Daily Brief for January 10, 2022

Daily commentary for market and investment insights

What Happened in the Markets?

Technology stocks were expected to open lower, while government bonds continued to decline, as investors prepared for inflation data and the opening of earnings season.

Futures contracts that predict the trend of the Nasdaq 100 fell 1.1%, resuming a downfall for the index, which dropped 4.5% last week. Futures contracts tracking the S&P 500 index fell 0.6%.

The markets are becoming more volatile as investors are struggling to figure out how to price assets now that the liquidity that drove equities to record highs is being withdrawn. This week, investors will closely monitor the latest U.S. consumer price index data as the Federal Reserve designs to suppress price stresses with rapid rate growths.

The possibility of the Federal Reserve raising interest rates more aggressively is disturbing markets as 2022 begins, particularly for tech stocks with long-term expansion predictions. Value stocks such as financials and energy firms are evaluated as winners of a hawkish environment.

Goldman Sachs predicts that the Federal Reserve will increase interest rates four times this year and begin its balance sheet contraction process in July.

Source: Bloomberg

ARK Invest’s flagship ARK Innovation Fund has slipped 45% since February, and Cathie Wood, the chief executive of ARK Invest, informed investors she is sharing their pain.

Higher interest rates may make stocks, especially those with high growth, less attractive due to the squeezed valuation of earnings of present values.

“The rise in real rates should not be hurting equity markets, or economic activity, at least until they move into positive territory, or even as long as real rates are below the real potential growth.”

Volatility is becoming an increasingly popular asset class because it offers investors protection and potential profits. Therefore, options volumes are now comparable to stock volumes.

Dealer hedging shapes the negative-gamma conditions that worsen price directions, pushing the markets more varying and prone to even lower prices and raising the need for protection. The market will likely become more unstable as long as volatility is high and equities are in negative gamma. However, decreased prices and increased demand for protection may lead to a market rebound.

Source: Bloomberg

Disclosure: This article expresses my own views, and I wrote the article by myself. I am not receiving compensation for it. I have no business relationship with any company whose security is mentioned in this article.

Sources: FT.com, Bloomberg, MarketWatch, WSJ.com

Important Information

The investment information, comments and recommendations contained herein are not subject to investment advice. The comments and recommendations contained herein are based on personal views. These views may not fit your financial situation and your risk and return preferences. For this reason, based only on the information contained herein, investment decisions may not have the appropriate outcome.