The markets opened with a bearish tone as there is a new turn of events on the pandemic course. Over the weekend, the news that a new virus’ variant circulates in the United Kingdom caused panic in Europe. According to the UK authorities, the new variant spreads faster, and that poses a risk for the period ahead.
Quickly after the announcement, several European countries suspended their flights to the United Kingdom, in a move that signals the harsh lockdown in place in Europe. As such, the market is at risk of declining due to the lack of liquidity characteristic this time of the year.
The Fed Remains Dovish
Last week’s main event was the Federal Reserve meeting and interest rate decision. The Fed chooses to do nothing at this meeting, but it kept a dovish tone.
During the press conference, the Fed’s Chair Powell said that the central bank reopened the USD swap lines and that it will keep the Quantitative Easing (QE) program at the same pace of $120 billion. Much of the focus of last week’s meeting was to see if the Fed hints at changing the focus of the bond-buying. So far, the focus was on shorter-term maturities, but rumors in the market suggested that the Fed may switch to longer-term maturities.
By targeting longer-term bonds, the Fed aims at lowering the yields further, in a move destined to ease financial conditions even more. However, it did not do so, but it hinted that it represents a tool it may use in the future.
Risk-Off Market Moves
Moving forward, there is the danger of a risk-off move that could grip markets this week. In a risk-off, the USD rises, and the stock market falls. Risk-off market moves are coordinated and have the tendency to affect all markets in a correlated manner. In other words, it does not matter what market one is trading, as they are all affected.
Because the USD is the world’s reserve currency, how it trades this week is key to risk. As such, expect a more volatile trading week than otherwise.