Looking Back at 2021 

As the sun rose in 2021, the world was still reeling from the effects of COVID-19. Markets were affected, people were under lockdown, many businesses were shutting down.  However, there was also hope on the horizon, that a new US president, and an impending vaccine roll-out, would lift the world out of the unusual and dismal circumstance it had suddenly found itself in. 

Now, nearing the end of the year, the ‘normal’ life still eludes us. Monumental shifts in 2021 impeded our return to pre-pandemic days. Let’s look at three of them, to see how they affected the markets this year, and how they’re likely to play out in 2022. 

Delta, Omicron and on (and on, and on!)

Two years into the pandemic, and the COVID-19 saga still continues courtesy of the Delta and Omicron variants. 

While vaccines did play a role in boosting the economy in the first quarter of the year, they were quickly outpaced by the new variants. By mid-2021 the vaccine’s positive effect on economic conditions began to wane. 

So what’s it look like for 2022? 

The variants continue to create the possibility of forced lockdowns and restricted movements that impede the economy’s ability to return to normal. Many countries had already enforced restrictions on their populations even prior to the emergence of the Omicron variant.

Immunity for entire societies alludes to us, because of variants that require more booster shots but more largely due to the scepticism holding large portions of the global population from taking the vaccines.  

As a result, it doesn’t look like the world will be past the pandemic as quickly as we thought it would be at the start of the year. 

Inevitable Inflation

A rising cost of living defined consumer spending in 2021. 

While expenses like food, fuel, and utilities all increased over the past two years, people now saddled with bigger bills to pay, just weren’t as prepared to spend any money on non-essential items. This in turn fuelled inflation, which registered at 6.8% at the end of November 2021 - the fastest annual hike in inflation since the early 1980s. By the end of November 2021, the Consumer Price Index index stood at a record-breaking high of 278.88.

Inflation didn’t hit the US alone. In Britain, it reached 3% and shot up much higher in many emerging markets. 

So the million-dollar question at the end of 2021 is: Will inflation ease in 2022? 

Most analysts agree that it will, but have different views on how and why. 

Some say the supply chain bottlenecks and lockdowns directly caused by the pandemic are to blame for the high inflation. Their belief is that once the world returns to ‘normal’, and all the post-covid wrinkles are ironed out, inflation will cure itself. 

Others are less confident that inflation will correct itself. Their view is that only a Fed intervention to hike interest rates will slow it down.  As long as interest rates are this low, they say, and the borrowing costs are so cheap, inflation will persist.

Either way, it’s looking like inflation will decelerate in 2022.  As vaccination rates rise, more people will return to work, and their income will go back towards services to help lift shortages on goods and bring the prices back down. Energy prices are likely to hold steady, because of a decrease overall in energy demands and more fuel production.  

Should the economy not ‘correct itself’, inflation will be contained largely by the central bankers. History has proven that they know a thing or two about how to use rate hikes to rein in inflation.

A Changing Worker Landscape 

The year brought on challenges that were not anticipated but also some unexpected wins. 

For many employees disgruntled by long commutes, dreary offices, and disheartening work/life balance, 2021 cemented what had begun at the start of the pandemic lockdowns. 

A new work order. One where employees could stay home, work remotely and also be more productive on both the work and home fronts. 

After the lockdown, millions of workers quit jobs that were not allowing them to continue to work remotely. Many employers found themselves having to adapt or struggle to keep their businesses staffed. 

The pandemic created a mass migration out of the office in 2021, and that trend will continue into 2022. 

Studies show both managers and employees are happy with remote working. Employees say they’re more productive at home, that working remotely has improved their working relationship, and work/life balance. 

The changing work landscape hasn’t only affected people’s lives, it’s affected markets like real estate, technology, and e-commerce. 

One of the most striking impacts has been on real estate. Remote workers are now moving out of pricier city centre rentals and buying homes they can afford to live and work out of in more suburban locales. 

Just like expensive, centrally located apartments, office buildings were largely abandoned in favour of more flexible office spaces in 2021. Marcelo Claure, executive chairman of WeWork, said recently that there was more demand for the company’s services than there ever was prior to the pandemic. 

These trends are looking to continue next year as the world adapts to this new chapter in worker history. The great office migration. 

Looking Forward to 2022 

Some of the effects of the pandemic will be with us for many years to come. So say analysts closely follow the stock markets, consumer spending habits, and employment trends. 

Variants and booster shots, potential lockdowns, and supply chain challenges all leave the hope of full economic recovery uncertain. 

Still, there are many opportunities in 2022 to look forward to.

Strong markets will likely continue rallying into the year-end. Perhaps not as high as the last three years, but the forecast is looking at a continuing upward trend. This rosy outlook is based on solid fundamentals, wider spread vaccines, higher savings balance sheets, more consumer spending, and the growth of corporate earnings. 

The bad news is that inflation remains high, but this could be addressed with the Fed’s interest rate hike to bring inflation down, in the early parts of 2022, towards its 2% target. 

The Fed will very likely start raising interest rates in mid-2022 and this is expected to cause some market volatility. 

It’s good to remember that despite the uncertainty and bleak outlook of 2020, the stock market was hot in 2021. All three major indexes – the S&P 500, the Dow Jones Industrial Average and the Nasdaq – set records.  This is an encouraging sign for investors indicating that despite the shorter-term impacts of the pandemic on the market, the pitfalls are for the most part short-lived. The longer-term and broader outlook has proven to be positive. 

Traders remain nervous ahead of this week's Federal Open Markets Committee (FOMC) meeting, leading to a decline in US yields, while stocks and oil have also dropped.

The Federal Reserve (Fed) is widely expected to announce plans to quicken the tapering process as inflation continues to soar. Last week's data showed that the US inflation rose +6.8% YoY - right as expected according to the CPI indicator. It was the fastest rate of increase since 1982. In addition, the core CPI jumped 4.9 YoY, meeting expectations, its highest since 1991.

According to The New York Fed's latest survey, the public's short-term expectations for inflation surged to a new record high at 6%. Furthermore, the survey showed that respondents expected prices of everything (from gold to rent and from college to food) to continue accelerating.

It looks like US yields have topped, with the short-term yields coming down from their cycle highs, while the benchmark 10-year US yield topped in March and has failed to post new highs ever since. Furthermore, it declined below the critical 1.5% threshold, suggesting more yield weakness is to come. 

On the other hand, the market has priced an entire rate hike for June 2022, which means the tapering is expected to accelerate from the current pace. Two additional rate hikes are priced in 2022, indicating investors expect the Fed to hike three times next year, with Quantitative Easing (QE) gone as well. 

In that scenario, one would expect yields to move higher. However, short-term yields have surged, but long-term yields declined causing the yield curve to flatten. Investors think that a sharp increases in fed funds will cripple the current economic recovery, leading to rate cuts in 2024 or so. 

Therefore, short-term yields are influenced by the Fed's decision to raise rates, but the market sets long-term yields. And the outlook is not so bright. 

Every trader's goal is to make as much money as possible in the financial markets. When they’re choosing which markets to trade in, traders will naturally ask themselves which markets present them with the best opportunity for profit. 

Two of the most popular markets are stocks and currencies. The main difference between trading Forex and trading stock is obviously, what you’re trading. With Forex, you’re buying and selling currencies, while with stocks, you’re dealing in shares, which are units of ownership in a company.

Here are a few other differences that can help you decide whether Forex or stocks are for you. 

Market size

The forex market is the largest financial and most liquid financial market in the world, even larger than the stock market. It has a daily volume of over 6 trillion USD. 

Volumes that are that big present traders with many advantages. It allows traders to sell and buy currencies quickly and easily. Traders can also get in and out of a position very easily, 24 hours a day, 5 and a half days a week. That means you’ll never be stuck holding a position because you can’t find a buyer. 

A bigger market size also creates tight spreads and more competitive quotes. 

Predictability

In the Forex market, currency prices constantly fluctuate based on supply and demand. When a currency such as the USD is being bought in large volumes, its value increases. When it’s being sold in large volumes, its value decreases. 

These lifts and dips in the currency markets are heavily influenced by financial market news, global economic data, macroeconomic forecasts, short term market volatility and portfolio flows. 

These are all very difficult to predict. 

Stock trading is a lot more straightforward. When you’re trading stocks, the most important thing you need to focus on is the value of your investments. Stock investors use the fundamentals of a company's stock to forecast its future prices, like earning reports that take a lot of the guesswork out of forecasting. 

By contrast, there are more factors that affect the value of a country's currency which makes the movement of currencies more difficult to predict than stock movement. 

Profitability 

When you’re looking at whether Forex or stocks are more profitable you really need to establish the context first. For example how much experience you have, what type of trader you are, what your profitability goals are. Then you’ll be better able to judge which market presents revenue potential for you. 

If you’re new to investing, don’t want to deal with high-risk scenarios, and want to reach your financial goals over the longer term, then stocks would be a more profitable option for you. 

If you’d prefer to be day trading, don’t mind taking some risk for higher rewards, and want to make quick returns over a shorter period of time, then you’d probably be more suited to Forex. That’s because in the Forex market there are lower capital requirements, and you can open and close trades within minutes, while also taking advantage of small price movements with leverage. Keep in mind, even if you are aiming for shorter-term gains, Forex will require an upfront time investment. You still need to have an understanding of the Forex market, know how to read technical analysis and have a fine-tuned, fool-proof trading strategy under your belt before you can see profits roll in. 

The more you know about the financial markets, the more likely you are to make informed choices about where to put your money, and that’s how you’re able to potentially profit when you’re trading and investing. 

A good way to get started is by practising with a virtual trading account. The hands-on experience will help you build the trading acumen you need, while you gain first-hand insight into the market you have more affinity with before you put your real money on the line. 

US equity indices advanced every day last week, rising for a fifth week for their longest rally in 14 months.

Sentiment remained bullish on Monday, boosted by the latest news that Regeneron Pharmaceuticals announced a Phase 3 trial of its injectable monoclonal antibody cocktail, REGEN-COV, which effectively prevented people from becoming sick from COVID-19.

The company said REGEN-COV reduced the risk of illness by 81.6% over a two to eight month period for those who received the four subcutaneous injections. In addition, it reported zero hospitalizations in that period. 

Additionally, Pfizer reported similar results with its anti-COVID pill, sending the company’s shares sharply higher. 

On Friday, traders paid attention to the US labor market update. October nonfarm payrolls increased by 531,000 jobs, and data for September was revised higher to show 312,000 jobs created instead of the previously reported 194,000. Nevertheless, both the US dollar and US yields fell after the release of the report. Traders bought stocks after the data, sending the major bourses to new record highs.

More Room To Go?

Moreover, the Goldman Sachs flow trader Scott Rubner, who said in mid-October that the meltup is just starting, has a stunning update for what could happen next. And it appears that at this point, going simply on technicals and flows, a 5,000 target on the SP500 is not unreasonable.

In the last two weeks, options trading in the USA has never been greater. 

“After following the retail trading community for 18 years, I could never imagine typing these large numbers” Rubner said.

However, indices now look overbought on many time frames, implying a correction is due soon. 

Nevertheless, the seasonal Christmas period is nearing, usually leading to solid gains in the stock market. Therefore, the SP500 index could still achieve the 5,000 USD psychological level by the end of the year. 

Technically speaking, it is now challenging to find any resistance since stock indices have never been here. Therefore, traders might watch for any unusual price formations indicating a possible price reversal.

On the downside, the key medium-term support is at September highs; for the SP500 index, it is at around 4,550 USD. As long as the index trades above it, the outlook still appears bullish.

All eyes are still set on oil as the commodity continues to perform well, climbing above the 85 USD level on Monday, confirming the long-term bullish trend. 

It is hard to believe that in April 2020, oil dropped below 0 USD as nobody wanted the commodity. Fast forward to today, the WTI benchmark is trading at levels last seen in 2014.  And it looks like the bull market can go on further. The 100 USD psychological level could be reached this year.

Oil was also supported by the recent Goldman Sachs analysis by Callum Bruce. The bank estimated that global oil demand has surpassed 99 mb/d and will shortly hit its pre-COVID level of 100 mb/d as Asia rebounds post the Delta wave.

Furthermore, OPEC+ is adding output back on the market gradually while stockpiles are steadily declining and JPMorgan warned on Friday, that Cushing could be effectively empty in just a few weeks.

It looks like the energy crisis is far from over, pushing higher energy prices everywhere. Natural gas is above 6 USD, the highest since 2014. Moreover, if there is a harsh winter in Europe, which analysts expect, energy prices will likely soar further.

Lastly, everybody but the central banks know that inflation would not be temporary, benefiting commodities. Oil tends to be one of the best inflation hedges, and it has confirmed this role pretty well recently. Because it has jumped from below 0 USD to the current 85 USD, it has outperformed both gold and silver. 

Gold is up nearly 10% since April 2020, and it has not moved anywhere over the last year. It remains stuck near 1,800 USD. If we take 15 USD as the reference bottom in April 2020 for oil (although it was even below 0 USD), then oil is up nearly 500% in 18 months. 

Technically speaking, as long as oil remains above 80 USD, the medium and long-term outlooks appear bullish. Dips are expected to be bought. Traders seem to be ignoring the overbought conditions in the market for now.

The US dollar seems to be struggling recently, and the dollar index is down for four consecutive days on Monday. It looks like the recent bullish trend might be running out of steam. We can say the same thing about long US yields, as the 10-year Benchmark yield posted a bearish reversal candle on Monday. At the time of writing, the 10-year yield stood at 1.58%, down from the daily highs at 1.62%.

The Curve Flattening is Usual a Negative Sign

The yield curve continues to flatten dramatically as short-term yields go vertically higher and market participants expect rate hikes to begin by September 2022. However, the 10-year or the 30-year yields are consolidating and not rising to new highs. 

That could be interpreted as a policy error by the Federal Reserve (Fed) as the central bank will have to raise rates, possibly crippling the current weakening economy. Therefore, short-term yields are spiking higher, and at the same time, investors are buying longer-dated bonds, which are usually taken as a safe haven instrument.

Since short-term yields are usually a better driver for the US dollar, it is somewhat surprising that the greenback has declined recently, despite a sharp increase in short-term yields. 

Nevertheless, the US dollar should remain supported as the Fed is expected to tighten its monetary policy and reduce the monthly amount of bonds it buys, also known as the tapering process. The tapering process is likely to end in July 2022, and it will likely begin in November or December this year.

The View Remains Bullish

In the view of economists at HSBC, the USD will likely remain resilient amid slowing global growth and the Fed’s forward guidance on rate hikes. 

“In our view, ‘stagflation lite’ – a lighter version of the 1970s stagflation – is occurring. We believe that this still plays to the advantage of the USD – one of the ‘hardest’ currencies.” they concluded.

The daily chart of the Dollar Index is still looking bullish. But a short-term correction toward previous highs near 93.50 cannot be ruled out. Bulls are expected to step in and buy the dip in that scenario, especially if yields continue rising. However, if that support is not held and defended, we could see a larger and more significant correction toward the 50-day moving average, currently near 93.20.

Alternatively, if the bulls regain control of the market, the first target lies at the current cycle highs near 94.50. Should the index rise above and close beyond it on a daily chart, the long-term uptrend would be confirmed, most likely sending the USD toward 95, or possibly to 96 levels. 

For the first time since November, 2014 oil continued to move higher this week managing to get above the level of 80 USD. The energy crisis that’s getting worse in the EU has now spread to the US and China. While the whole energy sector has been rising, investors seem to ignore the strengthening US dollar or soaring US yields. 

The soaring US yields prices might only worsen the inflation that is already at its highest and it really seems this inflation is going to stay here for long. 

According to Reuters, The White House is once again reiterating – most likely in a strongly worded email – and urging OPEC+ to increase crude production. In addition, White House officials say they

"…are using every tool to address anti-competitive practices in US and global energy markets."

However, all these actions have not helped so far. As a respected energy market and geopolitical observer Daniel Yergin told Bloomberg,

"… the Biden admin doesn't have many tools on energy prices."

Recently, Moody's Investors Service has returned to the pre-pandemic oil prices of 50 - 70 USD a barrel range, on the back of expected restraint in production growth and a rise in costs. However, that is still way below the actual price and much more pessimistic than major banks on Wall Street, where the consensus is between 80 and 100 USD.

The next target for oil is likely in the 90 USD region, and considering the current bullish momentum, it could be reached pretty quickly. However, oil needs to stay above previous highs of 77 USD for the medium-term outlook to remain bullish. As long as that is the case, dips are expected to be bought, and the market should continue making new highs.