Global markets ended the previous week with a decline in overall demand for company shares and a local growth in the US dollar. What is the reason for this and what can be expected this week?
Last week, the market focused on the Fed's first final decision on monetary policy for this year. In addition, investors also continued to monitor the development of the situation around the vaccination of the population in Western countries and were waiting for news about J. Biden's implementation of the assistance program in the amount of $ 1.9 trillion.
As for the stock markets, what is the reason for its sharp decline? Firstly, there was an unusual growth in demand for company shares last December. This was due to investors' expectations that the production of vaccines and the beginning of vaccination of the population of economically developed countries will lead to an increase in business activity, which will cause a faster V-shaped recovery of the global economy. However, this did not happen for a number of reasons. The main one was the lack of vaccines and the extremely low start of vaccination of the population, which gave us reason to believe that this process can be fully completed by the end of this year. Secondly, there was an increased pressure from the pandemic both in the US and in Europe during the end of the past year and the start of the new year. This caused lockdowns in Europe, which led to a drop in business activity and to general negative consequences in the economies, especially in European countries.
But it seems that the markets were somewhat more optimistic about the prospects for combating COVID-19. The earlier active growth in demand for company shares was replaced by their decline or rather profit-taking, which became the basis for a strong decline in stock indices last week. In this situation, the demand for protective assets increased when investors began to actively withdraw from risky assets, and this has traditionally led to an increase in demand for the US dollar as the world's reserve currency, as well as for the Japanese yen.
The stock indices continue to decline after the Fed's monetary policy meeting, which actually did not calm the markets. There were failed hopes that the US regulator will do something to stabilize the situation in the markets. The FRS only stated its plans for monetary policy, and on the contrary, its chairman made it clear that the Central Bank may change its policy amid the expected sharp recovery in the growth of the US economy.
The markets have now entered the second month of the new year, February. We believe that speculatively-minded investors will continue to look for high returns in the markets, which may cause a new local collapse, primarily in the US. We also believe that the demand for company shares, primarily in America, will continue the risk of declining. This is due to the lack of significant changes in the vaccination situation, the uncertainty about the implementation of Biden's plan, and how Europe will come out of lockdowns.
The US dollar will receive support in this situation, despite the Fed and US Treasury's large-scale fiscal stimulus measures. At the same time, the next positive data on the US economy will significantly weaken investors' expectations that the aid program promised by Biden will be fully implemented.
This week, we should focus on the publication of business activity indices in the manufacturing sector, the results of the RBA monetary policy meeting, the value of GDP in the eurozone and the publication of employment data in the US.
Forecast of the day:
The USD/JPY pair may correct downwards to the level of 104.25, if it breaks above 104.60.
The USD/CAD may also correct downwards on a possible local rebound in stock markets and the growth in crude oil prices. In this case, a price decline below the level of 1.2760 may lead to further decline to 1.2685.
