Dollar begins year on front foot, equities hover near highs
Omicron, inflation, central banks, and politics in the spotlight
Quiet day ahead but rest of the week seems promising
Dollar advances in thin markets
Happy new year to everyone. The quiet tone that characterized trading last week has carried over, with limited moves in most assets to kick off the new year. Liquidity is still in short supply as several investment hubs in Asia and Europe remain shut for holidays. News flow has also been exceptionally light, leaving investors little to go on.
The Omicron variant is spreading like wildfire but hospitalizations remain under control and most governments seem wary of going back to lockdowns, feeding optimism that this wave won’t inflict much damage on the global economy.
This cautious sense of relief is being reflected across financial markets today. Crude oil prices are on the rise, European equities are a sea of green, while the defensive Japanese yen is on the ropes. That said, all these moves are relatively minor as traders await the next big theme.
What will drive markets this year?
After a year when the US dollar sliced through the forex arena and the S&P 500 returned an astonishing 27% without any real drawdowns, it is useful to consider whether the same trends can persist moving forward.
Overall, the driving forces for markets this year might be how aggressively central banks normalize monetary policy, when inflation will peak, and politics ahead of the French presidential election and the US midterms.
For the dollar, it may be a year of two halves. The reserve currency could perform well early on but then lose its shine as ‘peak inflation’ dampens expectations for powerful Fed rate increases and the Republicans retake control of Congress, blocking spending initiatives and cooling US yields.
For equities, it may be a year characterized by volatility. Central bank stimulus acts like a volatility compression mechanism, so with liquidity now being withdrawn from the financial system while asset valuations are so high, volatility episodes could become a more frequent phenomenon. The overall trajectory is still positive, but it is unlikely to be smooth sailing like last year.
Gold remains elevated, quiet day ahead
Market participants seem to be warming up to gold once again. The precious metal briefly topped $1830 per ounce before pulling back earlier today, extending a rally that began in mid-December.
The December-January period is historically very strong for bullion, which has gained in 8 out of the last 10 Januaries. Beyond favorable seasonal patterns, the minor retreat in the dollar last month and tensions around Ukraine likely played a role too as investors hedged geopolitical risk.
As for today, there isn’t much on the economic calendar. Markets will remain closed in the United Kingdom and Canada, so trading volumes will be thinner than normal.
Thankfully, the rest of the week promises to be more exciting with a barrage of crucial data releases including the US employment report for December, the minutes of the latest FOMC meeting, and a monthly output decision from OPEC.