Analysis of today's markets

Roberto Hernanz, Markets Director at BBVA Private Banking.

The exchanges join the Christmas rally in their farewell to 2021

01/03/2022

Uncertainty took hold of the markets in the waning moments of 2021 due to the shifting policies of the leading central banks (given the persistently high inflation rates), the surprisingly rapid onset of the omicron variant and the delay in approving the fiscal stimulus package in the USA. Even so, risk assets closed out December on a high note, with significant stock market increases in recent weeks thanks to attenuated fears over a renewed healthcare crisis (apparently lower impact of the omicron variant). Some indexes even closed out the year at or near all-time highs (MSCI World and several American indexes). The global index recorded a 3.9% rise in December (+16.8% for the year), while volatility closed 2021 at 17.22%, near the annual low of 15 reached in October. Notable among the developed stock exchanges was the improved performance in Europe, although in the annual aggregate, it was the American stock market that paved the way. Equally notable was the worse relative behavior in Spain, both for the month and in the year as a whole. Emerging stock markets ended both the month and the year behind the developed markets.

The central banks were the main players in December, and as expected, the Fed kept the benchmark interest rate in the 0-0.25% range at its meeting and unanimously agreed to double the reduction of asset purchases ($30B a month), its goal being to complete the purchase program in March 2022 (three months ahead of schedule). Reflective of the more restrictive tone, given the high inflation data, the forecasts of the FOMC members suggest three increases of 0.25% both in 2022 and 2023. The ECB took advantage of its December meeting to announce the end of the PEPP (March 2022) and approved several measures to mitigate the impact on liquidity, such as extending the reinvestment period of PEPP purchases and increasing the net purchases of the standard QE (APP) program for the second and third quarters of 2022. In addition, the lower TLTROIII rates will end in June 2022, with a reassessment of the level multiplier. As for other central banks, Turkey saw a drop in its rates, while rates in England, Norway, Hungary, Poland, Mexico, Peru, Colombia, the Czech Republic, Russia, Chile and Brazil went up.

In fixed-income markets, although the deteriorating health situation and the confirmed end of the buy-back programs weighed heavily on debt in the European periphery, the month generally ended with lower risk premiums. The commodities markets saw generalized price increases. Of note is the recovery of crude despite the prospects for further restrictions and a weakening global demand. Gold, meanwhile, advanced 3.1%. In the currencies market, the euro clawed back 0.5% (-7% for the year) to $1.1370.

The markets seem to be kicking off the first week of 2022 with some optimism, undoubtedly maintaining the positive long-term trend in equities.

In summary, the expectation is for solid economic growth to continue in 2022, supported in part by fiscal incentives, the effects of which will be felt this year, and by the high built-up savings of families and companies, which will support consumption and allow corporate investment to add another component to the global GDP. This economic growth will result in corporate profits, the leading driver of expected increases in equities.