The 133rd episode of my weekly YouTube show where I discuss what is happening in investment markets and what to look out for. This week I explain what is causing volatility in investment markets leading up to year-end.
Each show lasts between 5-10 minutes and is aimed at DIY investors (including novices) seeking contemporary analysis to help them understand how investment markets work.
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Abridged transcript - Midweek Markets episode 133
This is the last show of 2021 as there are very few trading days left until the start of the new year so I will keep it short and sweet. What trading there will be will inevitably be light in volume which likely means that volatility will pick up.
Indeed we’ve certainly endured our fair share of volatility already this December. Last week the market’s reaction to hawkish moves from the US Federal Reserve (the Fed) and the Bank of England (BOE) suggested that the central banks had given the green light to the seasonal Santa rally. But equity markets appeared to change their mind between Friday and Monday with most equity markets tumbling 2 and 3%.
What caused the sudden turnaround? Rising Omicron cases globally and a raft of restrictions including national lockdowns (especially in Europe) certainly soured the mood. Also, political posturing in the US over the weekend put Joe Biden’s $1.75 trillion infrastructure bill under threat which the market didn’t like at all. While another possible cause could have simply been a bout of profit-taking into the year-end after such a strong rally and with equity market valuations elevated. Whatever the reason it certainly spooked investors, with the VIX (the so-called market fear gauge) above 26, and it’s long term average of 20. The CNN Fear & Greed Index tumbled and indicated that Extreme Fear was driving markets.
Bonds rallied, with the 10 year US treasury yield falling below 1.4%, a key threshold to keep an eye on. Commodities took a blow, as concerns over slowing global growth, due to Omicron, re-emerged. Once again investment headlines were emotionally charged and full of panic.
Yet while areas of the market were under stress, others bucked the trend. The US dollar, which is a haven trade, barely registered the market panic, with the US dollar index holding firm. If the market was in turmoil you’d expect to see some dollar strength. As currency markets kept their cool, eventually bond and equity markets calmed.
The VIX dropped back below its long term average and once again sits around 19. Most equity market indices have since rallied 2-3% in the last 24 hours, with most regaining their post-Fed highs of last week. The biggest takeaway as we head into 2022 is that the markets will likely be skittish for some time as long as there is a backdrop of uncertainty surrounding Omicron, inflation as well US and global politics.
For 80-20 Investor members I have produced some technical analysis which includes key levels to watch on UK, US and Asian stock markets. If you want to read it you can take out a free trial by following the links on the Money to the Masses website.
But the upshot is that the uptrend in US stock remains, for now, despite the recent wobbles, as it does in UK stocks. Japanese equities are trending sideways for the moment while the UK pound continues to struggle but has provided a currency boost for any overseas holdings, especially in the US.
If I was to highlight a couple of key levels to keep an eye on to give a hint to market sentiment, and to maintain objectivity over the Christmas period when others are losing their heads, then they are 4700 & 4500 on the S&P 500. A convincing move above 4700 will likely spur a move higher but a move below 4500 could start to see equity markets unravel. Similarly keep an eye on the 1.4% level on the 10 year US treasury yield, below that again equity markets are likely to come under pressure as investors flock to bonds.
But for now the Santa rally remains on the cards in the US and the UK. Month to date both are in positive territory and even a pullback might see them still finish in the green. It’s a different story for European and Asian equity markets though.
Heading into 2022 there are going to be a lot of investment themes to keep an eye on so I will be releasing a podcast on Sunday 2nd January which will contain a look back at investment markets in 2021 but also provide an outlook for 2022.