A new variant welcomes the New Year: Top Trade Q1 2022

As the timeline turns to 2022, the slate is wiped from the sustained enthusiasm that has driven risk markets up through the second half of 2020 and throughout 2021. Aggressive fiscal stimulus is on the way. now in the rearview mirror, as central banks around the world have started rolling back on asset purchases – and in some cases – aggressively raising interest rates to fight persistently high inflation.

The emergence of the Omicron variant may eventually portend the end of the pandemic as we know it, but the threat of overwhelmed health systems, even if deaths remain low, could lead to more government restrictions weighing on business. economic. At least for Q1’22, these factors could see a further cooling in risk appetite before calmer – and more bullish – heads prevail later in the year.

S&P 500 technical analysis against Nasdaq 100 (SPX / NAS): daily chart (January 2020 to December 2021)

When the best 4Q’21 opportunities were written, the US S&P 500 was trading below 4450, and a year-end target of 4800 was set. Stocks almost hit that target, hitting a high of 4,731 in mid-December. But there has been a noticeable shift in the internals of the market: High-flying, high-growth, low-income (or no-income) tech names have collapsed dramatically.

And so this is the catch for the start of 2022: growth stocks could continue to underperform their value counterparts. The S&P 500 / Nasdaq 100 ratio broke its downtrend in place from May to December through mid-December 2021, with a potential double bottom forming against the 1Q’21 and 4Q’21 lows. With the upside breakout just occurring in the last few weeks, we may be in the early stages of a stock rotation from growth to value. The long S&P 500 / short Nasdaq 100 trade is observed until the ratio reaches 1.29; it is currently 1.19.

Technical analysis of US 10 year yield minus 2 year yield (2s10s): daily chart (January 2021 to December 2021)

A new variant welcomes the New Year: Top Trade Q1 2022

One facet of the Federal Reserve’s tightening policy is the impact on short rates and long-term bond yields. While the short end of the U.S. Treasury yield curve tends to see higher rates when the Fed withdraws its stimulus, the long end of the yield curve tends to decline as growth expectations and inflation – inherently embedded in the long end – come as reduced stimulus measures reduce economic potential. A further flattening of the US yield curve is expected in the 2-10 year spread, which will inevitably spark speculation over recession fears in the financial media in the not-so-distant future.

EUR / USD Technical Analysis: Daily Chart (January 2020 to June 2021)

A new variant welcomes the New Year: Top Trade Q1 2022

And yet, even if growth concerns spread and the US Treasury yield curve flattens, the US dollar may continue to perform well. Both of these themes are well influenced by Fed tightening, but Fed tightening can be seen from another perspective: compared to what other central banks are doing. To that end, the juxtaposition between the Federal Reserve and the European Central Bank will only increase over the next few months, and historically the gap between the US and euro area inflation rates suggests. a further weakening of the EUR / USD exchange rate. A drop below 1.1000 should be observed during 1Q’22.

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