6 trends worth paying attention to in 2022

The year 2021 was grueling. Too many have experienced bereavement, illness and economic hardship due to quarantine. However, economic data shows rapid growth compared to the first year of the pandemic, with trade and employment growing rapidly. These economic trends will continue in 2022, although at a more moderate pace. However, progress has been bought at the price of perhaps the biggest inflationary threat since the 1970s, and fighting this threat while preventing a collapse in a market that is still trading at historically high multiples will require some effort. Here are some of the main trends worth paying attention to on the threshold of 2022.

1. Global monetary policy Tightening cycle

Next year will be marked by an increase in the interest rate. In truth, interest rate increases have already occurred in 2021 in many parts of the world, but the US Federal Reserve System, the custodian of the world's reserve currency, has now made this process truly global.

The long-term rate will be raised first, since the Fed will curtail the quantitative easing program in a short three-month period, which still amounts to $120 billion per month. The Fed is expected to raise the target range for funds by 75 basis points between March and the end of the year.

Whether the tightening will be greater or less will depend on the trajectory of inflation during this period. The effects of the base, and more importantly, the likely slowdown in economic growth as the 2020 savings surplus is finally spent, suggest that inflation should decline over the course of the year: the Fed itself forecasts growth in core personal consumer spending of only 2.6% next year, after an increase of 5.3% this year. Another important factor will be how much pressure Congress will put on the Fed in connection with the upcoming midterm elections in November.

In any case, as long as the Fed remains in tightening mode, the pressure on other central banks — with the exception of Switzerland, Japan and, possibly, China, will continue.

2. COVID-19: the countdown of the 3rd year has begun

The course of the pandemic is likely to have the greatest impact on the thinking of the Fed and many other central banks. At the time of writing this article, the omicron strain has already spread across Europe and is currently present in 43 of the 50 US states.

Not enough is known about omicron to make any predictions with confidence. Initial studies show that it is less likely to lead to serious diseases than the delta strain that has dominated so far, but it also evades the immune defenses created by double vaccination, which allows it to spread faster.

Lower virulence will not be enough to avoid new restrictions if the number of infections continues to double every 3 days, as is currently the case in some parts of the world.

Moderna (NASDAQ:MRNA), Pfizer (NYSE:PFE) and BioNTech (NASDAQ:BNTX) additional vaccination seems to be encouraging, and it will buy time for the development of new drugs specifically designed for omicron. Similarly, the supply of vaccines and, increasingly, antiviral drugs continues to expand, especially under the WHO Covax program.

This should reduce the inequality in access to vaccines that have enabled the virus to flourish and mutate in poorer countries of the world. According to the current forecast of COVAX, 2.39 billion doses will be available by March, and more than 6.5 billion doses by 2023.

3. Chinese "triad": Omicron, Evergrande and Taiwan.

Omicron may seem less dangerous to human life than all the dominant COVID-19 strains before it, but it still poses a serious threat to financial markets due to the response of the world's two largest economies to it.

In the US, hesitancy about vaccination means that the risk of rapid transmission of the virus is particularly high. This can raise waves of a large number of absenteeism, exacerbating the existing shortage of labor. However, the real supply-side risk is in China due to its tendency to rigidly and broadly restrict the market in response to any signs of the virus. Given the well-known low effectiveness of the two main Chinese vaccines against omicron, there is a risk of repeated closure of important Chinese production and logistics centers during the year, which will prolong the problems of other manufacturers and retailers further away in the west.

This is not the only problem that China will face next year. At a certain stage, the country's authorities will have to decide who will bear losses on the debts of China Evergrande Group (HK:3333) and other developers with excessive debt. This will need to be done without causing panic among domestic retail investors, and preferably without resorting to additional loans to get out of the recession.

Any sign of financial or even social instability may prompt Beijing to divert attention with a small foreign policy adventure: after the termination of Hong Kong's autonomy, President Xi Jinping, who received a new mandate from the Communist Party for life rule, does not hide his desire to restore mainland China's sovereignty over Taiwan.

4. The energy crisis in Europe

Geopolitical risk is also one of the elements (but only one) of another story that will dominate the news from Europe, especially in early 2022. The old year ends with Russian President Vladimir Putin threatening a direct invasion of Ukraine on the far-fetched grounds that NATO's expansion to the east poses an existential threat to him.

Most analysts are inclined to believe that military maneuvers on the border of Russia with Ukraine, where more than 100 thousand troops are currently concentrated, are ultimately pressure tactics to ensure the opening of the controversial Nord Stream-2 pipeline, which promises to be profitable for Gazprom (MCX:GAZP) and its state owners. However, when Putin spoke directly about "military-technical" actions at a speech to the heads of the defense department on Tuesday before the Catholic Christmas, this can no longer be taken as a given.

As in 2008, when oil prices were still above $100 per barrel, Europe's ability to respond to the invasion will be limited by the fact that electricity and gas prices are already much higher than previous record highs due to a shortage of gas in storage facilities, growing restrictions on coal-fired power due to environmental policy, as well as the declining availability of an aging nuclear power plant fleet, which has already been reduced due to environmental fanaticism in Germany and other countries.

The consequences of wanting to make an energy transition without securing supplies have become painfully obvious.

The impending explosion of household energy bills in April will increase inflation by 1% in the UK when the regulatory price cap is lifted, and will force Italy and Spain to extend subsidies previously included in electricity bills as an emergency measure. Gas-intensive industries, such as fertilizer production, have already been forced to close their plants, and there is a risk that even more plants will have to close before the end of winter, as utilities will limit supplies.

5. Will OPEC and the US be able to keep up with oil demand?

The spread of omicron has also suspended all bets on when exactly global oil demand will reach its pre-pandemic peak, but it seems that this will happen sooner rather than later, which calls into question both the policy of OPEC and the United States.

According to the American Petroleum Institute, demand in the United States alone by November was within 0.4% of the peak value, until the last wave of infections stopped air travel, and then, apparently, car travel. When demand finally recovers, it is unclear whether supply will be able to keep up with it: economic uncertainty and growing environmental activism of shareholders and governments have led to a reduction in investment in new production. According to an analysis by Rystad Energy, unless a miracle happens in the last days of the year, in 2021 the number of discoveries will fall to the lowest level since 1946.

"Those who consider recent price inflation to be a temporary phenomenon may misunderstand the time it takes to invest in oil and gas," Dean Forman, API's chief economist, warned in a recent note. OPEC and US producers are more concerned about restoring their balance sheets than increasing supply this year. Most likely, it will take a change of views on both sides to avoid a new jump in oil prices in 2022.

6. The Year of the Cryptocurrency Watershed

The global monetary policy tightening cycle will be a tough test for cryptocurrencies, which last year showed an increasingly high correlation with speculative assets. After all, speculative assets tend to take an interest rate hike badly.

However, for those who remain committed to cryptocurrencies, 2022 promises to be an exciting year when the US, Europe and India are expected to clarify the direction of regulation, which should put this asset class on a firmer legal footing.

At the technical level, the event of the year may be the completion of Ethereum's transition to the Proof-of-Stake mechanism in its blockchain, with a departure from the more energy-intensive Proof-of-Work mechanism, which limits scalability (and also creates a lot of negative news for this cryptocurrency in the press for environmental reasons). Given that Ethereum's place in the universe of decentralized finance initiatives (DeFi) is multiplying now, the importance of such a transition can hardly be overestimated.

The progress of the MATIC/USD currency, which provides the infrastructure for various blockchains when interacting with each other, may also expand the ease of use of many coins, although it will be more difficult for enthusiasts to claim that more than 6,000 digital coins are now in circulation, gaining value due to their rarity.

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