Monthly markets recap: Central banks cut support, Bitcoin stalls, Omicron spreads

Central banks were in focus at the end of 2021 with some of the big players announcing shifts in their pandemic support policies.

December 2021 markets recap

Central banks tweak pandemic support

One of December’s key stories was the move by some central banks to start peeling back their pandemic economic support.

The Bank of England, for example, chose to hike rates to 0.25% in December. It was a move that caught markets a little off guard. Much of the BoE’s rhetoric prior to the hike had been contradictory with Governor Bailey previously refusing to budge despite hinting that a rate increase would be prudent.

Historically high inflation basically forced the Bank of England’s hand here. UK inflation is at a ten-year high at 5.1%. It’s likely to keep pushing upwards into 2022, which may result in further rate hikes.

The Bank of England is still committed to its £875 billion bond-buying programme. At its final 2021 meeting, the bank’s Monetary Policy Committee voted unanimously to keep this in place.

Across the pond, the BoE’s cousins at the Federal Reserve are doing things differently. The FOMC has voted to scale back its bond-buying regime – something we all knew was coming – and hinted at the possibility of several rate hikes this year.

The FOMC announced at its December meeting that it will double the pace of the reduction of its monthly asset purchases. US treasury securities will be reduced by $20bn each month while agency securities will drop by $10bn on a month-by-month basis. At this rate, the Fed should wrap up bond-buying by March 2022.

Then there are rate hikes. The Fed’s dot plot shows that as many as three rate increases could take place this year. The average rate could be 0.9% by the year’s end, up 0.3% from September 2021.

The ECB is doing things a little differently. At the European Central Banks’ last meetings of 2021, no major changes to its current pandemic policy were announced. Instead, Christine Legarde et al stressed their readiness to maintain as much flexibility as possible.

A conclusion of the ECB’s own emergency PEPP asset purchasing programme is forecast for 2022, although this is expected to be offset by an increase in its APP programme. A bit of recalibration is probably on the cards for the European Central Bank.

Bitcoin bear market rolled on

Bitcoin ran into trouble towards the end of 2021, flying in the face of expectations that the world’s most popular cryptocurrency would hit $100,000 by the year’s end.

Instead of $100,000, Bitcoin is back searching for $50,000. It’s a Bitcoin bear market right now with BTC sitting some 30% off of its all-time high.

Bitcoin reached a new high watermark in November 2021, coming in just shy of $69,000. There’s a lot of ground to be covered before the token reaches those heady heights again. For context, BTC closed 2021 at a low of $45,559.

That said, the token was still up some 300% across the year – although competitors like Ethereum boasted annual gains of more than double that.

Could this bull market be spelling the end of Bitcoin’s dominance? Unlikely. It’s pretty much the poster boy for cryptocurrencies and Decentralised Finance (DeFi). We’ve seen periods of high BTC volatility before. This is nothing new.

2022 maybe a bit of a landmark year for cryptocurrency. We saw more and more institutions, investors, and organisations back crypto across 2021. Even China’s wholesale ban on crypto trading hasn’t really made much of a dent in the sector’s momentum.

However, regulation is probably coming. The Bank of England and Federal Reserve are certainly looking into creating regulatory frameworks for cryptocurrency trading alongside their relevant securities and exchange commissions.

We’re still in the Wild West phase of crypto trading, and scams are prevalent. Investors and traders are still encouraged to use a reputable broker, such as Markets.com, when it comes to pursuing crypto.

Oil creaked under Omicron but markets are confident the weight is lifting

No market was untouched by the emergence of the Omicron COVID-19 variant towards the tail end of 2021, but perhaps oil was the one sector that stood to lose the most should the pandemic return with a vengeance.

Oil prices began to drift lower as 2021 drew to a close. The impact of Omicron was initially thought to be on the same scale as Delta or the original COVID strain. A dismal demand picture was starting to emerge, just as global oil requirements began to align with pre-pandemic levels.

It does seem these fears may be a bit exaggerated. While it is highly infectious, the death and hospitalisation rate of Omicron is significantly lower than other variants. Coupled with a step up in global vaccination and booster shot numbers, Omicron’s impact on oil demand could be much less than first thought.

The latest thinking from OPEC+ suggests the cartel is feeling fairly bullish.

“The impact of the new Omicron variant is expected to be mild and short-lived, as the world becomes better equipped to manage COVID-19 and its related challenges,” OPEC said in its January 2022 Joint Technical Committee report. “This is in addition to a steady economic outlook in both the advanced and emerging economies.”

The report’s oil demand outlook remains unchanged at 5.7 million bpd and 4.2 million bpd in 2021 and 2022 respectively.

OPEC+ committed to a further 400,000bpd output increase at its first meeting of 2022. Oil appears to be starting 2022 on the front foot. Commodity traders will know volatility is never far away, but so far so good.