the market rise closer to 1.1400-1.1450 area, but it gave us no such chance, instead trading in the narrow 1.1250-1.1350 range. This sideways action could well be a preparation for lower prices as interest rates are clearly in favor of the dollar, thus we still look to sell euro on any rally to 1.14+ area or wait for the market to drop to 1.1000 to go long the pair.

While major longer-end yields consolidate in narrow ranges, US short-end is pricing in 50-75 basis-point rate hike in the next nine to twelve months. Current inflation numbers are getting harder and harder to ignore and real interest rates are deep in the negative territory. Recall that the yield on ten-year US treasuries stood at 1.8% in spring, but then fell to 1.12%. Now the market has returned to the 2021 highs thus increasing the likelihood of seeing yields in the 2-2.5% area. Of course, all this is happening against the backdrop of expectations of long-term inflation and the belief that the Fed will not reverse its tightening plans.

European and US equity markets

Precious metals give no relief

Inflation has hit troubling levels yet precious metals fail to give any relief to the bulls and even continue to show warning signals. Silver still holds 21.50-22 support level but each bounce is less and less powerful and there is serious concern that it might be only a matter of time before we go to test another major support zone of 19.20-20 dollars per troy ounce.

Gold also feels «heavy» in environment where it should act as inflation hedge. XAU/USD needs to regain levels beyond 1870-1900 to get in a safer zone, otherwise it risks testing 1750 support again. We still like the asset class, but metals need to give us a confirmation we consider an aggressive trade.

Goldprice, USD/oz

An energy crisis or a hybrid war?

London-traded natural gas future contract has recently risen more than twenty times from its 2020 lows before collapsing more than 50% on the news that US liquefied natural gas tankers are heading to Europe. Such an action does not “feel” very sustainable; hence, we recommend NYMEX-traded natural gas futures for those who want to include natural gas in their commodity portfolios.

High Yield bond Indexes

Congress contemplates additional stimulus; Covid-19 hurts Europe

In U.S. private payrolls increased by 807 000 jobs in December (the most in seven months) after a 505 000 increase in November showing that labor market continues to recover. The data, however, was collected in mid-December, i.e. before the Omicron was blazing through, meaning that momentum could slow down in the months to come. U.S. ISM’s index of national factory activity decreased to 58.7 in December compared to 61.1 in November. Input prices showed a positive sign – survey’s measure of prices paid by manufacturers decreased to 68.2 in December (the lowest level since November 2020) compared to 82.4 in November. As Omicron variant of Covid-19 has negatively affected several sectors, Democratic and Republican members of Congress are discussing another round of stimulus spending targeting restaurants, performance venues, gyms and minor league sports teams.

As expected, Covid-19 hurt Eurozone in December – IHS Markit’s Composite Purchasing Managers’ Index decreased to 53.3 points (lowest since March) compared to 55.4 in November. In Germany alone services sector showed a harsh decrease (IHS Markit’s final Purchasing Managers’ Index for services dropped to 48.7 in December compared to 52.7 in November), while composite PMI index reading stood at 49.9 compared to 52.2 in November. Additional restrictions point to further downside in activity in upcoming months. French numbers, however, barely decreased, showing certain resilience. Meanwhile ECB raised its inflation projections and now sees inflation at 3.2% this year, well above its 2.0% target. Rising demand and slight easing in inflation numbers fueled faster growth in China’s services sector –Caixin services PMI increased by one point to 53.1 in December. According to surveys, both supply and demand improved due to expansion of new businesses, but enterprises were concerned about possible disruptions due to rising Covid-19 cases. In addition, China’s factory activity grew at a faster pace due to lower price pressures and increase in production – Caixin manufacturing PMI was up in December and reached 50.9 point mark (the highest since June 2021).

Benchmark 10-year bond yields