Since July 1st, we’ve had dramatic movements in the financial markets that have been astounding. The S&P fell from 1340 to 1102 as a low and then rebounded to 1,230. This is a 17% fall with a 12% rebound, all within two months. The US dollar against the Canadian dollar rose from 0.94 to 1.00 and then back to 0.9730. The US Treasury 30 year bond had a 100 bp drop in yields and the two year note had a 30 bp drop in yield. This type of volatility reminds many market participants of the 2008 global financial crisis. The challenging question remains: what changed in July that made us go through these huge disruptions and dislocations within the market?
First and foremost, growth is not accelerating in the United States as we entered into the second half of the year. This is particularly striking given that many
and Public Policy Strategist
BMO Capital Markets
economists and strategists had predicted strong US economic growth due to the extension of the Bush tax cuts and the cut in the payroll tax. On July 8th, we had weaker than expected non-farm payroll and unemployment data. Then on July 29th, we had an extremely weak US Q1 GDP revision from +1.9% to +0.4% and Q2 GDP data was 1.3% versus expectations of 1.8%. (And, historical data were revised lower to show that the recession was deeper than initially reported.) On August 2nd, personal spending fell for the first time in 2 years and underscored the distressed nature of the US consumer.
Therefore, we’ve had a sharp shift in expectations over future growth with macro-strategists reducing their growth expectations for the end of 2011 and for 2012 between 0.5-1.0 percent. In turn, this shift led to selling of equities due to the reduced growth prospects.
Next, European political problems and the debt problems deepened since July 1st. This lead to European votes on expansion of the European Financial Stability Facility or EFSF, votes on a new Greek bailout package and a vote in Greece over new austerity measures. The process created a miasma of uncertainty for the financial markets and further reduced expectations of future growth.
Also, the United States political environment was unstable and this created negative conditions surrounding the debt ceiling hike in early August. Afterwards, the decision by Standard and Poor’s rating agency to downgrade the United States from AAA was a major negative surprise. This led to a cascading effect with additional downgrades from agency debts to municipal debt to even Warren Buffet’s Berkshire Hathaway. In turn, the markets began to reassess the remaining AAA rated countries for a potential downgrade. This led to France and then led to questions raised over French banks. This negative feedback loop is analogous to what occurred during the 2008 financial crisis as the markets froze up due to counter-party risk.
This is what drove the financial market upheaval and ructions into early August. Fortunately, the world doesn’t stay the same for very long and policymakers stepped in to stabilize the markets. First, Europeans did change the European Financial Stability Facility. They’ve increased the size and critically allowed for member countries to borrow from the fund to lend to their banks for capital injections. This will eventually reduce the counterparty risk issue, but only after it’s ratified. Next, the European Central Bank agreed to expand what they call their SMP or their sovereign bond buying program, to include Italy and Spain. This has had the salubrious effect as bond yields in those countries dropped quickly after the announcement. Subsequently, both Italy and France have worked on new austerity measures to reduce their budget deficits which further have reduced fears over funding issues.
On August 4th, the Bank of Japan intervened unilaterally in the currency markets to buy US dollars against Japanese yen to lessen the Risk-Off trading in the markets. The Japanese Ministry of Finance announced a new program on August 24th to spur Japanese spending on foreign corporate acquisitions and resources. The government will send foreign currency reserves to an agency which in turn will make loans to commercial banks. Remember, the stronger yen hurts Japanese exporters as it makes their goods less competitive and reduces the value of their overseas earnings.
Switzerland has been one of the countries that have been severely impacted by the market volatility. Market participants bought the Swiss franc as a flight to safety and this created enormous volatility against the Euro currency with fluctuations of over 10%. On August 17th, the Swiss National Bank (SNB) responded by expanding the supply of funds to their money markets by 200 billion francs and said it would take additional steps if needed. Finally, the SNB has discussed pegging the Swiss franc to the euro and a leading Swiss business group supported the move.
In the United States, Congress and the White House agreed to a compromise deal to increase the US debt ceiling by $2.1 trillion to avoid default. Also, the deal cuts discretionary spending by $917 billion over ten years and establishes a process to cut an additional $1.2-1.5 trillion over the next ten years which, if not done, would set off an automatically triggered round of cuts. While this structure didn’t stop S&P from their downgrade, Fitch and Moody’s didn’t follow S&P and therefore the markets didn’t react by selling US Treasury securities.
Another major stabilizer for the markets was the action by the Federal Open Market Committee (FOMC) to change the language of their monetary policy statement. On August 9th, the FOMC stated:
To promote the ongoing economic recovery and to help ensure that inflation, over time, is at levels consistent with its mandate, the Committee decided today to keep the target range for the federal funds rate at 0 to 1/4 percent. The Committee currently anticipates that economic conditions–including low rates of resource utilization and a subdued outlook for inflation over the medium run–are likely to warrant exceptionally low levels for the federal funds rate at least through mid-2013. The Committee also will maintain its existing policy of reinvesting principal payments from its securities holdings. The Committee will regularly review the size and composition of its securities holdings and is prepared to adjust those holdings as appropriate.
The Committee discussed the range of policy tools available to promote a stronger economic recovery in a context of price stability. It will continue to assess the economic outlook in light of incoming information and is prepared to employ these tools as appropriate.
These highlighted changes reassured the markets that the central bank would continue to engage in easy monetary policy to assist the US economy.
In summary, the financial markets in July and August of 2011 have had thrilling moves to both the downside and upside. Market expectations over future global growth have shifted as US GDP and consumer spending data disappointed to the downside. Also, political events and critical votes created conditions for heightened uncertainty. Finally, policy makers across the globe reacted to the temblors by easy monetary policy or by enacting austerity measures to reassure queasy financial markets. Further policy actions will be warranted to maintain the recent snap back in global stock prices, but it is comforting to know that world did not come to an end at the beginning of August.
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Factors That Affect the Direction of the Stock Market
A stock price represents the value of a particular stock of a particular entity, asset or another financial instrument. It is calculated by calculating the price per share of the stock at a particular price and period in time.
There are various factors that affect the direction of the stock market. These factors include interest rates and inflation rates as well as the state of the economy. If one of these factors is not in the favor of the stock market, then it could bring about a downfall of its value.
The stock prices are also affected by various stock indexes, which provide information on a particular company or industry. It helps to analyze the trends of the stock market and makes better decisions when buying and selling.
However, there are some major factors that can influence the performance of the stock market. One such factor is the state of the economy. The state of the economy refers to how well the economy is doing economically. If there is an economic decline in a particular country, then the state of the economy would be affected and the stock market would also take a hit.
Economic conditions can also affect the performance of the stock markets. For example, if the state of the economy is poor and the population is experiencing unemployment, then the economy will suffer and the stock prices will definitely take a hit.
Political turmoil can also bring about a negative effect on the stock markets because it affects the economic conditions and the way people relate to the government. When there is a lack of confidence in the state of the economy and people tend to sell off their stock at cheaper prices, the stocks of the company would suffer.
Another important factor that influences the direction of the stock market is the change in the global economy. It has been proven that the changes in the global economy are very large and it can affect the direction of the stock market in a major way. For example, during the global recession in 2020, the stock prices of many companies suffered a great deal and so did the profits of the company.
The most important thing that determines the direction of the stock market is the state of the economy and the state of the country in which the stock market is based. It is therefore, very important to invest in the stock market as a company that is in good condition. This is because it will help in ensuring the stability in the economy.
The price of the stock market is also affected by the political stability of the country in which the stock market is based. If there is a rise in the political instability, then the price of the stocks would surely go up. However, when the political stability improves, the prices of the stocks will definitely fall.
The factors that affect the direction of the stock market include the conditions in which the economy is doing. It is therefore, very important to have a good understanding of how the economic conditions in a certain country are progressing. This will help in making better investments.
There are certain countries that are very stable and these countries have a very high demand for the stocks of other countries. This means that people from those countries will invest in stocks of countries that are in good condition, and these investments will yield profits for them.
There are also certain countries that have very bad economic conditions and these countries have a very low demand for the stocks of other countries. These countries are also in need of investments and these investments will yield huge losses for them. Therefore, investing in these countries is not advised because these stocks will yield zero returns.
The stock markets are not stable unless there are good economic conditions prevailing in a country. This means that one has to know the economic condition of the country in order to make investments. Investing in the stock market is the best way to do this because investing will always yield returns, as long as the country in which one is investing is stable.
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.
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