Recalling 2022
Doug Nolan
I’ll hold off on a more comprehensive “year in review” until the delayed release of Q3 Z.1 financial flows data.
Trading at yearend and the start of a new year can be intriguing.
I tend to deemphasize market action during a year’s final couple weeks of trading.
There is the typical “Santa Clause rally” markup dynamic to enhance performance, bonuses, and hedge fund payouts.
What’s more, tax loss selling often pressures the year’s underperforming stocks and sectors.
January trading can be fascinating.
Hefty early-year inflows traditionally support stocks.
But January markets can also be buffeted by significant portfolio reallocations and strategy adjustments.
Early 2022 trading comes to mind.
At January 24th intraday lows, the S&P500 was down 11.5% month-to-date, losses that increased to 13.7% at February 24th lows.
The Nasdaq100 (NDX) lost 8.5% during January 2022.
Early selling portended a tough year for stocks.
At October 13th 2022 lows, the S&P500 had suffered a 27% decline (S&P500 returned negative 18.1% in ’22).
The Nasdaq100 ended 2022 down 33%.
A poor 2022 was preceded by a stellar 2021.
And while the NDX returned 27.5% during 2021, late-year trading dynamics flagged market vulnerability.
Heightened volatility saw two pullbacks (7.3% and 5.5%) in the late-November through mid-December period.
But between December 20th and 28th, a swift 7% rally locked in big 2021 returns.
The year-end rally would be reversed in January’s first five trading sessions.
Year-end 2025 trading dynamics were reminiscent of 2021.
A big performance year was under threat from late year market instability - by two bouts of selling in particular.
Between November 3rd highs and November 21st lows, the NDX dropped 8.7%.
And then between December 10th highs and lows from the 17th, the NDX was 4.6% lower.
The index then rallied 4.3% from lows on the 17th to December 26th highs.
Looking back a few weeks, there were indications of developing market cracks.
Bitcoin traded at an intraday low of 84,413 on December 18th – down a third from the October 6th high.
Cryptocurrencies were at the cusp of breaking below November lows, which would likely trigger another wave of selling.
And with the proliferation of crypto “basis trades” and myriad levered strategies, a major cryptocurrency de-risking/deleveraging would be systemically relevant.
Between December 8th and 17th, Oracle CDS surged 40 to 156 bps – the high back to financial crisis 2009 (began Q4 at 57).
Over this period, CoreWeave bond yields spiked 180 bps to 12.27% (began Q4 at 8.30%).
The AI mania/arms race/Bubble began fraying at the edges.
OpenAI reciprocal agreements.
Massive unending financing requirements, increasingly relying on Credit market borrowings.
Electricity.
Accounting.
Inflating data center buildout costs.
Opaque and suspect returns on investment.
Mounting public backlash.
“Jitters Over AI Spending Set to Grow as US Tech Giants Flood Bond Market.”
Heavy leverage has undoubtedly enveloped the entire technology universe.
In tech-related stock trading, combined margin debt, derivatives and hedge fund trading strategies have sector leverage expanding at an unprecedented pace.
Meanwhile, colossal borrowings for AI-related capex have the entire industry levering up.
Importantly, the high-flying AI/technology stocks have become acutely vulnerable to de-risking/deleveraging dynamics.
Crypto deleveraging made tech vulnerability a more pressing issue.
There was also the issue of festering Credit market problems.
First Brands and Tricolor.
Concerns for a turning Credit cycle.
Private Credit and leveraged lending.
Perhaps more importantly, serious concerns for “basis trades”, hedge fund leverage, and Non-Bank Financial Intermediation (NBFI) were voiced by the BIS, Bank of England, the Financial Stability Board, and others.
The Fed’s December 10th meeting – and Powell press conference - eased more immediate deleveraging concerns.
As of November 19th, the market was pricing less than 50% odds of a December rate cut.
Not only did they reduce rates 25 bps, the Fed restarted QE at a beefy $40 billion a month (commencing immediately!).
This assuaged fears of an increasingly unstable “repo” funding market.
It also further solidified confidence in the “Fed put.”
Powell may have emphasized the Fed’s focus on sufficient bank reserve levels and stable funding markets, but markets are conditioned to view the resumption of QE as a predictable response to heightened general market risk (i.e., crypto, tech, equities, Credit and bonds).
Federal Reserve Credit expanded $52.6 billion during the final three weeks of the year, the largest liquidity injection since the March 2023 banking crisis.
Indicative of an ongoing boom in leveraged speculation, money market fund assets (MMFA) surged $212 billion over the final five weeks of 2025.
Over the past 22 weeks, MMFA ballooned $657 billion, or 21.7% annualized.
Little wonder metals prices have been skyrocketing.
Ten-year Treasury yields traded to a December 10th intraday high of 4.21% - the highest yield in more than three months.
Treasuries were volatile into year-end.
Yields were at 4.10% early on the final trading day of the year, before closing 2025 at 4.17%.
December Treasury and global bond trading was full of intrigue.
Ten-year German bund yields traded to 2.91% on December 22nd, within six bps of 14-year highs - before easing to 2.82% on December 30th.
French yields traded to 3.63% on December 22nd, the highest since European bond crisis November 2011.
Leading the global yield surge, Japanese JGB yields jumped to 2.07% on December 22nd, the high back to February 1999.
JGB yields surged 25 bps in December.
It’s worth noting that Australian 10-year yields jumped 23 bps in December to 4.74%.
Canadian yields rose 29 bps to 3.43%.
It was a close call, but global bond markets avoided year-end fireworks.
Trading, however, certainly didn’t allay my fears of a surprising jump in global yields.
In a highly indebted world with generally outsized deficit spending and massive speculative leverage, the potential for acute instability should not be disregarded.
More specific to Treasuries, 2026 will be yet another year of egregious deficit spending, with a $2 TN budget shortfall possible.
And so long as loose conditions persist, upside inflation surprises are a good bet.
I suspect there’s still ample tariff inflationary fuel to make its way through price levels.
And myriad anecdotes point to ongoing elevated price pressures.
The exponential growth in AI-related spending now poses significant inflationary risk.
December 31 – Financial Times (Song Jung-a):
“Consumers should prepare for price increases this year, of as much as 20% for smartphones, computers and home appliances, analysts and manufacturers have warned, as artificial intelligence demand drives up the cost of memory chips used in electronics.
Consumer electronics makers including Dell, Lenovo, Raspberry Pi and Xiaomi have warned that chip shortages were likely to add to cost pressures and force them to raise prices, with analysts forecasting increases of 5 to 20%.
Dell’s chief operating officer Jeff Clarke said during an earnings call in November that the company had never seen ‘costs move at the rate’ they were rising now and the impact would inevitably reach consumers.”
December 30 – CNBC (Sam Meredith):
“Copper is on track for its biggest annual price rise in more than a decade, driven by supply disruptions, a weakening U.S. dollar, improving expectations for Chinese economic growth — and blockbuster spending on artificial intelligence.
Analysts say the red metal’s rally could continue next year, particularly amid supply fears and a rapidly expanding global data center footprint.
Three-month copper prices on the London Metal Exchange, or LME, traded up 1.5% at $12,405 per metric ton on Tuesday, paring recent gains after notching a record high of $12,960 in the previous session.
The benchmark contract, which is up around 41% this year, is on pace for its best year since 2009…”
January 2 – Bloomberg (Annie Lee):
“Aluminum climbed above $3,000 a ton for the first time in more than three years on a tightening supply outlook and long-term demand bets, joining other base metals notching recent milestones.
A cap on Chinese smelting capacity and constraints to European production due to higher electricity prices have chipped away at global inventories, while the demand outlook from the construction and renewable sectors remains robust.
Futures rallied 17% last year, the most since 2021.”
The Bloomberg Commodities Index surged 13.9% in 2025, while the dollar index devalued 9.6%.
While depressed crude prices help, the impact of oil prices on general inflation has waned over the years.
Key prices, including electricity, healthcare and health insurance, homeowners and auto insurance, point to persistent pricing pressures.
Meanwhile, the supply of new debt hitting the market has been huge - and is poised to further test the markets’ capacity to absorb Trillions of bond issuance.
January 2 – Bloomberg (Michael Gambale):
“The US investment-grade primary market is gearing up for a strong January, as syndicate desks brace for a busy 2026 after 2025 ranked as the second-most active year on record.
An informal survey of debt underwriters see around $215 billion of issuance this month… up from $186.4 billion sold in January 2025.
That total was about $3 billion below the 2024 record of $189 billion.
Supply this month is expected to top all prior Januarys, with about $70 billion slated for the first week.
Syndicate desks project $1.8 trillion to $2.25 trillion of issuance in 2026, with firms expecting even the low end to be a record.
Estimates for 2025 of $1.4 trillion to $1.9 trillion proved broadly accurate, as issuance totaled $1.58 trillion, second only to 2020’s $1.75 trillion amid Covid-driven borrowing and ultra-low rates.”
December 29 – Axios (Dan Primack):
“2025 has been a monster year for dealmaking, trailing only 2021 in terms of dollar value, according to preliminary data from LSEG…
Global M&A value was around $4.39 billion through Dec. 18, a 45% boost over 2024.
The only richer year-to-date was 2021, at $5.48 trillion, while 2015 was the only other year to surpass $4 trillion in deal value.
The number of deals, however, fell 7% to a nine-year low.
U.S. dealmaking followed a similar trend in 2025, with $2.23 trillion in M&A value for around 11,300 deals — up 54% and down 14% from 2024…”
One day is not of what a trend is made, though we can contemplate the possibility that it’s the start of something.
Notably underperforming to start the new year, the Bloomberg MAG7 index lost almost 1% in Friday trading (S&P500 declined 0.19%).
After a strong open, technology stocks were under selling pressure for most of the session.
My interest is piqued when tech and financial stocks are simultaneously under pressure.
That was not the case Friday.
The KBW Bank Index surged 1.75%, while the Broker/Dealers advanced 1.59%.
The broader market enjoyed a strong start to 2026.
The S&P400 Midcap Index gained 1.34%, and the small cap Russell 2000 rose 1.06%.
Stocks were mixed, as sellers wasted little time in global bond markets.
Ten-year yields jumped seven bps in Italy (3.67%), six in the UK (4.53%), and five in Germany (2.90%), France (3.61%), Spain (3.34%), Portugal (3.19%), and Greece (3.48%).
Yields jumped 10 bps in Australia (4.83%) and rose another four bps in Canada (3.47%).
In general, yields are at or near multi-year highs.
Ten-year Treasury yields added two bps to a near four-month high of 4.19%.
The scenario of a destabilizing backup in global yields remains in play.
Best I can tell, the U.S. economy enters 2026 with momentum.
Third quarter GDP was reported at a striking 4.3%, bolstered by post-pause financial conditions loosening and market rallies.
Conditions and market liquidity remained loose throughout Q4, while fears of rapid labor market weakening proved overblown.
So long as conditions remain loose, overheating risks outweigh downside economic and employment risks.
At least from my vantage point, egregiously over-levered Treasury and global bond markets face clear and present danger to start 2026.
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