Complex year-end for financial markets

The last month of 2021 begins under a situation in financial markets reflecting a certain deterioration in the appetite for risk and greater stress related to the operating panorama in the near horizon. Fortunately, the pandemic front has not revealed signs of material deterioration in terms of global metrics, but, certainly, the imposition of new restrictions in various regions, some reactive and others precautionary, are consistent with the irresolution of this factor of risk despite the fact that the world gradually admits it as endemic.

Meanwhile, the global inflation outlook continues to worsen amid little improvement in value chain bottlenecks. This has imposed not only a real challenge beyond structuring, but even for the conceptualization of policies that accelerate monetary tightening the following year if necessary and face the difficult inflationary situation, but without affecting the weak framework of economic recovery and cause significant adjustments in the markets.

This complex context has become visible in the dynamics of the North American yield curve where long-term instruments have abandoned their historical relationship with phases of higher inflationary pressure. Treasuries continue to operate in markedly narrow ranges or even appreciating as has been the case with the long end, where the slope between 20 and 30 year maturities has been reversed for the first time. This disconnect not only reflects, at the very least, wariness about the growth scene going forward. It suggests the possibility of a market that has focused on incorporating the assignment of probabilities exclusively for the horizon within reach, in a regime of remarkably greater uncertainty given the uniqueness of the pandemic context.

As a result, the main guide for price action has focused on the short term and, consequently, on the policies of central banks that, in general terms, retain monetary stances that are still broadly accommodative, except in the case of some emerging regions. They have already accelerated the pace of the stimulus withdrawal. Due to its global influence, the case of the Federal Reserve’s position is the most notable and the route to initiate a less lax position has been clarifying in recent weeks, reflected in pressures in the short part of the yield curve. In this sense, the 2-year Treasury note has risen to its highest level since March 2020. In turn, supported by a recently more recent narrative hawkish By some members of the FOMC – especially on the pace of reduction of the quantitative stimulus – and the inflation figures in the US, the market continues to adjust up its expectations about the monetary tightening of the following year and speculates on the ramifications that it could generate in sectors particularly sensitive to increases in interest rates. With this, combined with a possible more dovish bias on the part of the European Central Bank given the new waves of contagion in Europe that have weakened the euro, the US dollar has extended the strengthening of the year.

On the balance sheet, the route for the following months will probably continue skewed in a stronger US dollar and more pressured interest rates for short terms. This combination results in a challenging framework for the operation of risk assets and especially for those in emerging regions, where the Mexican peso has recently observed a new phase of high volatility where its operation has tied levels close to minimums against the dollar since last year. It is likely that some of these pressures will fade in the following weeks, although they are evidence of the scope that a significant adjustment in the markets could generate for local assets in stages of less favorable financial conditions.

Santiago Leal Singer is deputy director of Fixed Income Strategy and Exchange Rates at Grupo Financiero Banorte.

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