Market news & insights

A currency peg is a policy in which a country's government or central bank fixes the exchange rate of its currency to the value of another currency or a basket of currencies. The pegged rate is enforced by the country's central bank, which will exchange currency at that rate. Commonly, countries that participate in this practice prefer to peg their currency to the US dollar, as it is seen as a stable currency globally.

There are also a few examples of a Euro peg, including the Danish krona, which made the decision not to adopt the Euro as its currency. Currency pegs can be temporary or long-term; for example, the CHF (Swiss franc) was pegged to the Euro between 2011-15. Another well-known and often-discussed example of a currency peg is the connection between the Hong Kong Dollar (HKD) and the US Dollar (USD).

Since 1983, the Hong Kong Monetary Authority (HKMA) has maintained a peg, allowing the HKD to trade within a narrow range of 7.75 to 7.85 to the USD. The HKMA commits to buying or selling HKD at this range to maintain the peg. Implications of currency pegs.

There are potential challenges as well as the perceived advantages associated with currency pegs, These include: Stability: For the Pegging Country: A currency peg can provide stability to a country's currency, especially if it's pegged to a stable currency like the USD. This can help reduce inflation and foster a predictable trading environment. For Global Trading Partners: Businesses and investors in both the pegging country and its trading partners may enjoy reduced currency risk.

Interest Rate Impact: Alignment with Pegged Currency: The interest rates in the pegging country often have to align with those of the currency to which it is pegged, which may impact the respective central bank's ability to conduct independent monetary policy. Foreign Exchange Reserves: Need for Ample Reserves: Maintaining a peg requires the central bank to have substantial foreign exchange reserves to buy or sell its currency as needed to retain its value within the range of any currency peg. Potential for Currency Speculation: Vulnerability to Attacks: If traders believe that the peg is unsustainable, they might bet against it, leading to potential financial crises if the central bank's reserves are depleted.

Limited Trading Opportunities: A peg can mean less volatility and fewer opportunities to profit from large swings in the currency's value for traders. Effects on Trade Balance: Competitive Advantage or Disadvantage: A peg might make a country's exports more competitive (if pegged low) or less competitive (if pegged high), impacting trade balances. Potential for Economic Misalignment: There may be challenges in adjusting to major economic events as a peg might prevent a currency from adjusting to economic changes locally or globally, potentially exacerbating economic downturns or bubbles.

Summary A currency peg is a significant monetary tool that can bring stability but also comes with trade-offs and potential risks. It can affect everything from inflation to interest rates, trade balances, and investor behaviour. For traders, pegged currencies may limit opportunities compared to those of the general foreign exchange market pairs.

Share buybacks refer to the practice where a company purchases its own shares from the open market or directly from its shareholders. In practice this results in a reduction in the number of outstanding shares available in the market, and so buybacks can also have an impact on the stock's price, as the reduction in supply can drive up demand and, consequently, the price. This indirectly returns value to existing shareholders.

This is sometimes used as an alternative to dividends, which is a more direct way of delivering value (we will discuss one approach versus the other later). Costs associated with purchasing the shares in a buyback can come from two main sources. Companies can either use their available cash reserves from profits, or even borrow funds to execute share buybacks.

Ultimately, the decision to engage in share buybacks depends on a company's financial goals, market conditions, and its outlook on growth and shareholder value. Here's an example of how a share buyback could work: Company: XYZ Corporation Current Number of Outstanding Shares: 10 million Current Stock Price: $50 per share Market Capitalization: $500 million (10 million shares x $50 per share) Implementation of Share Buyback: XYZ Corporation announces a share buyback program of up to 2 million shares. A budget of $100 million is approved for the buyback program.

The buyback will be executed over a specified period, for example, over the next 12 months. XYZ Corporation will buy back shares from the open market at prevailing market prices. Total Cost of Repurchased Shares: 2 million shares x $45 per share = $90 million The Market's View of Share Buybacks The market's view on share buybacks can vary considerably and depends on several factors.

The major issues include the following potential opinions. Positive Signal of Undervaluation: When a company announces a share buyback, it can signal to the market that the company believes its stock is undervalued. This can lead investors to view the stock more favourably and potentially drive up demand, causing the stock price to rise.

Improvement in Earnings metrics By reducing the number of outstanding shares available, this can lead to an increase in earnings per share (EPS), even if the company's actual earnings remain the same. This can make the company's financial performance appear stronger and more attractive to investors. Consequently, other earnings metrics will also change, e.g., P/E ratios.

Return of Capital to Shareholders: Share buybacks are often seen as a way for companies to return excess capital to shareholders. Investors looking for income through capital appreciation might view buybacks positively, as they can lead to an increase in the stock price. Concerns Regarding the Use of Funds versus other Potential Projects: Critics of share buybacks argue that companies sometimes prioritize buybacks over investments in research, development, and long-term growth.

This can be a concern if buybacks are used to artificially inflate EPS without contributing to the company's fundamental growth. Dividend vs. Buyback Debate: Some investors prefer dividends as a means of returning value, as they provide direct cash payouts.

Others appreciate buybacks, as they can lead to increased stock prices, but they don't provide the same level of immediate income as dividends. Effect on Debt Levels: If a company uses debt to fund its buybacks, it can increase its leverage and financial risk. Investors might be cautious if a company's debt levels rise significantly due to buybacks.

Additionally, if a company already has significant debt levels some market participants may feel that the capital used for the buyback would have been better used to reduce these, particularly if there are economic pressures currently in financial markets. Summary Share buybacks can have both positive and negative implications for a company and its stakeholders, and market opinions can significantly differ depending on many factors, some of which have been discussed above. Buybacks may enhance shareholder value by signalling confidence in the company's future prospects and increasing key financial ratios.

However, they can also be criticized if they are used to artificially boost stock prices without addressing underlying operational issues and potential opportunities for growth that similar company investments could provide.

Currency appreciation refers to the increase in value of one currency relative to another currency or basket of currencies. Depreciation refers to the opposite scenario where a currency loses value against another. When a currency appreciates, it takes more units of other currencies to purchase one unit of the appreciating currency, and of course in depreciation the reverse is the case.

These have implications for the economy and, of course, for those who trade Forex. Various influences can impact on this phenomenon and this article briefly outlines some of these factors that influence the appreciation and depreciation of a currency and its implications. Factors Contributing to Currency Appreciation and Depreciation Interest Rates: Higher Interest Rates: If a country's central bank raises interest rates, or if market rates increase, the currency often appreciates because it offers better returns on deposits and other interest-sensitive investments.

This effect may be exaggerated if the rate rise occurs unexpectedly. Of all factors discussed, this is arguably the primary influence. Interest Rate Expectations: Even the expectation of higher interest rates in the future, spurred by hawkish statements from central banks and economists, can lead to currency appreciation.

Conversely, if a dovish central bank stance exists or interest rates decrease, this is likely to result in currency depreciation. Economic Growth Strong economic performance with robust GDP growth can attract foreign investment, leading to increased demand for the currency and, consequently, appreciation. Conversely, currency depreciation is often the result when economic growth falls short of expectations.

Inflation Lower inflation compared to other countries can make a currency more attractive, as it preserves the real value of assets denominated in that currency. Higher inflation can have the opposite effect. However, this must be considered in the context of potential interest rate interventions.

Trade Balance If a country exports more than it imports, thereby demonstrating a trade surplus, there will be higher demand for its currency, leading to appreciation. A trade deficit may result in currency depreciation. Capital Flows Foreign Direct Investment (FDI) can also be influential.

An influx of foreign capital into stocks, bonds, real estate, or businesses can increase demand for a country's currency, and of course vice versa should there be a pulling of such out of markets or businesses. Political Stability and Economic Policy Sustained political stability and responsible fiscal and monetary policies can boost confidence in an economy and its currency, leading to appreciation. The reverse can have a detrimental impact on currency valuation.

Global Events: Changes in Commodity Prices: For countries reliant on specific commodities, a rise in those prices can lead to currency appreciation (e.g., Australia, Canada). Global Economic Conditions: Shifts in global economic sentiment and events in major economies can affect currency values. Other Central Bank Interventions: Central banks may intervene in currency markets by buying their currency on the foreign exchange market to influence its value.

Moreover, central bank interventions such as Quantitative Easing (QE) and Quantitative Tightening (QT) will undoubtedly impact currency value. These potential effects are multifactorial and complex, extending beyond the scope of this article. Impact on Traders, International Investors, and Businesses Understanding currency appreciation and depreciation and its underlying factors is vital for currency traders and investors with international exposure.

It affects: Currency Pairs: The relative value of different currency pairs can shift dramatically due to these factors. Export and Import Businesses: A stronger currency can make exports more expensive and imports cheaper. Investment Returns: The value of foreign investments may be affected by currency movements.

Summary Currency appreciation and depreciation are multifaceted phenomena influenced by both economic fundamentals and market psychology. Understanding these dynamics requires a comprehensive view of the global economic landscape and market conditions, enabling traders, investors, and businesses to seize opportunities and manage risks effectively.

What is a PE Ratio, and Why is It of Interest to Investors? The Price-to-Earnings (P/E) ratio is a metric that measures a company's current share price relative to its earnings per share (EPS). It's a relatively simple calculation, worked out by dividing the current share price by the Earnings per Share.

Traditionally, it has been used as a potential method as part of fundamental analysis to determine the valuation of a stock at its current price, and by comparing it against other stocks, one can make a judgment as to whether a stock is overvalued or undervalued relative to its earnings. In simple terms, a high P/E ratio might indicate that the stock is overvalued and may be worth avoiding, while a low P/E ratio could suggest undervaluation and hence an opportunity to invest and benefit as the price moves up to a fair value. We have discussed P/E ratios and the influences of this fundamental analysis measure in some detail in another article, “PE Ratios: What They Tell You (and What They Don’t),” which you can find HERE.

However, although this is true to some degree, it is far from the whole story. It is equally true that a low P/E ratio may have causative factors that mean you should avoid the stock rather than jumping in expecting a return to former glory. So, in this article, we take a deeper dive into some low P/E ratio causes that may be “red flags” in your investment decision-making.

For each, we will define what the concern may be that merits further investigation and provide examples to assist in highlighting how this may happen. So, in essence, you will have a checklist to use when considering stocks with low P/E ratios as investments. Declining Industry or Sector: A low P/E may be indicative of an actual or potential gradual reduction in overall demand and growth prospects within a particular industry or sector.

Many reasons for this could include changes in policy, environmental concerns, technology advances, customer preferences, and demographics. Although this decline may be permanent in some cases, there may also be temporary declines due to longer-term supply chain issues or healthcare reasons (the recent COVID pandemic being a prime example where overnight the travel industry was hit hard). The difficulty with the more temporary causes is not only the investor's ability to judge the potential duration of the causative factor but also the subsequent time required for recovery after the event has passed.

The more permanent declines may be currently in progress or likely to happen in the future. With current declines, an obvious example would be the move from traditional print media to digital news platforms. The ability, or even the possibility, of a company to adapt is part of the equation to determine the degree of decline.

Assessing the potential for decline poses the challenge of timing, as it is commonly unknown when there will be a substantial impact. An example of this may be the coal industry's decline due to renewable energy adoption. Poor Quality Earnings: Earnings are clearly part of the P/E ratio calculation.

However, this warrants further exploration, as earnings may be temporarily inflated, giving a misrepresentation of the company's true health. Even a company with an already low P/E that appears to have growth based on the latest earnings, and may look attractive, is worth additional checks. One-time events, accounting changes, or other non-recurring factors may all contribute, at least superficially, to earnings that may be indicative of growth potential.

For example, a company’s earnings may be inflated by a one-time sale of intellectual property or an asset. As this may be reflected more obviously in trailing rather than forward P/E, at a minimum, this should be a starting point for any assessment, but it does reinforce the need to view other broader fundamental analysis metrics. High Debt Levels: High debt levels, appearing to support a company’s ability to operate currently, may restrict future flexibility, the ability to service such debt should interest rates or consumer spending landscapes change, and ultimately jeopardize stability.

Even in a company with a comparatively low P/E and relatively good performance currently, the level of debt should be part of your decision-making process when considering stock positions for the long term. Examples of such could be a real estate company highly leveraged during rising interest rate periods or a consumer discretionary retail chain carrying excessive debt in an economic downturn. Lack of Growth Potential: There may be a situation where a low P/E reflects a decrease in price due to the market's perception of limited opportunities for a company to expand its market share, innovate, or increase revenue due to various internal and external factors.

The level of competition and innovation within a specific sector is a key potential factor in this, with a comparison to industry peers helping the investor to identify discrepancies or unique attributes that may suggest that a low P/E ratio is merited and unlikely to improve in the foreseeable future. Examples of this may include a mature telecom company with limited growth in a saturated market or a software company hindered by strong competition and a lack of innovation. Poor Management or Governance: Poor management can manifest in several ways, with varying degrees of potential damage to the company going forward, resulting in a company’s low P/E ratio reflecting trouble rather than value.

Weak leadership or governance may lead to inefficiency, apparent indecision, or strategic mistakes. This can include decisions leading to legal or regulatory issues that may threaten the company's well-being or result in substantial financial penalties. Warning signs could include: A company with frequent CEO changes, indicating instability.

A corporation's history of failed acquisitions, showing poor decision-making. A car manufacturer recalling models due to dangerous design faults. A pharmaceutical company involved in lawsuits over questionable marketing.

Conclusion: Understanding the warning signs when considering a stock with a low P/E ratio involves an in-depth analysis of various aspects, including earnings quality, financial leverage, growth prospects, product relevance, leadership quality, among many others not included in this article. We have focused on what we consider to be the top 5, and we trust this proves to be a useful starting point. Being adept in interpreting these signs is a vital skill that can help traders mitigate risks and make more informed decisions.

The Non-Farm Payrolls (NFP) is one of the most significant economic events data release of the month and is released on the first Friday by the U.S. Department of Labor. It is a comprehensive snapshot of the current state of US employment, and encompasses the total number of paid employees in the U.S. economy, excluding agricultural, government, private household, and nonprofit organization workers.

Both the numbers that form the report and data trends are of particular interest to central banks, (particularly of course the US Federal reserve), economists, market participants and policy makers, as well as having global interest due to the US position as a leader in the global economy. Key points of the NFP Data: Employment Change: The main figure in the NFP release is the alteration in the total non-farm payrolls compared to the previous month. This statistic indicates whether the U.S. economy is creating or losing jobs.

A positive number signifies job growth, while a negative value indicates job reduction. Unemployment Rate: The report includes the headline unemployment rate expressed as a percentage of the labour force actively seeking employment but unemployed. A lower unemployment rate usually is perceived as being positive for the economy.

Labor Force Participation Rate: This metric gauges the proportion of the working-age population either engaged in employment or actively seeking work. Fluctuations in this rate could signify shifts in people's willingness to partake in the labour market. Average Hourly Earnings: The NFP report includes insights into average hourly earnings, reflecting alterations in wage levels.

Escalating wages might signify robust consumer spending and potential inflationary pressures. Market Impact of NFP: The release of the Non-farm Payrolls data ranks among the most important economic events in the calendar, with often substantial implications in the financial markets across multiple asset classes. The market response to NFP release will be largely dependent on the consensus estimates of each of the numbers (with are theoretically priced into markets to some degree) against the actual numbers released, and how close this is to estimates.

A figure that is wide of the mark compared to expectations is likely to produce a more severe market response. Additionally of course, the current state of the economy may increase the significance and alter the response. For example, in an interest rate sensitive environment, where inflation may be higher than desired, a higher number, suggesting that employment markets are robust may give the green light to the Federal Reserve (the “fed”) to tighten rates, and so the market response will reflect that increased likelihood of Fed action.

Generally speaking, the impact and subsequent response will be felt across all asset classes including the following: Forex Market: Pairs involving the U.S. dollar (USD) frequently experience pronounced movements following the NFP data release. Solid job growth and a lower unemployment rate can bolster the USD, while subpar data might result in USD depreciation. Other risk-on currencies such as the AUD, CAD and NZD may fluctuate significantly dependent on whether the data is viewed positively or otherwise.

Stock Market: Favourable NFP data can elevate investor confidence in the economy's strength potentially leading to stock market optimism. Conversely, weaker than expected NFP figures might raise concerns about economic expansion, potentially triggering stock market selling. Obviously, the degree to which this will be the case may be dependent on the individual sector.

Bond Market: As previously discussed, strong job growth could raise anticipations of forthcoming interest rate hikes by the Federal Reserve to counter potential inflation, resulting in lower bond prices and higher yields. Conversely, weak job growth could provoke the opposite outcome. Commodity Market:.

A thriving job market might imply augmented consumer spending, potentially fostering demand for commodities such as copper and oil. Conversely, tepid job growth might be perceived as threatening commodity demand. Additionally, the inverse relationship between the USD and gold is likely to influence precious metals prices as the USD valuation alters.

However, it's essential to recognise that market response to data may often be unpredictable and so to try to pre-empt not only what the data may be, but also the market response to such, should be considered as high risk. Acknowledging that market reactions can be significant, it would seem prudent for traders (particularly those with a short-term approach) to have the date of future NFP releases in your diary, and take steps to account for the increased risks within your trading decision making. GO Markets offer regular LIVE sessions during key data releases from Australia and the US, where we observe the immediate market response as it happens across multiple related asset classes.

Check out our Education Hub for more information.

Quantitative trading, often referred to as quant trading, is a trading strategy that relies on the use of mathematical models, statistical analysis, and data-driven approaches to make trading decisions. Often associated with the creation of specific automated trading systems, terms Expert advisors (EAs) on MetaTrader platforms, it a perceived as a specialist branch of the trading world. This article offers a brief overview of quantitative trading and some of the key processes involved in employing this as a trading approach.

What is Quantitative Trading? In a nutshell, quantitative trading involves the systematic application of algorithms and quantitative techniques. These algorithms are designed to identify patterns, trends, and opportunities in financial markets by analysing historical and real-time data, ultimately providing the required information to execute trades.

Quantitative Trading Process: From Idea to Action There are several steps involved in the quantitative trading system process that must all be actioned prior to the implementation of any such strategy in live markets. Data Analysis: Quantitative traders analyse vast amounts of historical and real-time data, including price movements, trading volume, and other relevant financial metrics. They use this data to develop models and strategies that aim to predict future market movements.

Arguably, the increase in the development of machine learning and AI suggests that this approach may evolve further, although a detailed exploration of this is beyond the scope of this introductory article. Algorithm Development: Quantitative traders design algorithms based on the data analysis stage that implement their trading strategies. These algorithms are programmed to follow predefined rules for entering and exiting trades, managing risk, and making other trading-related decisions.

Strategy Testing: Before deploying their algorithms in real markets, quantitative traders extensively test their strategies using historical data. This process is twofold and involves back-testing, which helps traders evaluate how their strategies would have performed in past market conditions, and forward testing to ensure the validity of any back-test results. Risk Management: Risk management should be part of any strategy, and quantitative trading emphasizes strict risk management.

Traders set parameters to control the size of positions, the maximum acceptable loss per trade, strategies to reduce profit risk (i.e. giving too much back to the market from winning positions), and overall portfolio risk in specific and often adverse market conditions. These parameters help mitigate potential losses which of course is crucial in any trading approach. High-Frequency Trading (HFT): Some quantitative trading strategies are categorised as high-frequency trading.

This is where trades are executed at extremely fast speeds, often in milliseconds. HFT relies on technology infrastructure and low-latency connections to execute a large number of trades in a short time and despite concerns of this as an approach on market pricing seems to be subject to ever-increasing popularity as an approach worth consideration. Additional Potential Challenges Outside of risk management related to quant-driven trades themselves, there are four other critical considerations that must be taken into account and may contribute to the success or failure of a quantitative trading approach.

Data Quality and Consistency: Accurate and consistent data is crucial for quant trading. Discrepancies or errors in data can lead to faulty models and incorrect trading decisions. Overfitting (or Curve Fitting): Developing models that perform well in historical testing but fail to work in real-time trading is a common risk.

Overfitting occurs when models are overly complex and tailored to historical data noise rather than genuine market trends. Market Dynamics: Market conditions can change rapidly, and strategies that work in one type of market may not perform well in another. Adaptability is key to staying successful in different market environments.

Some quantitative models run all the time, riding out the fluctuations associated with different market conditions, while others may have "switches" that turn the model on or off based on specific criteria. Technology Infrastructure: Quantitative trading relies heavily on technology, including fast computers, low-latency connections, and robust trading platforms. Maintaining and updating this infrastructure is essential.

Summary Quantitative trading is frequently employed by institutions and professional traders who have access to advanced, specialist technology and data resources. It allows for systematic and disciplined trading while minimizing emotional biases. As technology develops, its prevalence is likely to increase.

However, it requires expertise in programming, data analysis, ongoing monitoring systems, and a deep understanding of financial markets to be successful.