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Article | 11 January 2022 | Investments
Global stocks finished the year with a ‘Santa rally’, as expectations for strong economic growth in 2022 allowed investors to look past skyrocketing Covid-19 cases and heightened inflationary pressures. In the US, the S&P 500 rose 4.4%, hitting all-time highs on a dip in jobless claims. In Europe, markets optimism that the Omicron variant would have limited economic impact drove the Euro Stoxx 50 index up 5.8%. Japan’s TOPIX index ended the month up 3.3% and the MSCI EM index lagged with a 1.6% rise.
The Federal Reserve announced plans to fight inflation, after speeding up the end of its bond-buying programme, with up to three rate hikes in 2022. As a result, government bonds had a weak month, with US and European prices falling as yields rose. In corporate bond markets, high yield bonds ended on a strong note on both sides of the Atlantic, on renewed hopes for strong economic growth. Meanwhile, investment grade bond prices were slightly negative in the US and Europe.
In December, sterling raced higher against the euro and the US dollar, after the Bank of England raised interest rates. The dollar was mixed heading into the year's end, falling against sterling and the euro, and rising against the Japanese yen, which lost ground as traders stayed in riskier currencies and asset classes, such as equities. The euro was higher against the yen and the dollar but fell against sterling over the month.
Oil rebounded from its November losses, with Brent Crude finishing the year at $78, on hopes that demand would hold up despite soaring Omicron coronavirus infections, and that OPEC and its allies would continue with incremental increases in production. Gold prices rose by 3.1% to finish December at $1,829 per ounce, as an improved risk appetite capped further advances.
Stock market volatility (measured by the VIX index) dropped over the month as fears over the severity of the Omicron variant faded. The so-called fear gauge peaked on the first day of the month at 31.12, before cooling off to finish the month at 17.22.
Biden's hopes to pass the Build Back Better bill in time for Christmas were dashed, as a member of his Democratic party dealt a devastating blow to his legislative agenda. The $1.75 trillion spending package looks for massive investments in healthcare, childcare and climate initiatives
Financial markets largely ended the year in a growth mindset. Equity markets locked in a third year of double digit gains, while bond yields rose (and prices fell) in anticipation of interest rate hikes in 2022. Energy markets closed the year strongly, driving headline inflation higher.
Central banks announced moves to unwind pandemic-era support, despite surging Omicron infection rates, with the most aggressive plans from the US Federal Reserve (Fed). Meanwhile, the Bank of England became the first G7 country to raise interest rates, addressing a more persistent rise in inflation.
China’s property sector remained in turmoil and Evergrande was officially rated ‘in default’. The People’s Bank of China cut interest rates in order to calm markets, while economists cut GDP growth forecasts, acknowledging the importance of this sector to the Chinese economy.
The Omicron variant of Covid-19 is set to continue its rapid spread, prompting varying degrees of response from governments around the world. China looks likely to continue its ‘zero-Covid’ policy, requiring tight lockdowns, while other major economies appear willing to ‘ride out’ the surge in case numbers.
The Fed will accelerate the tapering of its monthly bond purchases, aiming to wind up the programme by the end of March. Nonetheless, the Fed meeting at the end of January could show adjustments to the ‘dotplot’ of interest rate hikes expected for 2022, in light of Omicron developments over the course of the month.
US companies will kick off the Q4 reporting season in the middle of January. If the average earnings growth of the S&P 500 matches forecasts, it will be the fourth consecutive quarter of earnings growth above 20%. Managements’ forward guidance will be closely scrutinised for insight into current trading conditions.