Marquee Views - Trade with the Fed & The European Recovery Themes Going into 2022
In the Marquee Views series, we share our views on the markets, supported by observations across content, market analytics and investor surveys on Marquee. Full note was published on December 14, 2021, on Marquee’s Global Markets Insights hub.
Key takeaways and views
1. The Fed has pivoted towards a tightening bias over the last few months and even more so in November with strong hints of a faster taper. The market has wobbled temporarily but quickly recovered leading financial conditions to stay very easy. Going into the December FOMC, market participants seem to have widely registered the desire to a faster taper and a optionality for an earlier hike.
2. But as we head into 2022, the market will likely have to come to terms with the fact that the Fed now wants tighter financial conditions. The lack of follow through of the backend (and real yields) has prevented broader markets from properly repricing across the whole macro landscape. With very little margin left before a curve inversion, the lock from rangebound backend rates could jump and the US financial conditions tightener trade may become one of the strongest conviction trades. That being said, the different legs of the trade may not be equally attractive. The FX one (USD stronger) may be the highest quality trade, followed by higher US rates (the most direct expression) and then the credit widener and finally equities.
3. On the other side of the Atlantic, bigger slack combined with potentially easing financial conditions (on the back of a stronger USD), strong pandemic driven rebound and lower investor participation could pave the way for a period of European outperformance.
All references to “we/us/our” refer to the views and observations of the desk
This message has been prepared by personnel in the Global Markets Division of one or more affiliates of The Goldman Sachs Group, Inc. ("Goldman Sachs") and is not the product of Global Investment Research. It is not a research report and is not intended as such.