Fed on hold
The Federal Open Market Committee (FOMC) conclude their policy meeting today and it is expected that this will be the fifth consecutive meeting where monetary policy is left on hold following last December’s rate hike. Market expectations about the FOMC’s intentions have been volatile through the course of this year as the FOMC’s ‘policy guidance’ itself has been volatile, often depending on what is happening in financial markets rather than necessarily in terms of its economic mandate. Being asset price dependent rather than data dependent creates the risk of a feedback loop in which the markets believe the FOMC becomes more hawkish when equity markets are moving higher and becoming dovish when equity markets are moving lower. This is a recipe for an increase in financial instability.
Hence, at the start of this year, the FOMC’s own interest rate projections (the so-called ‘dots’ looked for four quarter-point rate hikes this year. This was quickly revised to just two in reaction to the market slide earlier in the year and escalation in international economic and financial uncertainty (China FX policy, an elevated US dollar and a weak oil price). Although, the Chinese currency has depreciated both against the US dollar and in terms of the currency basket, the proposed inclusion of the RMB into the SDR in October implies that devaluation risks for the financial markets will be limited. The US dollar is fairly flat but the oil price is weakening again though much of the oil industry’s adjustment of investment plans has probably already taken place.
Now the markets are pricing in just one rate hike this year with ‘Fed-watchers’ looking at the 21 September and 14 December FOMC meetings as being the timing of the next move. A rate hike at the 2 November FOMC meeting is unlikely given the proximity to the US Presidential election. Janet Yellen’s next public pronouncement will be at the Kansas City Fed’s annual economic symposium on 26 August where the programme this year will be on the design of monetary policy frameworks (see previous years’ programmes here). Brexit uncertainties seem to be dissipating and the consensus view that Brexit would cause a long-standing economic and financial shock seems to have been mistaken.
The FOMC has never tightened monetary policy in the month preceding a Presidential Election though: since 1964 the FOMC has raised interest rates eight times in the year of the election. The path of US bond yields during an election year does not depart much from the average pattern which indicates a seasonal bias to rise in early February before drifting higher through mid-May and slowly decreasing into the year-end. This is more or less what has happened so far with the US 10-year Treasury yield this year. As an aside, the upward pressure on libor interest rates reflects a recent increase in the demand for US dollars as a result of funding pressures, especially with Eurozone banks and also the impact of regulatory changes for US prime money market funds that come into effect on 14 October.
Equity markets have enjoyed a strong rally on the basis that the major central banks remain accommodative and this reflationary theme is bolstered by the re-iteration of using fiscal policy as a demand-management tool at the G20 meeting at the weekend. The S&P500 index is at a new high though valuations are historically very stretched. The US economic data surprise index has been rising (i.e. the data has tended to be better than expected, though yesterday’s US PMI service index at a five-month low pointed to sluggish growth).
Separately, Japan is expected to implement a fiscal stimulus soon with about JPY 6tn in new funding and the BoJ might announce fresh monetary measures at its policy meeting later this week. The Japanese two-year bond yield fell to a record low of minus 0.37% and the USDJPY exchange rate moved back towards the 106 level. The exception to the advance in EM equity markets, which are at an 11-month high, is China where the regulator is said to be considering tightening curbs on the USD 3.6tn market for wealth management products.
As far as equity markets are concerned, the main threat to sustaining the rally is upcoming political risk in the form of the Italian constitutional referendum scheduled to be held in October. The popularity of the anti-euro Five Star Movement has fanned ‘Quitaly’ concerns. The under-capitalisation of the Italian banking system will be revealed in the publication of the banks ‘stress tests’ this Friday. In time-honoured fashion, there will likely be a ‘last-minute’ deal to allow some state recapitalisation of the Italian banking system that mitigates the cost to bank bondholders of being ‘bailed-in’ (see Italy’s bail-in headache by Silvia Merler of Breugel). The next key political risk is the US Presidential election in November. Recent opinion polls have given Donald Trump a slight lead over Hillary Clinton. The financial markets’ preferred candidate for the White House is Hillary Clinton as she represents the status quo and is seen as friendly towards Wall Street. A Trump Presidency, on the other hand, would augur a change in economic policy that is a lot more protectionist (‘America First’). Janet Yellen would probably lose her job though Donald Trump said he favours a low interest rate policy.
Elsewhere, a week tomorrow, the BoE’s Monetary Policy Committee meet and the BoE will also publish its Inflation Report and update its economic forecasts post-Brexit. The BoE has been part of the consensus view that Brexit is bad, though the effects so far seem to be on published measures of business and consumer confidence. This is not surprising given the ‘Project Fear’ campaign in the run-up to the referendum. The BoE’s own agents’ summary of business conditions suggested little economic impact and this week’s CBI industrial trends survey was surprisingly upbeat on both output expectations and export orders.
International investors are taking advantage of the fall in the sterling exchange rate to purchase UK companies (Softbank-ARM) and buy commercial property. GlaxoSmithKline this morning announced plans to invest GBP 275mn at manufacturing sites in the UK. Note that net speculative short positions are now at an extreme and suggest that the exchange rate might be subject to potential short-covering. Brexit fears of a UK recession are clearly exaggerated and a case can be made for the BoE not to carry out further monetary easing. Indeed, press reports that some UK banks are preparing for negative interest rates might be counter-productive as both the ECB and BoJ have found. With gilt yields at record lows, will more QE make much difference?
How has the online trading landscape changed in 2020?
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?
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.
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.
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.
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.
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.
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.
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.
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.
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.
Economic recovery likely to prove a ‘stuttering’ affair
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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