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Stocks: Dow seeing worst drop in 2021 amid COVID-19 variant headline risk

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Yahoo Finance's Brian Cheung details the market's reaction to news regarding a new COVID-19 variant and if market plunges will affect the Fed's tapering timeline.

Video Transcript

[BELL RINGING]

- Welcome back. Well, we are seeing a sea of red across the equity space and other risk assets. The Dow now down over 1,000 points at their session low. It is the worst drop of 2021. S&P and NASDAQ also lower. And we want to turn our attention now to US Treasury yields also falling sharply on the news around the new variant that was found in Southern Africa. Here with more on the sharp reversal is Yahoo Finance's Brian Cheung. Brian, we have done a round trip on treasuries just in the last couple of days.

BRIAN CHEUNG: Yeah. Certainly. And that sea of red is also kind of being seen in the US bond markets as well. If you take a look at the longer dated US treasuries yields are down across the board. When you take a look at the US 10 year currently at a 150 handle, that represents about a 15 basis point decline. The 30-Year at 185 basis points. That's a decline of 12 basis points. A lot of the movement has actually been in the belly of the curve. The 5-Year actually falling a number of basis points as well. It's actually down I believe to-- I cannot remember. I think 117 basis points as of a few minutes ago.

Now, of course, when you take a look at US Treasury markets yield down means bond price up, that means people are trying to get out of those riskier US equities then into these more safe US dollar denominated assets. But one interesting thing to also watch is the US dollar index, if you take a look at that. The US dollar has actually fallen as well to a 96 handle that represents about a 7/10% decline since the last trading session.

Now, this is interesting because at the beginning of the trading session today you actually didn't see the US dollar index move that much, which may have signaled because it wasn't declining as much as the broader US equities market. Maybe that meant people had some strength in specifically the United States ability to handle this emerging variant that apparently isn't the case anymore with the US dollar index now falling considerably as well. So what we're looking at right now is indeed a continuation of this sell off here. People running to these risk free assets. We'll see if that continues throughout this abbreviated trading day, guys.

- Yeah and in the FX space we're seeing the usual safe haven plays like the Yen as well as the Swiss Franc advancing today. Brian a lot of people are asking, you know, what exactly does this mean for the Fed at a time when a lot of investors are already looking to see the pace of tapering that the central bank's likely to push forward?

BRIAN CHEUNG: Well, make no mistake, the Federal Reserve is going to be watching the market action today. And we need to kind of underscore here though, the Federal Reserve has said in the past that new emerging variants did remain a downside risk to the economy. That's exactly what appears to be playing out in the financial markets today. But this is happening at a unique time where the Fed is starting to signal that it wants to tighten the spigot on its easy money policies.

We actually heard just from the San Francisco Fed president, Mary Daly here on Yahoo Finance On Wednesday, where she was saying she would advocate for a faster tapering process to get the Fed position to get ahead of rising inflationary pressures. Now, it's interesting to already see some of the quick reactions here.

I got a note from Evercore ISI in the last hour or so noting that, yes, it is indeed the case that financial markets may get the Fed's attention. They're not going to call an emergency meeting or anything like that. But they said that their initial knee jerk reaction is that the variant will not create too much difference at least for the Fed's plans on accelerating its taper process. It's going to meet in about three weeks to decide whether or not they want to increase the $15 billion a month pace of slowing their asset purchases. So very interesting to see how, yes, this is definitely something that's going to be on the Fed's radar.

We have seen some changing pricing in the Fed funds futures market with regards to interest rate hikes, which would happen after the tapering process is done. If you take a look at where people are placing their bets for interest rate hikes over the next few years. Keep in mind that at the end of 2022, ahead of today, we were seeing about a 30% chance of three interest rate hikes in total. Next year that has actually changed to about 25%.

So you're seeing some people get a little bit more hesitant with regards to the aggressiveness by which the Fed might want to raise rates in the next year just over the first few hours of trading this morning, guys.

- OK. A lot of the discussions playing out over the next several weeks. Brian Cheung, thanks so much for bringing that to us.