The Views for 2022

Hello to all and welcome back to my usual service of blog posting. This will be a short one today... although it could have dragged on for ages so for my brevity, you are welcome :) 

In this post, I'm going to outline very briefly my key views for 2022. 

Equities: 

UK & Europe continue to be preferred and the best value in the market. This is based purely on their relative cheapness to the US. But, the number you're all waiting for... my SPX target. I'm way more bullish than most on the street (below) and am expecting a year-end of around 5600-5800. This is, yes, a large range. But I mainly believe this because inflation pressures are likely to become more visibly diminishing as we enter a disinflationary environment (due to falling commodities prices). 

This has also been an extremely one-sided rally in equity market so far - with tech leading all the way (and even tech is too broad a term - more like megacap tech). I see a catch-up of value which will be the main driver of returns in 2022. 

There are a huge number of downside risks, but I will elaborate further in a specific report once my January exams are out of the way :) 

Treasuries: 

I'm a big fan of "steepeners" for this year. Particularly, I think the short-end of the curve is pretty much priced to perfection for a perfect hiking cycle. I do not believe the Fed will be hiking as aggressively as the market is currently priced for. Thus, I think the trade is for a steeper curve, as the 2y drops back a little from its aggressive pricing, while the 10y yield has room to rise further as slightly higher medium-term inflation expectations start to be baked in. Thus, I see a first Fed hike probably in July, and then I'd be surprised if we needed to see another one before the end of 2022. 

This though, will likely bake in that higher inflation expectation, which will allow the 10y to rise. Year-end, I see the 2y yield in the region of 0.8 - 1% (this as a result of a higher initial rate to begin with) and the 10y yield at 2%. This would give us 100bps of spread between the 2y and the 10y. 

Elsewhere, the story is less clear. In the UK, the Gilt market is expecting FAR TOO MUCH FROM THE BOE! Yes, I know my track record on the BoE lately is a little bit mixed, with one perfect call and one catastrophic, but nonetheless, the UK Money markets seem to expect 75-100bps of hikes this year! Madness in my view. 

In Europe, the ECB is the last man standing on the transitory front. I wouldn't be surprised if they dropped this in a meeting or two's time, but we shall see. To me, this means we can have some further upside for EUR rates, although I do not believe a hike or any kind of policy tightness will emerge this year. 

FOREIGN EXCHANGE: 

EURUSD: Bullish in the first quarter - everyone expects the Fed to engage in a quick tightening cycle. This probably is an incorrect view - we are nowhere near full employment. Consensus is for USD strength in 22, the consensus FX view last year was destroyed in a week... balance of risks is to definitely to the upside in EURUSD. 

Longer-term, see EURUSD probably ending a touch stronger on the year. 

Quarterly Profile for EURUSD

Q1: 1.14

Q2: 1.15

Q3: 1.15

Q4: 1.14

GBPUSD: 

Definitely weaker in the first quarter - priced for BoE to be rapid and this just isn't going to happen. See 1.32 as an initial target and possible weakening further into year-end - especially if the BoE remains quiet as I expect. After the initial shock of a more dovish than expected BoE, expect to see GBP follow the broader market. 

Q1: 1.32 

Q2: 1.33

Q3: 1.33 

Q4: 1.32 

TRADE IDEA FOR Q1: BUY EURGBP TARGETING 0.864

EURCHF: 

Come and say it with me... BUY EURO-SWISSIE... That's been my anthem for the last 3 months anyway (sorry for those who followed into the trade)... but I am close to re-evaluating on this. I think it will be interesting to see how the yields / havens story interacts over the next couple of months. 

USDJPY: 

As mentioned a few times, I think the market is expecting too much from the Fed, this could help the JPY in the short-term as it is very yield driven, but the rising 10y dynamic may also lead to some weighing on the currency, so I'm pretty neutral overall. 

COMMODITIES: 

GOLD - USD2000/oz by Year-end: 

We all know I'm massively bullish on gold, and I continue to have this view. We are USD300 lower than the all-time highs and the environment remains very monetarily accommodative despite surging inflation. At some point I think it regains its lustre and powers higher - I certainly don't see much more downside provided the USD1760/oz low which has been observed continues to hold. 

OIL: 

Moves to the downside - OPEC+ cohesion isn't going to last long with oil at these prices. Also US shale will likely be incentivised back to the market in greater fashion. Worst of the shortages seem to be over... expect year-end Brent around USD75.