As we look ahead to 2022, there are a number of important factors that will impact the financial market. These factors include High inflation, Low-interest rates, political instability in Europe and Asia, and increased investment in China. The following are some of the key things to keep an eye on. We’ll also discuss why these factors matter, and what they mean for the financial market. We hope this article will help you make a well-informed decision about the future of finance.
Table of contents
High inflation
Capital markets did not appear to be concerned with the rise in inflation rates during the year 2021. Major stock indexes remained near record highs throughout the year and the yield on the benchmark 10-year U.S. Treasury note stayed close to 2%, a historically low level. However, during the first quarter of 2022, stock market volatility spiked. Bond yields began to move higher, creating a more negative market picture.
The ongoing COVID-19 pandemic is another source of rising inflation rates, but it is unknown how long this outbreak will last. Several countries are responding to the pandemic differently, which makes it difficult to determine the exact reason for the persistently high inflation. Countries that halt business activity can further disrupt the supply chain, causing the price to rise. For example, China continues to shut down select cities, delaying the production of some exports.
The COVID-19 pandemic is the primary culprit for excessive inflation in 2022, but this epidemic is expected to diminish by the year. The US Federal Reserve is expected to hike borrowing costs three times by 2022. While this is bad for the economy, stagflation in late 2022 is a greater danger. The global economy will still have high inflation rates, but the risks to a healthy economy are lower.
While many economists are still reading the tea leaves to predict inflation, the fact remains that high inflation rates have already occurred in nearly every part of the world. The key uncertainties include how long the labor market is likely to remain tight and how central banks will respond to such high levels of inflation. In addition, the financial markets remain vulnerable to unexpected shocks. The most important factor in determining inflation rates beyond 2025 will be whether central banks continue to rein in inflation.
Low interest rates
In the year 2022, interest rates will rise dramatically from near-zero levels. The Federal Open Market Committee (FOMC) expects that the Fed funds rate will reach 1.9% by the end of the year and 2.8% by 2023. Fed Chairman Jerome Powell hinted that the central bank would move swiftly to raise interest rates. With the economy booming and the number of new jobs climbing, the Fed is unlikely to have trouble raising rates. While investors are nervous about rising interest rates, the financial system is expected to continue to grow at an above-trend pace in 2022.
While macroeconomic policy will continue to play a vital role, health outcomes will become increasingly important. In addition, as stimulus packages gradually become obsolete, they will become a source of new challenges for policymakers and risk to financial markets. As a result, central banks will face an increasingly difficult challenge of achieving a delicate balance between growth and inflation. The following are the possible scenarios for the year 2022:
The average rate for a 30-year fixed-rate mortgage will peak at 3.75 percent in 2022, the highest since May 2020. Ultimately, mortgage rates are closely tied to inflation and the yield on the 10-year Treasury note, which serves as a benchmark for mortgage rates. The forecast assumes that interest rates will continue to rise slowly, but faster than inflation. With this in mind, many consumers will still find it beneficial to take advantage of the low interest rates in the financial market in 2022.
If the economic recovery continues unabated, the Fed will likely raise interest rates once again this year and reduce the balance sheet. The US Federal Reserve is expected to hike interest rates three times this year, which may be equivalent to reducing the stimulus programme’s impact on the economy. In fact, the risk of a recession in late 2022 is higher than that of stagflation. This scenario is unlikely to continue in the near future.
Political situation in Europe and Asia
The EU may project itself in the Indo-Pacific region while focusing on domestic security issues. Competition with China and cooperation with the US will become more important in this region. However, the balance of power may tip the other way, and the EU may be forced to focus more on matters in its neighbourhood. This is the key question that will remain unanswered for the foreseeable future. What should the EU expect in 2022?
While the EU may be facing an election year, the constellation of political forces appears to be more favorable for reform. France will remain under the leadership of President Emmanuel Macron, and the four largest countries in Europe will have strongly pro-EU leaders. While the Netherlands and Austria pushed for restrictive fiscal policies, they have since softened their position. While this may lead to more tension, it is worth a closer look.
In the CESEE region, five national elections are scheduled in 2022. The results will have major implications for the geopolitical balance in the region. In Hungary, for example, the ‘illiberal’ bloc could lose power. In Slovenia, a similar scenario may unfold. While regime change is unlikely, opposition forces may secure symbolic victories. In Turkey, meanwhile, there is an increased likelihood of snap elections in the country.
While the EU has publicly backed ASEAN to mediate the crisis, the Myanmar crisis is likely to continue to cause strain. Brussels is stuck in a bind as it tries to mediate the conflict with Myanmar. A decision in Brussels could jeopardize relations with ASEAN. Its actions in 2022 may also have a significant effect on the global political situation. Therefore, Europe and Asia in 2022 must remain focused on promoting democratic governance and the development of human rights and freedom of the press.
Increased investment in China
As the economic outlook for 2022 progresses, investors should keep an eye on the incoming data. While the government’s policy of easing financial restrictions has long been a concern for markets, Beijing may be willing to take on additional volatility to boost the quality of future growth. Moreover, Beijing may be considering implementing new policies geared toward the energy transition. In either case, the impact on the economy is likely to be positive.
Historically, Chinese leaders have shown a greater concern for order than economic growth, and as a result, have been less concerned about foreign investors’ losses in the stock market. This is in line with the current policy of President Xi Jinping, who prioritizes order over economic growth. This has made Chinese investors more hesitant to invest in the stock market, though they remain a significant part of the market.
As the Chinese economy continues to upgrade, there is still plenty of room for growth. The demographic dividend is over and the education dividend is just beginning. From one million college graduates to nine to ten million, China’s competitive advantage is moving from low cost to technology-driven. Innovation is now the major driver of wealth creation, and China’s biotech and internet sectors have generated over USD 1.8 trillion in market capitalization. Companies are now competing on performance, rather than price.
The financial services sector will also see a growth in online wealth management. Online financial wealth management has been developing rapidly in recent years, and traditional financial institutions are moving toward greater integration of products and services. China has the largest internet population in the world, with almost a billion users – more than the combined populations of the US and EU. The country has also made great strides in the field of e-CNY, with a million people using mobile payments every day, more than eight times more than in the US.
Stock market volatility
The stock market is going to remain volatile, but we should not be surprised if we continue to see dramatic swings from time to time. This is because the range of prices is widening, and a market crash doesn’t necessarily happen in a single day, week, or month. However, if we look at last month’s market volatility, we can see that the stock market slipped for four straight sessions and lost a staggering amount of ground. The Nasdaq lost nearly 50% of its gains from 2021. This volatility will likely continue into 2022.
The first month of 2022 was particularly rough. After a relatively smooth ascent through March 2020, the stock market took a tumble and entered correction territory, before recovering briefly before ending the month down 5.3%. Ultimately, investors are now unsure of what will happen next, and this uncertainty is likely to continue for a while. Stock market volatility in 2022 may be a microcosm of what’s to come.
One factor contributing to recent volatility is Fed rate hikes. Although the Fed has remained in a dovish position, focusing on inflation and reducing unemployment, it made clear in December that rates would be hiked in the near future. Markets began to price in rapid policy tightening, and financial markets declined in January. As a result, volatility was expected in the coming years. In fact, a few investors have been predicting the volatility of 2022 for years.
Russia’s increasing tensions with Ukraine and the prospect of higher interest rates are some of the biggest risks driving volatility in 2022. In the meantime, stock market volatility in 2022 is already high and could continue to rise. Hedge funds and asset managers are also paying close attention to crowdsourced volatility and data misinformation. A virtual panel sponsored by Wall Street Horizon recently shared their views on volatility and its future trajectory. The report outlined the potential for volatility in 2022 and how it can affect investors’ portfolios.