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Jingle all the way

Most of the large central banks are squeezing their final updates for 2021 into this week. The salvo of statements is likely to add to the overall picture of monetary tightening in 2022: for unconventional measures, such as asset purchases, the paths keep diverging.

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Key take-aways

  • The final busy week in 2021 is central banks’ week: the tapering of asset purchases is likely to be very uneven, while rate hikes could be pushed out in unison due to Omicron. Geopolitical tensions in Europe remain a wild card.
  • Risk assets turned in a healthy rebound – hang on in there and enjoy the year-end festivities. Stay tuned for 2022.

The Federal Reserve looks likely to speed up its tapering efforts, while some European central banks are likely to remain pandemic-dependent. As for rate hikes, the trajectories seem to be converging somewhat, though with explicit statements from the US related to detaching the tapering from rate hikes. In Europe, some of the early movers, such as the Bank of England, are likely to push out the first rate hikes as well. So, all in all, this fits our forecast that monetary tightening in 2022 will be conducted on a very cautious footing, with a strong focus on keeping liquidity ample. This is designed to avoid policy mistakes, which remain the biggest risk for the economy and bourses in 2022.

Head of Research Christian Gattiker recommends creating a strategy to "put excess cash to work"

Tension in Europe
Speaking of risks, the tensions in Europe keep investors on their toes. It is striking how bond markets in Russia seem to be sanguine, while equity markets there are more jittery. The main reason why bond markets are less affected this time around is less due to the geopolitical risks themselves, and, seemingly, more to do with the lessons learnt during previous incidents. Funding stress seems to be less pressing for many issuers. As to the probabilities of an escalation, the mutual dependency of both sides should call for reason (see number of the week). But we all know that the situation can derail when major powers are playing with fire. It is the inconvenient truth that this remains part of the risk landscape for global investors, while staying invested all the same.

Conclusion for investors
To conclude on a more positive note, the recent rebound from the Omicron lows was broad-based and calls for a solid year-end performance. So this is it for 2021. Thank you for your support and inspiration. The first 2022 edition will be in your mailbox on 3 January. We wish you a happy holiday season and a good start to the New Year.

We wish you a happy holiday season and a good start to the New Year.

Christian Gattiker, CFA, CAIA, Head of Research

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