 Good morning and welcome to CMC Markets on Friday 16th of December and this last look at the week ahead of 2022 with me, Michael Houston, and it's certainly been an interesting last couple of days, an unexpectedly hawkish tone from the European Central Bank, Christine Lagarde did her best Bundesbank impersonation, if I can call it that, when the ECB raised rates by 50 basis points yesterday and I think that paid to any thought that we might see a so-called Santa rally into Christmas in a year that ultimately has been very challenging for equity markets in general. If there has been a silver lining, it's been the performance of the FTSE 100 which has outperformed pretty much every other global equity market out there. So what does that mean for 2023 going forward? Well, ultimately it makes for a very challenging outlook for 2023. Bond yields have gone surging higher, particularly in Europe as we can see from this chart here, this is the Italian 10-year yield, it's up 50 basis points in the last two days, 30 yesterday, another 20 today. We're also seeing German 10-year yields go pretty much the same way, retesting those peaks of earlier this year, rather more benignly US 10-year yields have been much more subdued. And I think that's really down to do with not so much the fact that the Fed was particularly hawkish. I think Powell wanted to be fairly hawkish, and he came across as fairly hawkish. But it's really about the Fed's hawkishness relative to the economic data that we're seeing come from the US economy. CPI was weaker than expected, there's a clearly discernible trend, the US inflation has peaked, it peaked in the middle of the summer, it's been coming down slowly ever since. And while it's easy for the markets to look at the data coming out of the US and say, well, you know, there's a potential soft landing here, it's harder to make that case for the economies in Europe and the UK, which perhaps helps explain why you've seen such a, why you've seen a much more violent reaction in European bond markets. Because ultimately, while we have seen inflation start to fall back in the euro area, the ECB is much further behind the curve when it comes to rate rises. And consequently, that means any future rate rises and Christine Lagarde was at pains to point out that not only were they going to, obviously not only did they do 50 basis points this month, but they were going to be doing at least another 100 between now and March. And the combined effect of upgrading their forecasts showed that they don't think inflation is going to fall back to their 2% target much before 2025. Inflation forecasts for this year were 8.4%, 6.3% in 2023 and 3.4% in 2024. So rates are going to have to stay higher for a lot longer than was thought to be the case. Now, there is a school of thought that suggests that while the ECB may wanting is acting in a particularly hawkish fashion, they won't be able to deliver on those promised rate hikes. And that's certainly certainly a reasonable position to hold. If you look at the reaction of Italian bond markets and you look at borrowing costs across the periphery, then there are going to be some weak spots in European sovereign bond market that the ECB will need to try and get their heads around and stay on top of. And the transmission protection instrument, there's still some degree of skepticism as to how that will work. And that perhaps helps explain why the euro dollar after briefly spiking above 107 has slipped back. Nonetheless, I think the markets will want to test the resilience of the ECB when it comes to its reaction function if bond yields continue to blow out. We also have to be very aware that we are heading into a very thin part of the year when it comes to trading and volatility. But certainly if we look at the way the DAX has behaved over the course of the past few days, the move higher that we've seen in the DAX does appear to be running out of steam and we could well see further weakness going forward. Certainly if we look at the DAX year to date, we're still very much down on the year. We can see that borne out in this chart here and we can see straight away that the DAX is down quite significantly. It appears to me that this doesn't work anymore. Let me just see if I can get that to work now. For some reason I can't get the values to work on that. But yeah, I mean, basically very much sharply lower from where we finished the end of last year which was around the 15,800 area on the right hand side. So the question now is where do we go to next? And that's probably a harder question to answer when it comes to European markets. With respect to US markets, it's a lot less, it's a lot more clear cut. If we look at, say, for example, the S&P 500, we can certainly see here that we are still down around about 19% year to date. And that's assuming that obviously we don't get a rebound in the interim but certainly we've seen big declines there. We are still in the downtrend that we've been in since the start of the year apart from this brief spike higher here. This was a warning sign here, the fact that we're unable to sustain the move not only above the December peaks but also unable to sustain that move above the 200-day moving average. We are now starting to slide back down again. The next key level on that has appeared to have now gone, though it's a little bit less clear cut in terms of the uptrend there. But certainly I think when we broke higher on the S&P, what was notable was the fact that we weren't able to break above that trend line on the NASDAQ 100. We can see that there. That spike high there actually hit the line pretty much dead on from the peaks that we saw at the end of last year. And the damage on the NASDAQ has probably been greater when it comes to actually looking at the losses there. We're down over 30% so far year to date from where we finished the end of last year when we were around about 16,300. With the potential we could actually finish the year an awful lot lower. So the direction of travel still remains very much sell the rally when it comes to the NASDAQ. We can probably draw a trend line through the lows to try and draw in some support levels. But ultimately, I think until such times as we get a clearly defined break above here on the NASDAQ and the S&P, it's going to be very, very difficult for European markets to rally if US markets are starting to unravel. Certainly, I think there is a concern now that US economic data is starting to show signs of deterioration. We saw that in the industrial production numbers yesterday. We saw in the retail sales numbers yesterday as well as rising inflation repression or even elevated inflation repression because let's face it, even though US inflation is falling, it's still well above 7% on the headline CPI number. And consequently, it's going to take an awful long time to fall down to the sorts of levels that are in any way sustainable in the short to medium term. So or certainly easier on consumer pockets. I think that's the key, easier on consumer pockets. So going forward, what do we think about the prospects for next year? I think it's going to be challenging. I think ultimately the same trends that have been in place over the course of the last 11 to 12 months are going to remain intact in the short to medium term. And it's really just a question of how quickly or how quickly we get additional evidence that inflation is starting to slow quite substantially. The Bank of England decision yesterday was intriguing, shall we say. Two members voted for no change. One member voted for a 75 basis point hike and six members voted for 50 basis points. Now I'm no excuse me. I'm sort of a little bit perplexed that two policymakers can vote for no change when inflation is at 10.7% and base rates are 3%. Even if you do think that inflation is going to come down, the likelihood of it returning to 2% anytime soon is pretty slim. So I think pushing back against a rate hike when inflation is three times as high as the base rate does strike me as well. A little bit counterintuitive, shall we say. Anyway, the slightly dovish nature of the Bank of England does feed into and has fed into a very big drop in the value of the pound, particularly against the dollar, but also against the euro as well. So we've got a bit of a bearish reversal here that is likely to feed into further sterling weakness back towards a 200-day moving average. More importantly, also back towards that long-term trend line from the record lows that we saw back in September. I think the big test will come if we basically come in at 120. And 120 has always been a bit of a line in the sand. It was a line in the sand on the way down. We weren't able to close below 120 on a monthly basis. I think that was significant and is significant. And I think as long as we can hold above 120 on a monthly close, then this period of sterling weakness should be fairly short-lived. If, however, we drop back below 120, then we could well see a very rapid move back towards 116. So I'm keeping a very close eye on this trend line support here from the lows at 103.20. The dollar could continue to remain very much the trade of next year if the economic recovery, or not recovery, but if the economic conditions in the euro area don't improve anytime soon. We've seen a similar bearish reversal in euro dollar as well. On the back of that hawkish ECB decision there, we tested up to 107.35. We weren't able to consolidate those moves higher and actually close the day lower with a bearish key day reversal. That suggests to me that euro dollar is probably going to test lower and not higher. And consequently, we could well retest. We could see a move back towards 104 and perhaps even lower between now and the end of this year. As we look ahead to next week, one central bank meeting of note is the Bank of Japan, not really expecting much in the way of a policy change from the BOJ. There's a big resistance on dollar yen at 138. The recent weakening of the dollar has put the Japanese yen back above its previous intervention levels, well above its previous intervention levels of between 145 and 150. The Bank of Japan is likely to be much more relaxed about where dollar yen is now than it was a couple of months ago. There's also been some mutterings that the Bank of Japan might start to look at changing its current policy on yield curve control, maybe just upwards the upper rate on the 10-year yield. That's certainly, I think, a debate worth having. I don't think it's a debate they're going to have quite yet, though you might have it in the first part of next year, maybe in the first quarter. Certainly, national CPI is now at 3.7%. That's its highest level in eight years since 2014, when it was above that level for around about four or five months before collapsing back lower again. I think while it would be tempting to think that the Bank of Japan might be looking at adjusting its monetary policy sometime soon, I don't think it's going to happen this month. I think it's unlikely that the central bank, I think it's likely, rather that the central bank will probably opt for a significant policy overshoot when it comes to CPI before thinking about tweaking the brakes on its exceptionally easy monetary policy. Certainly keeping an eye on that 138 level on dollar yen, I'm certainly expecting to see, and even if we do, then 140 is probably going to be a significant resistance level as well. I'm still of the opinion that we can probably see further dollar weakness and further yen strength as we head into 2023. We've also got US core PCE coming up this week, and having seen the Fed raise rates by 50 basis points, which is a downshift from 75. I think this week's core PCE numbers could set a benchmark as to the size of future rate hikes as we head into 2023. Certainly, recent PPI and CPI prints have shown that inflation is coming down, and it's coming down a little bit faster than perhaps people initially thought that it might. Certainly, I think in October, we saw core PCE core deflator fall to 5%, while PCE deflator fell from 6.3%, 6%. In light of the Fed decision to hike by 50 basis points, I think this week's PCE numbers could well start to shape a narrative of whether we get another 50 basis points from February the 1st, or whether we start to see a downshift towards 25 basis points as we look ahead to 2023. More rate hikes are coming from the Federal Reserve. The question that really needs to be asked is, where the terminal rate is? Is it 5.25%, 5.5%? Is it higher than that, or is it lower than that? With a headline rate of around about 4.5%, how much more scoped does the Federal Reserve have to hike rates? Where is the terminal rate? More importantly, when will the Fed start to stop, when will the Federal Reserve, or when will the market start to price in the prospect of the first rate cuts? I'm of the opinion that next year still seems a little bit soon. I think rates will have to remain high for a lot longer than the market is currently pricing. That doesn't necessarily mean that Dolly Yen won't continue to fall, because the other side of that equation is a tweak to yield curve control on the Yen side of the equation. Yen generally tends to gain in a period of risk off. I think the first couple of weeks, the first few weeks of next year, could be difficult given the fact that U.S. earnings season starts the second week in January with J.P. Morgan's results on the 13th. Those bank results could be very interesting in the context of how well the U.S. economy is done in the final quarter of 2022, and what that effect has had on bank earnings, Q4 bank earnings going forward. We've also got the final Q3 GDP numbers for the UK. Not really expecting any significant change to them and 0.2% contraction was slightly better than expected. Nonetheless, the numbers since then point to a UK economy like others elsewhere that is continuing to suffer from high energy prices and squeeze consumer incomes and shrinking pay packets in real terms, along with the government, which appears continually at war with itself. So not really expecting great things from Q4. So it looks like we could well see the UK fall into recession in the second part or the back half of 2022. It's really just a question of whether it's a shallow one or a steeper one, and whether or not the Bank of England is correct in its assessment that we won't see any growth in 2023 at all. I have my doubts about that, but since when a Bank of England forecast ever been right. On the earnings front, we've got FedEx and Nike, both reporting Q2 numbers, both on the 20th of December. FedEx will be a very decent bellwether as to how well the US consumer is doing in terms of logistics. They issued a profits warning at the beginning of the end of Q1. The company said it would take further measures to cut costs and raise prices as it looks to make $2.7 billion in savings. The plans are also said to include cutting flights as well as closing underperforming offices. So Q2 profits are expected to come in at $2.80 a share, which is well down from $3.44 a share that we saw in Q1. Nike again, Nike shares slipped two year lows back in October. How much damage has the China lockdowns done to their Q2 numbers? We've seen with Chinese retail sales how poor they were in October and November, and that's likely to impact Nike's numbers in the greater China region. Its US operations have actually performed fairly well over the course of the last two quarters, but even here we could see a little bit of weakness. Profits expected to come in around about $0.65 a share, which is well down from the $0.93 a share that we saw in Q1. So we've looked at Euro sterling. We've looked at Euro dollar. We've looked at cable. Have a quick look at Euro sterling. Broken hire on that. We could well retest the peaks back in November, but we still remain very much range bound on Euro sterling. Fairly decent support in and around the 200-day moving average. I would be surprised if we moved much above the highs of November at around about $88.30, but certainly I don't think it's outside the realms of possibility that we could retest those peaks. Brent crude, good news, I think from an inflation point of view that we are falling back. Lots of good news is because of a lack of demand or demand concerns. Certainly the Chinese government in looking to ease COVID restrictions has created another problem for itself, massive surges in infections, which is likely to mean that any rebound in the Chinese economy is likely to be very stop-start over the course of the next two or three months. And consequently, that means demand isn't likely to pick up anywhere near as much as perhaps people think that it might. So oil prices likely to remain under pressure. They're not likely to fall that much, however, simply because OPEC Plus will probably just cut production. And you've got the fact that the Biden administration will want to try and replenish the Strategic Petroleum Reserve, which has run down over the course of the last three months in an attempt to try and keep a lid on those very sane oil prices. Okay, so that's pretty much it for me this week. And this year, ladies and gents, like to thank you for your time in listening to these videos. I hope you found them informative. I hope you found some ramblings informative. But in the meantime, I would like to wish you all a very Merry Christmas, Happy New Year, and I'll see you all in 2023. Thanks very much for listening.