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Omicron, Fed Put & Inflation...

Video Script

Hi everyone, thanks for tuning into my preview of the week ahead in forex and financial markets.


Markets were hit by a double-whammy last week - the discovery of the new omicron variant of covid-19 - and the prospect of faster QE tapering from the Fed. So I’ll talk about what this means moving forwards as well as highlight the top items in this week’s economic calendar, including rate decisions in Australia and Canada and US inflation data.


We didn’t know when or why but we knew that after such a long period of calm in stock markets - we had to see volatility jump. And that’s what happened last week with the Dow Jones having a few days of multi-hundred point moves. At the same time traders bought haven currencies like the Swiss franc - which keeps hitting new multi-year highs versus the euro in the EUR/CHF pair.


So in brief, there is of course a new virus variant first discovered in South Africa called Omicron. It seems to be causing a lot more covid cases and that appears to be encouraging what was already a move to tighten restrictions from various governments. At the same time, Jerome Powell finally admitted that central bankers should retire the use of the word 'transitory’ to describe the inflation that has been rising for months and be prepared to taper QE more quickly.


Now if the rest of this year is anything to go by, we might already have seen the end of this correction in stock markets. Every dip of around 3 to 5% has been bought successfully in 2021.


I’ve mentioned this trading strategy before but what I will do on these occasions is look at the VIX index - which measures volatility in the S&P 500. This VIX is back up to 29, which has been the exact top for the last two sell-offs in the S&P 500 in May and September. If we hold over 29 - it tells me the drop will be worse than these two other occasions - and could easily be the worst of 2021. If it drops back down towards 20 again, the panic is probably over.


As traders we don’t want to try to become overnight experts in virus variants to decide whether to go long or short stock indices. It’s always about the balance of risks. I won’t repeat all the reasons that buying stocks has been working but the risks of further economy-impeding lockdowns is going up and alarmingly for investors this time they could happen as central banks reduce stimulus - not increase it like last time.


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Let's switch gears to this week’s economic calendar highlights. I’ll be watching the Reserve Bank of Australia and Bank of Canada meetings with interest after the rate hike in New Zealand - the other commodity currency nation. But the big theme continues to be inflation and there are numbers out of China and the US this week. The situation with Omicron has highlighted the big problem inflation can pose to markets. What I mean is inflation might kill the so-called Fed put. Central banks can’t step in to save investors from economic risk by printing more money if they need to tackle inflation by reducing the money supply!


Right thanks everyone, good luck trading this week and make sure to click on subscribe so you don’t miss the next episode of the week ahead.


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