Risk sentiment turned suddenly sour on Thursday. Nasdaq tanked 2.5% and the S&P500 slid close to 0.87% from ATH levels, as investors weighed the possible negative impacts of a tighter Federal Reserve (Fed) policy, the rising omicron cases, and the fact that Biden’s $2 trillion won’t pass the legislation this year.

Volatility is rising again, lowering the predictability of what may happen next. Although this week gave little answer about whether we will see a Santa rally, we now have a clearer roadmap about what should happen on the US monetary policy front. Therefore, there is chance of seeing one last record before we close the year on the index level.

On the central banks front, the Bank of England (BoE) raised its rate by 15 basis points to 0.25% and became the first major central bank to raise the rates, the European Central Bank (ECB) made a hawkish tweak to its policy, announcing the end the PEPP program by next March (yet they will double the APP purchases to ease the transition!), and Turkey defied the market cutting its repo rate by 100bp. The lira got hammered again.

In this episode, I share my prediction on what could happen in Turkey, and where the US indices may be within next 6 months.

A relief rally following the Federal Reserve (Fed) meeting is what’s in play right now, as yesterday’s decision, though hawkish was mostly priced in. The Fed announced it will double the pace of QE tapering by buying $30 billion less Treasuries and MBS for the months ahead. It will be done with the asset purchases altogether sometime early 2022, then will come the first rate hike by spring. And according to the median forecast of the famous dot plot, the first spring rate hike won’t be the last; the Fed would proceed with two more rate hikes during the course of next year.

The major US indices first fell then rebounded. And the rebound was rather strong. The US tech giants had a great session; the announcement that there will be a 75bp hike next year didn’t hit the investor appetite for these giant growth stocks.

The inflation talk is heating up in Europe as well, and the latest inflation data in Britain showed that inflation exceeded the 5% mark in November, while the BoE was expecting to end the year somewhere near 4%.

Yet, no one expects to see a rate action from the BoE today. Nor from the ECB. And of course no action from the Swiss National Bank which swiftly follows the ECB in its decisions.

Another place of interest is Turkey, where the lira has sat on the headlines, losing 80% of its value against the US dollar since the beginning of September. It’s Erdogan against the market. But there will be only one winner!

Yesterday’s US producer price index came as a slap in the market’s face, as the latest data showed that goods costed close to 10% more at the factory gate in November, a terribly high number for the US that the Federal Reserve (Fed) must deal with ASAP.

Investors’ eyes popped out of their heads when they saw the 9.6% PPI figure, and the hawkish expectations topped sending Nasdaq more than 2% lower during the session. The technology-heavy index still recovered to the close, but ended the session more than 1% lower. The S&P500 slid 0.75% and the Dow dropped some 0.30%.

The kneejerk reaction to the US PPI data is reasonable, but it may be more fear than harm when it comes to how strong the Fed will react to it. Walking in today’s decision, we already know that the most important take of this year’s last FOMC meeting is inflation being no more ‘transitory’. We already know that the Fed is preparing to announce a faster QE taper, and to hint at perhaps sooner and faster rate hikes to cool down the inflationary pressures. And that’s already mostly priced in.

But the possibility of a hawkish surprise from the Fed keeps appetite in Bitcoin limited, while Dogecoin rallies after Elon Musk’s tweet suggesting that Tesla will sell merch in exchange of Dogecoin.

Elsewhere, Harles Davidson is going green but the conviction seems to be low for its electric motorcycles for now.

Five stocks are behind a third of the S&P500 rally, a fact that worries some analysts but not the others.

The overall risk sentiment is mixed as the Federal Reserve (Fed) starts its two-day meeting where it is expected to announce a faster QE tapering and to hint at perhaps earlier and faster rate hikes.

As such, risk-on assets like Nasdaq and Bitcoin are under pressure, although the Fed decision could bring along a relief rally given that the hawkish expectations are mostly factored in the market prices, and a no surprise meeting should give investors a sigh of relief.

While the Fed decision is predictable, the Turkish central bank’s decision, due Thursday, is much less! The market is calling for a significant rate hike to cover the risks of a high and rising inflation I Turkey, but the central bank doesn’t move an inch toward that direction, and prefers selling its FX reserves instead. The FX sales are nothing but a waste of time and money, and could hardly save the CBT from hiking the rates in the coming weeks – if not in a scheduled policy meeting, it would be in a mid-night emergency meeting.

Risk sentiment is relatively strong this Monday on news that China will add fiscal stimulus in early 2022 to boost growth, and investor mood in the equities space is bullish after Friday’s inflation data revealed that consumer prices in the US advanced to 6.8% in November, just a tick higher than the consensus of 6.7% (although relatively faster compared to the 6.2% printed a month earlier).

If the investors didn’t react too strongly to the slightly worse-than-expected US inflation data, it is certainly because they were happy to see the actual number just a bit higher than consensus. And the latest acceleration was mostly priced in, but the FOMC meeting is important to determine the market mood and answer the question: will we see a Santa rally to the year-end?

The Fed tightening will be the first important test for cryptocurrencies. We have stronger evidence that cryptocurrencies are increasingly correlated positively to the risk assets. Therefore, we expect to see Bitcoin trading with a high beta, meaning with amplified gains and losses compared to major market indices. But this is just an assumption. We don’t rule out that the behaviour in cryptocurrencies could change fast as this is a new asset class. But the chances of Bitcoin acting like a hedge against inflation, or a hedge against a severe market rout are low.

It may be a challenging day with the US inflation data looming, but I will start with this: JP Morgan research says that ‘2022 will be the year of a FULL global recovery, an end of the global pandemic and a return to normal conditions we had prior to the Covid-19 outbreak’

The major event of the week is today’s US inflation data. Consolidation and profit taking are in play across the US markets. The Dow Jones ended Thursday’s session flat, but the S&P500 lost 0.72% and Nasdaq dropped 1.71%. Plus, the mood in Asian session was sourish, as Evergrande has officially been labeled as a defaulter. The news came as no shocker and the losses in the Asian session were moderate.

The US consumer inflation may have accelerated to 6.7% last month. If this is the case, it would be the highest levels since the beginning of the ‘80s. And given that the recovery in the US labour market has progressed well with the latest unemployment rate showing an improvement to 4.2%, the Fed will do what it’s got to do to deal with the rising US inflation: tighten the policy.

Nonetheless, it feels like the inflationary pressures are now approaching a cycle peak, and that there is a chance that we see a softer than expected number as soon as at today’s read.

Else, I came across a very interesting Bloomberg article on how luxury brands are making millions selling NFTs for metaverse. Here is the link for a weekend read!

https://www.bloomberg.com/news/articles/2021-12-09/luxury-fashion-brands-are-already-making-millions-in-the-metaverse

Apple is about to become a $3-trillion company as investors just can’t have enough of it! Some analysts say the stock is undervalued at the current levels, and the fattening process can only accelerate for Apple and the other tech giants as big calls for bigger!

The mood elsewhere is a bit more contained compared to the prior sessions, but small gains are good news as they show that a consolidation is underway. The easing volatility is a sign that the gains are more sustainable than what they appeared to be a couple of sessions ago.

Of course, that does not mean that tomorrow’s US inflation data will be piece of cake¨!

On the virus front, worries that omicron will cause trouble are waning, but a new strain is found in Australia, and it is harder to detect with a PCR test. The latter news call for caution with the airline and travel stocks!

Nasdaq soared 3% on Tuesday, the S&P500 gained 2% and the Dow, which was benefiting from a reflation divergence over the past couple of days added another 1.40%. Not all headlines are rosy, yet the perception is very optimistic.

In theory, such strong gains are sign of instability and should be taken with caution, so we should see some consolidation and correction in the next trading hours. We already see the European index having hard time extending past sessions’ gains.

Elsewhere, the strong risk rally, the easing omicron worries, and lower US oil inventories give a boost to oil prices, but gains in Bitcoin remain timid.

In stock news, Intel will let Mobileye fly on its own, and the announcement has been welcomed b investors. Yet the latest news will hardly help Intel reverse the negative trend.

Bank ratings flow in as it’s the end of the quiet period for Rivian and they look rather… strong!

Tesla, Lucid Group and Donald Trump’s DWAC under pressure of SEC news.

Overall, equities, especially the reopening stocks, benefit from encouraging news that the omicron symptoms are rather ‘mild’ and that the People’s Bank of China loosens its purse’s strings to provide support to the Chinese economy, but the upcoming US inflation is a threat to the market mood.

Alibaba rallied, gold is steady below the $1800 mark and Bitcoin advances past the $51K mark. Bitcoin is a high-risk asset, however, there is clear evidence that Bitcoin is paving its way to the traditional finance, and that institutional investors are increasingly on board. It still doesn’t make it a hedge against inflation, nor a safe haven, but it makes it a stronger alternative investment vehicle where we could see the size of one-off drops reduce over time.

Cryptocurrencies had an agitated weekend, with a 20% drop recorded in Bitcoin’s price on Saturday to as low as $42K per coin. Only half of the losses have been recovered so far. But the Saturday drop raised a big question for the crypto traders: is it an opportunity to buy the dip?

The weekend selloff in Bitcoin was likely the continuation of the heavy selloff in the US equity markets following a mixed US jobs report before the weekly close. The US economy added some 210’000 new nonfarm jobs in November, which was much less than 550K penciled in by analysts, but the participation rate improved, and the unemployment rate fell surprisingly to 4.2% from 4.6% printed a month earlier, and versus 4.5% expected by the market. For a second, investors didn’t know how to interpret the data!

All three major US indices fell, but Nasdaq suffered the most with almost 2% drop into the close.. The bloodbath in Chinese equities didn’t help.

We will be talking a lot about inflation this week, as the latest CPI data is due Fridy. Last week, the Federal Reserve (Fed) Chair Jerome Powell finally said that inflation is ‘not transitory’, and Fed action is needed to tame the pressure.