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AUTUMN HAS COME: NEW SEASON OF FINANCIAL MARKET

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Elizabeth Belugina

By Elizabeth Belugina, head of analytical department at FBS

Elizabeth Belugina

Elizabeth Belugina

As the holiday season is at an end, time comes for traders and investors to reassess the economic outlook and invent new trade ideas. The general public also awakens from the summer hibernation and wants to make some investment decisions. In this article we will make a review of the current financial situation in the world and outline the prospects for the main assets.

Macroeconomic picture

Developed economies remain heavily dependent on monetary help from central banks. So far, Brexit decision hasn’t led to the economic apocalypse predicted by many analysts as it’s clear that Britain won’t immediately part with the EU. Financial markets were quick to digest the shock. As for the economy, it seems that the United Kingdom may avoid recession: Moody’s predicts growth of 1.5% this year.Despite uncertainty about the nation’s future British economy is getting help from monetary and fiscal stimulus. Elsewhere the euro area’s and Japanese economic growth remains anemic and inflation keeps undershooting the target level. All in all, growth may be characterized as sluggish, but for now the situation doesn’t appear critical.

The United States stands apart from other advanced nations. On the one hand, growth of the world’s leading economy slowed down to just 1.1% in June quarter. However, industrial production, durable goods orders and residential construction give reasons to believe that we’ll see better figures in Q3: Atlanta Fed projects 3.5% growth. American labor market seems to be in good shape and consumer sector is strong. Low inflation though remains one of the main obstacles to rate hikes in the US: core personal consumption expenditures index (PCE), the Fed’s preferred inflation measure,rose by 1.6%y/y in July that is below 2% target.

Emerging market economies, which attracted a lot of capital in past months, do not actually have solid economic fundamentals. Many of them depend on China with its unbalanced economy, which experience a clear slowdown. In August, Moody’s raised its short-term outlook for the emerging market economies, which are part of G20, but still they are extremely vulnerable to potential US rate hike: if America raises interest rates, this will lead to a major outflow of cash from emerging markets back to the US.

Currencies

The main question of interest for Forex traders is the timing of US interest rate hikes. The autumn Federal Reserve meetings will take place on September 21 and November 2. It seems that the US central bank will ultimately have to tighten policy as it did promise to act this year and is running out of excuses not to do so, but a rate hike is more likely in December than in the autumn months. Although the inaction in September may once again hurt the greenback, the closer the winter, the stronger the expectations of a hike and, consequently, the US currency should become. US dollar index remains in a broad sideways trend. By the end of autumn, it will likely move towards its upper border in the 99.00/100.00 area.

US dollar index, weekly chart

US dollar index, weekly chart

The single currency lacks fundamental reasons to strengthen because of the loose monetary policy of the European Central Bank, which is already set in place. However, EUR/USD has been trading in a rather stable fashion in the recent months.It happens because of the euro area’s large current account surplus and the fact that fragile European banks don’t feel good enough to invest money abroad, so monetary outflows from the region are limited.Taking into account the fact that the euro is off highs, there’s the risk that the ECB doesn’t deliver new monetary easing expected by some analysts. In the absence of September rate hike in the US, odds are that EUR/USD will continue moving sideways fluctuating around 1.1100.

Japanese yen retreated from highs, but for the time being it will be very hard for USD/JPY to reverse the downtrend. Analysts expect the Bank of Japan to ease policy on September 22, but at this point it will be really hard for the regulator to exceed the market’s expectations. That’s why there’s the risk that any new BOJ measures stimulus measures will have limited impact on the currency market. Strong psychological support at 100.00 is the key level to watch on the downside. In case of good economic data from the US combined by monetary easing from the Bank of Japan and other central banks, resistance for USD/JPY will be at 107.50 and 110.00.

Commodities

Oil price rose on speculation of output freeze talks by the world’s largest producing nations.The market is focused on International Energy Forum in Algeria on September 26-28. However, discord in the Organization of the Petroleum Exporting Countries (OPEC) is still severe and the possibility of an agreement isn’t high. Moreover, production levels in both OPEC and non-OPEC members are at the record highs, while production in Nigeria is recovering after the disruptions, so even if there is a deal to freeze the output at the current level, it won’t have a sizeable impact on the immense oil supply.From the demand point of view note that many refineries will stop operation for the seasonal maintenance ahead of winter. As a result, it would be very hard for Brent to stick around $50 mark. According to Reuters poll, Brent would average $45.44 a barrel in 2016. Up to this point this year’s average was about $42.6.

Brent oil, daily chart

Brent oil, daily chart

Gold is one of this year’s best performing asset, despite consolidation in the last two months. Recently the precious metal was under the negative impact of the increased US rate hike expectations. The prospect of higher interest rates makes gold less attractive to investors as the metal doesn’t provide yield.Demand for gold jewellery, which accounts for more than half of total gold demand, declines because of higher price.However, expansionary monetary policy of the most major central banks and negative interest rates in Europe and Japan in particular is a supportive factor for gold. In addition, things like Brexit, Italy’s troubled banking sector and geopolitical tensions in the Middle East are still capable of creating risk aversion. All in all, gold may appreciate in the medium term, but the overall strength of American economy and the Fed’s policy tightening won’t allow it to make a big rally.

Stocks

The resilience in American stock market may be largely explained by the approaching US presidential election due on November 8. At the moment the consensus is that Hillary Clinton will replace Barack Obama at the job. The Democrats are expected to retain the White House, while the Congress will be split into Democratic Senate and Republican House. Such layout would mean that the divided leadership won’t be able to produce any fundamental changes in economic policies. In this case the Federal Reserve will have to keep taking care of the economy. Such scenario is good for risk sentiment and for markets as it represents a blissful thought that there are no shocks ahead. Clinton is now ahead of Trump, but should the lead narrow ahead of the election, uncertainty may cause spike in volatility as the market is now pricing too big a chance of Clinton’s victory. This should provoke bearish correction in American equities.Trump victory may lead to a fiscal stimulus and strong USD. The first debate between Trump and Democrat Hillary Clinton will take place on September 26.Other risks for stocks include US interest rate hike and decline in oil.

S&P 500, daily chart

S&P 500, daily chart

Emerging-market stock shave risen by more than 20% over the past six months. Taking into account the crowded positioning, riskier assets are ready for correction, at least on profit taking.

Conclusion

With the end of summer volatility is bound to increase. US Presidential election, talks between oil exporters and expectations of action from major central banks (tightening from the Fed and easing from the ECB, the BOE and the BOJ) will make autumn a busy season. High-yielding assets have been recently in great demand, but the ability of this trend will depend whether the central banks keep fueling it by easy monetary policy. More easing from European and Japanese central banks, Federal Reserve on hold in September, Hillary Clinton becoming the US president will make riskier assets enjoy more gains. At the same time, risk of uncertainty associated with the upcoming events can give the market reason for correction. Other risks not discussed in this article include Chinese yuan devaluation and the maybe bubble in sovereign bond market.

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How has the online trading landscape changed in 2020?

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How has the online trading landscape changed in 2020? 1

By Dáire Ferguson, CEO, AvaTrade 

This year has been all about change following the outbreak of coronavirus and the subsequent global economic downturn which has impacted nearly every aspect of personal and business life. The online trading world has been no exception to this change as volatility in the financial markets has soared.

Although the global markets have been on a rollercoaster for some time with various geopolitical tensions, the market swings that we have witnessed since March have undoubtedly been unlike anything seen before. While these are indeed challenging times, for the online trading community, the increased volatility has proven tempting for those looking to profit handsomely.

However, with the opportunity to make greater profits also comes the possibility to make a loss, so how has 2020 changed the online trading landscape and how can retail investors stay safe?

Lockdown boost

Interest rates offered by banks and other traditional forms of consumer investments have been uninspiring for some time, but with the current economic frailty, the Bank of England cut interest rates to an all-time low. This has left many people in search of more exciting and rewarding ways to grow their savings which is indeed something online trading can provide.

When the pandemic hit earlier this year, it was widely reported that user numbers for online trading rocketed due to disappointing savings rates but also because the enforced lockdown gave more people the time to learn a new skill and educate themselves on online trading.

Dáire Ferguson

Dáire Ferguson

A volatile market certainly offers great scope for profit and new sources of revenue for those that are savvy enough to put their convictions to the test. However, where people stand the chance to profit greatly from market volatility, there is also the possibility to make a loss, particularly for those that are new to online trading or who are still developing their understanding of the market.

The sharp rise in online trading over lockdown paired with this year’s unpredictable global economy has led to some financial losses, but with a number of risk management tools now available this does not necessarily have to be the case.

Protect your assets

Although not yet widely available across the retail market, risk management tools are slowly becoming more prevalent and being offered by online traders as an extra layer of security for those seeking to trade in riskier climates.

There are a range of options available for traders, but amongst the common tools are “take profit” orders in conjunction with “stop loss” orders. A take profit order is a type of limit order that specifies the exact price for traders to close out an open position for a profit, and if the price of the security does not reach the limit price, the take profit order will not be fulfilled. A stop loss order can limit the trader’s loss on a security position by buying or selling a stock when it reaches a certain price.

Take profit and stop loss orders are good for mitigating risk, but for those that are new to the game or who would prefer extra support, there are even some risk management tools, such as AvaProtect, that provide total protection against loss for a defined period. This means that if the market moves in the wrong direction than originally anticipated, traders can recoup their losses, minus the cost of taking out the protection.

Not a day has gone by this year without the news prompting a change in the financial markets. Until a cure for the coronavirus is discovered, we are unlikely to return to ‘normal’ and the global markets will continue to remain highly volatile. In addition, later this year we will witness one of the most critical US presidential elections in history and the UK’s transition period for Brexit will come to an end. The outcome of these events may well trigger further volatility.

Of course, this may also encourage more people to dip their toes into online trading for a chance to profit. As more people take an interest and sign up to online trading platforms, providers will certainly look to increase or improve the risk management tools on offer to try and keep new users on board, and this could spell a new era for the online trading world.

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Trading Strategies

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Trading Strategies 2

By Paddy Osborn, Academic Dean, London Academy of Trading

Whether you’re negotiating a business deal, playing a sport or trading financial markets, it’s vital that you have a plan. Top golfers will have a strategy to get around the course in the fewest number of shots possible, and without this plan, their score will undoubtedly be worse. It’s the same with trading. You can’t just open a trading account and trade off hunches and hopes. You need to create a structured and robust plan of attack. This will not only improve your profitability, but will also significantly reduce your stress levels during the decision-making process.

In my opinion, there are four stages to any trading strategy.

S – Set-up

T – Trigger

E – Execution

M – Management

Good trading performance STEMs from a structured trading process, so you should have one or more specific rules for each stage of this process.

Before executing any trades, you need to decide on your criteria for making your trading decisions. Should you base your trades off fundamental analysis, or maybe political news or macroeconomic data? If so, then you need to understand these subjects and how markets react to specific news events.

Alternatively, of course, there’s technical analysis, whereby you base your decisions off charts and previous price action, but again, you need a set of specific rules to enable you to trade with a consistent strategy. Many traders combine both fundamental and technical analysis to initiate their positions, which, I believe, has merit.

Set-up

What needs to happen for you to say “Ah, this looks interesting! Here’s a potential trade.”? It may be a news event, a major macro data announcement (such as interest rates, employment data or inflation), or a chart level breakout. The key ingredient throughout is to fix specific and measurable rules (not rough guidelines that can be over-ridden on a whim with an emotional decision). For me, I may take a view on the potential direction of an asset (i.e. whether to be long or short) through fundamental analysis, but the actual execution of the trade is always technical, based off a very specific set of rules.

To take a simple example, let’s assume an asset has been trending higher, but has stopped at a certain price, let’s say 150. The chart is telling us that, although buyers are in long-term control, sellers are dominant at 150, willing to sell each time the price touches this level. However, the uptrend may still be in place, since each time the price pulls back from the 150 level, the selling is weaker and the price makes a higher short-term low. This clearly suggests that upward pressure remains, and there’s potential to profit from the uptrend if the price breaks higher.

Trigger

Once you’ve found a potential new trade set-up, the next step is to decide when to pull the trigger on the trade. However, there are two steps to this process… finger on trigger, then pull the trigger to execute.

Paddy Osborn

Paddy Osborn

Continuing the example above, the trigger would be to buy if the price breaks above the resistance level at 150. This would indicate that the sellers at 150 have been exhausted, and the buyers have re-established control of the uptrend.  Also, it is often the case that after pause in a trend such as this, the pent-up buying returns and the price surges higher. So the trigger for this trade is a breakout above 150.

Execution

We have a finger on the trigger, but now we need to decide when to squeeze it. What if the price touches 150.10 for 10 seconds only? Has our resistance level broken sufficiently to execute the trade? I’d say not, so you need to set rules to define exactly how far the price needs to break above 150 – or for how long it needs to stay above 150 – for you to execute the trade. You’re basically looking for sufficient evidence that the uptrend is continuing. Of course, the higher the price goes (or the longer it stays above 150), the more confident you can be that the breakout is valid, but the higher price you will need to pay. There’s no perfect solution to this decision, and it depends on many things, such as the amount of other supporting evidence that you have, your levels of aggression, and so on. The critical point here is to fix a set of specific rules and stick to those rules every time.

Management

Good trade management can save a bad trade, while poor trade management can turn an excellent trade entry into a loser. I could talk for days about in-trade management, since there are many different methods you can use, but the essential ingredient for every trade is a stop loss. This is an order to exit your position for a loss if the market doesn’t perform as expected. By setting a stop loss, you can fix your maximum risk on a trade, which is essential to preserving your capital and managing your overall risk limits. Some traders set their stop loss and target levels and let the trade run to its conclusion, while others manage their trades more actively, trailing stop losses, taking interim profits, or even adding to winning positions. No matter how you decide to manage each trade, it must be the same every time, following a structured and robust process.

Review

The final step in the process is to review every trade to see if you can learn anything, particularly from your losing trades. Are you sticking to your trading rules? Could you have done better? Should you have done the trade in the first place? Only by doing these reviews will you discover any patterns of errors in your trading, and hence be able to put them right. In this way, it’s possible to monitor the success of your strategy. If your trades are random and emotional, with lots of manual intervention, then there’s no fixed process for you to review. You also need to be honest with yourself, and face up to your bad decisions in order to learn from them.

In this way, using a structured and robust trading strategy, you’ll be able to develop your trading skills – and your profits – without the stress of a more random approach.

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Economic recovery likely to prove a ‘stuttering’ affair

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Economic recovery likely to prove a ‘stuttering’ affair 3

By Rupert Thompson, Chief Investment Officer at Kingswood

Equity markets continued their upward trend last week, with global equities gaining 1.2% in local currency terms. Beneath the surface, however, the recovery has been a choppy affair of late. China and the technology sector, the big outperformers year-to-date, retreated last week whereas the UK and Europe, the laggards so far this year, led the gains.

As for US equities, they have re-tested, but so far failed to break above, their post-Covid high in early June and their end-2019 level. The recent choppiness of markets is not that surprising given they are being buffeted by a whole series of conflicting forces.

Developments regarding Covid-19 as ever remain absolutely critical and it is a mixture of bad and good news at the moment. There have been reports of encouraging early trial results for a new treatment and potential vaccine but infection rates continue to climb in the US. Reopening has now been halted or reversed in states accounting for 80% of the population.

We are a long way away from a complete lockdown being re-imposed and these moves are not expected to throw the economy back into reverse. But they do emphasise that the economic recovery, not only in the US but also elsewhere, is likely to prove a ‘stuttering’ affair.

Indeed, the May GDP numbers in the UK undid some of the optimism which had been building recently. Rather than bouncing 5% m/m in May as had been expected, GDP rose a more meagre 1.8% and remains a massive 24.5% below its pre-Covid level in February.

Even in China, where the recovery is now well underway, there is room for some caution. GDP rose a larger than expected 11.5% q/q in the second quarter and regained all of its decline the previous quarter. However, the bounce back is being led by manufacturing and public sector investment, and the recovery in retail sales is proving much more hesitant.

China is not just a focus of attention at the moment because its economy is leading the global upturn but because of the increasing tensions with Hong Kong, the US and UK. UK telecoms companies have now been banned from using Huawei’s 5G equipment in the future and the US is talking of imposing restrictions on Tik Tok, the Chinese social media platform. While this escalation is not as yet a major problem, it is a potential source of market volatility and another, albeit as yet relatively small, unwelcome drag on the global economy.

Government support will be critical over coming months and longer if the global recovery is to be sustained. This week will be crucial in this respect for Europe and the US. The EU, at the time of writing, is still engaged in a marathon four-day summit, trying to reach an agreement on an economic recovery fund.  As is almost always the case, a messy compromise will probably end up being hammered out.

An agreement will be positive but the difficulty in reaching it does highlight the underlying tensions in the EU which have far from gone away with the departure of the UK. Meanwhile in the US, the Democrats and Republicans will this week be engaged in their own battle over extending the government support schemes which would otherwise come to an end this month.

Most of these tensions and uncertainties are not going away any time soon. Markets face a choppy period over the summer and autumn with equities remaining at risk of a correction.

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