To all my new subscribers and loyal ones, welcome to Market Macro Hub!
Man, it’s been a while, firstly happy holidays and happy New Year! If you were following my Twitter and Instagram you would be aware that I released my free guide for traders learning macro which you all showed so much support and love for. Thank you.
Now, you’re probably thinking 2022 is over, is there much value in reviewing the major events?
100%. We’re not here to predict, we’re here to react to market cycles and conditions, from which we gather calculated trade ideas. Something that you’ll be seeing a lot more this year from me, actionable trade ideas I’m looking at.
Without further due, lend me your attention ;)
1. Russia’s Invasion of Ukraine
Russia invasion of Ukraine has to be one of the most prominent events of 2022; an event which central bank leaders such as Jay Powell used to explain why inflation was running so hot.
On 24th of February, Russian military launched a full-scale assault on Ukraine to conquer Ukraine and replace its government. Immediately the West reacted by imposing thorough sanctions on Russia, the aim being to financially destabilise their economy, pressure the Russian government to steer away from its military decisions to invade Ukraine and de-escalate the rising global tensions. Regardless of the sanctions, the decision to ban Russian banks from SWIFT, freezing Russian central bank deposits and massive corporate pull out from the nation, the Russians still advanced further into Ukraine. Surprisingly they were met with equal and adequate force from the citizens of Ukraine which held back the troops.
The relevance? Apart from this flagging up geopolitical risks, social, financial and any others you would like to think of, the war destroyed more than 16% of Ukraine’s grain storage facilities and destroyed crops totalling more than $2.1 billion.
It’s expected that c59% of the increase in inflation is due to the Russia-Ukraine war according to central bank comments.
2. The Year Of Global Tightening
2022 will go down as the most prominent global synchronised central bank tightening we have ever seen! Nearly every central bank hiked over 250bps this year, we saw the likes of the ECB a central bank that has kept deposit rates in negative territory at -0.5% since 2012 to now hiking 250bps throughout 2022.
In a fight against inflation central banks around the world were forced to shift away from loose monetary policy conditions of low-interest rates, and cheap access to credit to a high-interest period which many developed economies have not been accustomed to over the past decade. Comments from Fed Waller put additional pressure on equities & risk assets to perform:
“We need to move to a much more restrictive setting in terms of interest rates and policy and we need to do that as quickly as possible”
— St. Louis Fed Chief, Bullard Waller, July FOMC meeting 2022
2022, the SPX index returned -19.24%, and the Nasdaq -33.45%
3. The Trade of The Year, Dollar Longs
Pretty obvious right? Well, here are a few reasons why this trade was named the trade of the year:
A number of factors have led to this dollar rally:
Risk-off sentiment in risk assets led to increased dollar demand (capitulation)
Widening interest rate differentials between the U.S and G-7 central banks led to dollar inflows
Ongoing war within Russia-Ukraine (safe haven flow)
Credit risks across the Uk & European markets additional demand for a safe reserve of capital
Although the dollar let off some steam towards the end of the year due to month and year-end liquidation of dollar-long positions, the dollar still managed to return a respectable 8%.
4. Euro Area Fragmentation Risk
The ECB raised rates 250bps throughout 2022 in hopes to claw back inflationary pressures, the main concern, however, is that through the raising of interest rates, fragmentation risk also becomes a far more significant issue. For those who aren’t familiar with this term let me explain:
Within the Eurozone, fragmentation risk is the widening of sovereign spreads in some countries within the EU as the monetary policy system leads interest rates higher. The risk here is that as rates across the Eurozone increase, so do the refinancing costs involved with each and every country, even the vulnerable ones like Italy particularly. To factor for this risk investors require a ‘risk premia’ and as this process happens the spreads on such vulnerable countries widen to a point where the goal of progressing monetary policy across the grouped economies within the Eurozone becomes delayed due to uncertainty surrounding the weaker economy’s ability to maintain financial stability.
The effect? As you can imagine fragmentation risk within the euro area puts additional pressure and sensitivity around every move the ECB makes, mainly preventing them from moving in line with countering central banks due to the risk of a mechanism breaking within their economy, the wider scale effect can be seen through the drastic decline in the Euro through 2022 where €1 was equal to $1, parity.
5. UK Gilt Markets Collapse & Pension Funds Margin Called
Looking back, financial markets really saw it all during 2022. Can’t believe some of these things actually happened.
After Liz Truss came into power on September 6th 2022, her Chancellor of Exchequer Kwasi Kwarteng released what may go down as one of the worst budget plans the Uk has ever seen. The worry that the Uk would not be able to finance such costs with debt and rates relatively high sent investors away from Uk fixed-income markets and that revealed the underlying liquidity issue. As pension funds began to get margin called due to the price of their bonds not meeting the collateral requirements yields on long-term gilts soared to as high as 4% - 5%, whilst bond prices lost as much as 52% as shown from the chart below.
The Bank of England was forced to step in and purchase specifically long-end bonds to prevent the Uk from having a full-scale market implosion.
6. The Bank of Japan FX Intervention
As mentioned above, 2022 was full of central bank tightening. All except for one central bank, the BoJ.
Since 2016, the BoJ has implemented YCC keeping rates negative at -0.1% and pinning their 10Y JGBs close to zero. Up until 2022, that was a policy which could have sailed quietly in the distance however, as interest rate differentials kicked in and traders began noticing the stubbornness of President Kuroda of the BoJ, they began shorting the Yen as it depreciated heavily against the dollar. This is up there for the trade of the year alongside dollar longs which I was exploring as a carry trade idea where one longs the dollar and shorts the yen simultaneously.
On the 22nd of September the Bank of Japan intervened in its currency for the first time since 1998, the BoJ sold off FX reserves sending Yen rates lower temporarily before the Yen weakened even further after the intervention.
7. FTX Blowout & Crypto Implosion
This had to make it in the 2022 year-in review piece.
In a drama unlike one seen before SBF embezzled client funds from his crypto exchange firm and used those same client funds to trade within his hedge fund Alameda Research. The company which was once seen as the JP Morgan of the industry is now responsible for the loss of more than $6bn of client funds.
Using his swiftly acquired wealth to buy influence amongst various US politicians, particularly within the Democratic Party Bankman was second in funding only to George Soros. His “donations” totalled over $40M to Democratic leaders running within 2022, a fraudster purchasing his way through day-to-day life and in the midst hurting hundreds of thousands if not millions of clients.
And that’s a wrap! A longer piece than usual but that’s required given the year we just had.
Every week I’m sending out 1-2 macro breakdowns with actionable trade ideas.
I’m building an encyclopedia for traders who want to advance their knowledge above the average standard level. More details coming soon, it’s going to be a heavy one that will take me TIME; but this will be 10x better than my macro guide.
In the next piece, we’ll have a forward-looking perspective on how the global macro space is being shaped.