The (Hawkish) Fed – continuing on from last year, the Fed continues to be the major player in markets. This was evident in the first trading week of the year, as minutes from the December meeting were released and left the Nasdaq down 3.5% – it’s a worst-performing week since March 2021. Goldman Sachs is now forecasting 4 rate hikes in 2022, one more than what was forecast towards the back end of last year. Is the Fed now in panic mode? Do they think inflation is running away? With midterms coming up, is there political pressure to bring price increases under control?

Covid & Omicron – US hospitalizations could hit a new high this week as Omicron rips through the world’s population and looks to be evading initial vaccine resistance. The UK once again, like at the start of 2021 with its efficient vaccine rollout, appears to be the ‘one to watch’ as it aims to get through the winter season without bringing in new restrictions. Markets will continue to provide volatility on new variant news or if Omicron forces Governments to start limiting economic activity again (see 20% move down in Crude in Nov/Dec from a drop in demand concerns).

China’s slowdown – China continues to adopt a ‘Covid-zero’ strategy as they aim to keep factories open, but is this a realistic proposition with the increased transmissibility of Omicron? Will further factory closures result in continued supply chain pressures? Or will the U.S. look to transition its importing from elsewhere (Mexico?). Signs of an economic slowdown are there (we will be watching the data releases such as PPI closely), the property development market is still on edge and with Evergrande’s potential bankruptcy looming, what will be the knock-on effects for the world and in particular, Australia.

Cryptos: A pure risk play – Throughout 2021, cryptos, in particular the larger ones such as BTC and ETH, behaved very much as a ‘high risk’ asset. In line with high growth, speculative tech stocks on the Nasdaq, they rose on risk-on market sentiment and fell with the risk-off sentiment (generally). We categorize them now as ‘speccy tech’. They continue to provide great trading opportunities through the unparalleled volatility provided but we don’t quite buy the ‘inflation hedge’ narrative, seeing as though Bitcoin is now down almost 40% from its highs (at the same time as 40-year high inflation numbers were coming out of the US). If the Fed continues to lean more Hawkish, expect more downside pressure. 

As an algorithmic trading firm, we use automated trading systems which allows us to reduce the level of noise in our trading. However, as professional traders, we always want to be aware of the market environment and how that may affect our model performance. 

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