2021 has been a very eventful year indeed, as far as the financial markets are concerned. As vaccination rates have climbed internationally, various sectors of the economy have been able to come out of hiding, against a backdrop of changing lockdown rules and government guidance.
This run of events has sent stock markets skyrocketing (the S&P 500 closed at record highs more than 67 times this year), as central banks have maintained their quantitative easing programmes. Perhaps we can call 2021 the calm before the storm.
While many opportunities undoubtedly lie ahead in the new year, traders and investors alike will be keeping a watchful eye on the ongoing inflation situation, as well as what central banks do to keep spiralling numbers in check. Likewise, continued supply-chain disruptions and the emergence of the Omicron variant will complicate matters further. Add labour market dislocations and tightening monetary policy into the equation, and investors have a lot to be thinking about.
So, with all this in mind, what should traders and investors be considering as we head into 2022?
Central bank meetings
First and foremost, given that the Bank of England (BoE) has just become the first major central bank to raise interest rates since the coronavirus pandemic wreaked havoc on the global economy, investors would be wise to monitor these developments closely. As policymakers voted 8-1 in favour of raising rates, the benchmark interest rate now sits at 0.25%, with further hikes pegged for 2022 to bring down inflation.
This surprised economists, who had anticipated that the BoE would hold off on making any bold moves, given the current uncertainty surrounding the Omicron variant. That said, as a result of the BoE’s action, the pound rallied as much as 0.8%, while U.K. 10-year yields jumped 5 basis points after the decision – many traders see the BoE’s key rate rising to 1% by September. The U.S. Federal reserve have also set a hawkish tone, signalling three rate hikes next year and accelerating the winding down of its stimulus program.
In any case, traders and investors should watch the value of local currencies in line with any further rate hikes – the pound and the dollar are likely to climb as interest rates rise. Value stocks also tend to manage inflation well, so this should provide some food for thought.
Although cryptocurrencies can be high-risk, the past two years have seen prices skyrocketing as a result of low interest rates, rising consumer savings, as well as stimulus checks from the Government in the case of the U.S. markets. So, what next?
Bitcoin’s recent market downturn will have raised some eyebrows in recent weeks. Currently, the currency is in line with its 2020 average of around $47,000, but generally speaking, things remain volatile, as Bitcoin has soared to highs of $68,000 and lows of $29,000.
Now, the question is whether recent whisperings around regulation will sway the markets, as the Biden administration has outlined proposed legislation that would bring more regulation into the cryptocurrency market and U.S. Federal Reserve Chairman Jerome Powell has also raised his concerns about the current lack of regulation. Moreover, the Fed is actively assessing whether it should create a central bank digital currency (CBDC), which could certainly shift investor sentiment surrounding Bitcoin. Watch this space.
Will tech stocks prevail under Omicron pressures?
As I have already mentioned, the re-opening of the economy saw the hospitality sector rebound to a certain extent, as many people enjoyed visiting venues and travelling to places that they were unable to attend under strict lockdown rules. That said, recent developments with the Omicron variant of Covid-19 spreading at a rapid pace threaten to derail this recovery. On the contrary, tech stocks may thrive once again, should any restrictions be reinstated – measures which the UK Government currently refuses to rule out.
As ever, tech stocks still have the potential to outperform against any backdrop, with high profitability and strong, sustainable cashflows. However, the prospect of the Fed hiking interest rates may be enough to limit tech stocks which have already enjoyed a stellar run. Green energy tech stocks in particular may be a shrewd investment, in light of recent COP26 talks. Spurred on by retail investors, electric car manufacturer Tesla (TSLA), for one, has continued its stratospheric rise throughout 2021, as it joined the Trillion Dollar Market Cap Club.
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Whatever investors decide, they should be selective heading into the new year – it may be a bumpy ride.
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Giles Coghlan is Chief Currency Analyst, HYCM – an online provider of forex and Contracts for Difference (CFDs) trading services for both retail and institutional traders. HYCM is regulated by the internationally recognized financial regulator FCA. HYCM is backed by the Henyep Capital Markets Group established in 1977 with investments in property, financial services, charity, and education. The Group via its relevant subsidiaries have representations in Hong Kong, United Kingdom, Dubai, and Cyprus.