The final quarter of 2021 turned out to be an eventful one for financial markets.
After a sustained, and seemingly unstoppable rally in risk assets since the start of the pandemic, things started to wobble. In November, inflation was reported to be the highest in 40 years driven by energy and food prices. Several central banks started to hike rates to combat this effect stating financial conditions are too loose and no longer in line with inflation and economic growth expectations. This made markets doubt if inflation indeed is transitory, and in the run-up to the FED November meeting we saw the risk of reduced FED liquidity and potential rate hikes being repriced. This led to a major volatility squeeze of short term interest rate options yielding significant losses for several players across the street. During the meeting of 3rd November, Powell laid out the actual path to asset purchase taper which is when we started to witness a rotating in underlying sectors and equity factors. Stocks that benefited from the lockdowns and enormous amounts of central bank liquidity were being sold in favour of more value-oriented stocks and ‘quality growth’. To top it all off the Bank of England sustained from a well-telegraphed rate hike, which created another big repositioning in markets, resulting in one of the highest volume days of the last five years in SONIA. Our fixed income market making desk navigated these unprecedented moves well and was in a position to provide continuous prices and liquidity to make sure the markets kept functioning during this great turmoil.
The Biden administration announced the release of 50 million barrels out of the Strategic Petroleum Reserves to stem high oil prices and at the same time countries across the globe reverted to partial lockdowns and travel restrictions due to Omicron. As a consequence, WTI oil price dropped close to 12% in 24 hours, a move that puts it in the top 10 of largest one-day oil price moves.
Despite this, inflation pressures kept building over November and in the December meeting of the FED chairman Powell dropped the word ‘transitory’, completely hinting at a heightened pace of taper. The S&P 500 index dropped 6% over the next couple of days, wherein particular the meme stocks were sold off aggressively. In combination with Elon Musk offloading several billion dollars worth of Tesla shares, the markets went risk-off. The VIX fear index doubled in a couple of days and the Maven equity index team was very busy with two-way flow. We had buyers of put protection, but other institutions that already implemented a hedging strategy unwound and once again the market bought the dip. December turned into the famous Santa rally after all.
Equities may find the environment next year somewhat more difficult, with rising wages and inflation possibly weighing on margins and earnings growth, and the risk of tighter Fed policy putting pressure on valuations, especially if longer treasury yields pick up next year. The question is, will central banks stay on target with the taper and rate hikes, or will they cave and unleash more liquidity if markets are correct?
At Maven, we are prepared for what looks to be another exciting year and want to wish all of you a healthy and prosperous 2022.