Market news & insights

US Markets With relatively sound fundamentals driven by strong earnings growth so far in this earning season, US equity markets have continued their bullish trend. The S&P500 bounced back strong from its 100-day moving average in early July, and by going over the 2800 level, it seems to be on track to reach its all-time high of 2870, possibly even winning new grounds. Chart 1: US S&P 500 Whilst it is hard to make a case against the trend above, we also want to be ready for when markets descend into a (possibly overdue) correction phase.

UBS has recently released a note suggesting we are going to see some serious pain should the tariff war between U.S and China intensify. They also argue that the current rate of tariffs has minimal impact on the markets, but if the U.S takes it to the next level by putting a 10% tariff on US$200 billion worth of imports from China, then the S&P500 would most likely be hit by a 10% decline. They also predict that the S&P500 could drop by an additional 10 percent (a total of 20%) if the current situation between U.S and China escalates into a full-blown trade war.

On a macroeconomic level, we note that the difference between short term and long term interest rates is narrowing down rapidly. This phenomenon, also known as yield-flattening, is usually seen as a signal that long-term growth is potentially not as strong as short-term growth. When yield-flattening turns into yield-inversion (where short-term rates are higher than long-term rates) and is combined with increasing cost of borrowing for companies, higher inflation, and rising unemployment, it can be a serious sign of an upcoming recession.

Inflation expectations have somewhat stalled over the past few months, but as shown in the chart below they are on a clear strong upward trend. Chart 2: U.S five year break even (inflation expectation) US unemployment seems to be stable, but corporate borrowing costs are moving higher. Therefore, while traders enjoy the current calm they should also be on the watch for signs of risk.

This article primarily allows readers to understand better risk monitoring; by undertaking a historical analysis, we show some instruments’ sensitivity to volatility. Monitoring Risk: A common way to monitor market risk is to monitor volatility. In simple terms, you can think of volatility as the range of candlesticks in your candlestick chart.

In the more volatile periods, the candlestick ranges are larger, and in the less volatile periods, the candlestick ranges are smaller; as volatility is the magnitude of price swings whether upwards or downwards. Reading candlestick charts or price swings to determine the state of volatility is seen as backward looking. That means you would be only limited to past information to make an inference about the future state of the markets — This can be problematic for traders.

The Volatility Index measures the implied volatility as opposed to historical (or so called realized volatility). It is a forward-looking measure and roughly estimates how much volatility traders are incorporating into their pricing models. One of the reasons volatilities are so important to watch is that high volatilities will usually cause stock markets to fall rapidly.

With stocks falling fast, investors will switch to a risk-off mode, which in turn has a follow-on impact on all other markets including currencies, commodities, etc. To better see how the VIX affects other markets, we have selected 5 scenarios in Chart 3 where volatility has significantly jumped up over the past ten years. Chart 3: VIX over the past 10 years Table 1 shows the duration of each period and subsequent fall in the S&P500.

The last column in this table measures how fast the market has fallen over the volatility period. During the GFC, the market fell on average 0.15% per day for almost 367 trading days. Table1: Volatile Periods and their impact on S&P500 (measured close to close) Period Start Period end No of Days Change in S&P Average %Drop per business day Scenario 1 11/10/2007 6/03/2009 367.00 -56% -0.15% Scenario 2 26/04/2010 1/07/2010 49.00 -15% -0.31% Scenario 3 7/07/2011 4/10/2011 64.00 -17% -0.26% Scenario 4 19/08/2015 11/02/2016 127.00 -12% -0.09% Scenario 5 26/01/2018 9/02/2018 11.00 -9% -0.80% Source: Bloomberg Let’s explore how asset classes have performed during these scenarios.

Equity Indices: Watch the Nikkei We may have heard that correlations go to 1 during crises. This means that if a major risk event were to hit one corner of the world markets, others would be affected too. The table below shows that each time the S&P has sneezed (or gotten sick during the GFC) the rest of the world followed suit.

Table 2: Performance of major indices during crises (measured close to close) S&P 500 DAX 30 FTSE 100 ASX 200 Nikkei 225 Scenario 1 -56% -54% -47% -50% -59% Scenario 2 -15% -7% -16% -13% -18% Scenario 3 -17% -30% -18% -15% -16% Scenario 4 -12% -18% -14% -8% -22% Scenario 5 -9% -9% -7% -3% -10% Source: Bloomberg With the exception of Scenario 3, the Nikkei 225 has almost always dropped more than the U.S market. This means that traders would have received a bigger bang for their buck should they chose to short Japan 225 in risk-off environments. Interestingly, ASX 200 has been a better performer than S&P 500 in times of crises.

Precious Metals: Gold and Platinum We previously wrote about how Gold historically turns into a safe haven asset during crisis periods, as depicted in the table below. Unlike Gold, platinum does not hold up during these times, and in fact seems to have been instead highly correlated with stocks — an interesting fact for pair-traders. Table 3: Performance of Precious metals during crises (measured close to close) Gold Silver Platinum Scenario 1 26% -3% -24% Scenario 2 4% -3% -14% Scenario 3 6% -17% -15% Scenario 4 10% 3% -5% Scenario 5 -2% -6% -5% Source: Bloomberg Energy: A case for short-sellers?

During crises all energies can drop quite significantly. Specifically, let’s look at WTI, Brent, and Natural Gas. On average Oil tends to drop a bit more than Nat Gas, but the gap is not wide enough to make Oil a prime shorting candidate.

Table 4: Performance of energies during crises (measured close to close) Oil (Crude) Oil Brent Natural Gas Scenario 1 -45% -44% -43% Scenario 2 -13% -17% 14% Scenario 3 -23% -16% -12% Scenario 4 -36% -36% -27% Scenario 5 -10% -11% -26% Source: Bloomberg Currencies: Commodity currencies once more We have previously written about how USD, CHF and JPY become safe haven currencies during crises. Seeing the US Dollar Index and JPY going higher was not a surprise for us, but it is quite interesting to see the magnitude of AUDJPY’s drop, as it underperformed all other currencies in this analysis. The last row of Table 4 shows the average drop per currency.

The AUDJPY ‘s average decline is almost twice (or even more) that of others. Table 4: Performance of currencies during crises (measured close to close) USD index EURUSD AUDUSD JPYUSD GBPUSD CHFUSD AUDJPY AUDEUR CADUSD Scenario 1 13% -11% -29% 19% -31% 2% -40% -20% -24% Scenario 2 4% -6% -9% 7% -2% 1% -15% -3% -6% Scenario 3 6% -7% -11% 6% -3% -8% -16% -4% -9% Scenario 4 -1% 2% -3% 10% -8% -1% -12% -5% -6% Scenario 5 2% -1% -4% 0% -2% -1% -3% -2% -2% Average (including GFC) 5% -5% -11% 8% -9% -1% -17% -7% -9% Average (not including GFC) 3% -4% -8% 6% -5% -2% -13% -4% -6% Source: Bloomberg Given current markets conditions in the US, Europe, Asia and emerging economies, the smart trader would want to keep his finger on the pulse for any signs of changes in volatility. GO Markets Pty Ltd

Many traders consider trading daily timeframes but when used to trading the shorter timeframes, overnight holding costs of positions may not be something they have come across previously. This brief article has the aim of understanding why these trading costs exist and how they are calculated. But First…An important message about holding costs… Let us start by stating a little “reality check” perspective.

Holding costs, like “slippage” and Pip spreads are NOT ultimately the deciding factors as to whether you become a successful trader with sustainable positive results. Much is made of these, but the reality is there are other things which are far more impactful such as effective position sizing and appropriate and timely exits from trades. Nevertheless, for those of you that are treating trading seriously enough, indeed, let’s use the term “trading as a business”, as with all the above, holding costs should be considered in your trading.

So how does it work… To understand overnight holding costs it is worthwhile starting by looking at what you are doing when you trade a currency pair. If you are buying 0.5 EURUSD position for example, in practical terms you are ‘borrowing’ US dollars and buying euros with the proceeds. If this position is held “overnight”, (i.e. in practical terms this means at 4.59pm US EST), you pay interest on the US dollars you borrow, but earn interest on the euros you bought.

There is a long rate and a short rate which you can find on your MT4 platform (This obviously changes daily). Rates are set globally, and the actual dollar figure is dependent on the size of position you have. To find this on your platform: a.

Right click on your chosen currency pair in “Market Watch” b. In the drop-down menu choose “Specification”. This brings up a pop-up with details of the contract information relating to that specific currency pair. c.

Scroll down to find the long and short swap rates (the example shown is of EURUSD). This calculation creates either a debit or credit to your account per day (termed the swap rate) and is shown in the “swap” column in your trade window at the bottom of your screen. The calculation is as follows: Current long/short rate x number of lots = swap debit/credit in second currency For example, if we held long 5 mini-lots of EURUSD, the “swap long” shown is Long Swap rate of -12.88.

Therefore this looks like -12.88 x 0.5 (contracts) = -$6.44USD This is then converted into your account currency (so AUD if based in Australia) and shown accordingly as a debit. Likewise, If we held short 5 contract of EURUSD, then the calculation would be: 7.14 x 0.5 (contracts) = $3.57 This is then converted into your account currency) and shown accordingly as a credit. We trust that helps.

Of course, please get in touch with us if you need any more clarity on holding costs at any time. This article is written by an external Analyst and is based on his independent analysis. He remains fully responsible for the views expressed as well as any remaining error or omissions.

Trading Forex and Derivatives carries a high level of risk.

All eyes will be on the Jackson Hole in Wyoming this week, where the annual Jackson Hole Economic Symposium will be held by the Federal Reserve Bank of Kansas City. This years symposium will take place from 23rd until the 25th of August and the topic for the upcoming event will be “Changing Market Structure and Implications for Monetary Policy”. About Jackson Hole Economic Symposium The key feature of the meeting is the discussion that takes place between the participants.

Because of the high-profile participants and the topics that are discussed in the event, there is a considerable interest in the symposium, however, to help foster the open discussion that is critical to the event, the attendance is very limited. The event receives a large number of requests from media agencies worldwide, however, the press presence is also limited to a group that is selected to provide transparency to the symposium. Importance of the event The symposium is closely followed by financial markets participants around the world and over the past decade it has attracted more attention, this is mainly because what has happened in the past.

Some of the biggest monetary policies were initially revealed at the event, although they were not formally announced. During the event, any unexpected comment from any participants can influence the global financial markets. Here are some notable moments from the Jackson Hole Symposium: 2005 – Raghuram Rajan (then the professor at the University of Chicago and former governor of Reserve Bank of India) warned about risks that the financial system had absorbed throughout the years.

Three years later, the US subprime mortgage crisis erupted into the global financial crisis. 2012 – Michael Woodford (macroeconomist and monetary theorist, Columbia University) presented where he said that Fed’s stance on keeping its main interest rate near zero until a certain time would reflect pessimism about the speed of the economy’s recovery. Later that year, the Fed announced it would keep rates near zero until unemployment fell to 6.50% and inflation did not climb above 2.50%. 2014 – Mario Draghi (ECB president) hinted that the ECB was edging closer to embarking on its QE path. During the event, Mario Draghi said that ECB could use ‘all the available instruments’.

His announcement came just two months after ECB introduced negative deposit rates in the Eurozone, the financial markets rallied during his speech at the Jackson Hole. The symposium is a must watch financial market event and it is worth keeping an eye on the discussions and speeches during the event as we may see statements from some of the most influential people from around the world. This year, Federal Reserve Chairman Jerome Powell will headline the event in Jackson Hole with a speech about monetary policy in a changing economy, according to the Fed Board so it’s time to mark your calendars!

Klāvs Valters Market Analyst

People often ask me how they can get an edge over other traders in the currency market. My simple answer is this. Study financial market history and it will greatly enhance your profit opportunity because Forex markets will highly likely react the same way each time based on how they reacted last time.

Human beings are what drive all financial markets and as a whole the big money is reasonably predictable in what it will do. It will likely do the same is it did last time when a similar event occurred. Take for example the Yen, which has risen some 17% in 2016 as the BOJ has tried to lower its value by printing more money and putting interest rates into the negative.

Each time the BOJ announces more of the same (money printing & bond and stock buying) the forex market buys more Yen. This is one of the reasons why you have to be in this business for the long haul because the longer you are in the business the more you learn about the history of how the forex market behaves. The average trader often doesn’t want to do the time and they want the profits quickly without doing the forex trading apprenticeship that is required.

This does not mean sitting in front of a computer for hours a day it simply means reading for 15 or 20 minutes a day about why price is moving. The chart is NOT making the price move, the news is making the price move and the chart is simply a reflection of how traders have interpreted the news and bought up or sold off a currency. Join with me and become a detective of forex trading and you will highly likely enhance your profit making potential.

You can join me every Wednesday evening at 7pm AEST for a free one-hour live currency coaching session. Simply click on this link to join the session. http://gomarkets.webinato.com/room1 Andrew Barnett | Director / Senior Currency Analyst Andrew Barnett is a regular Sky News Money Channel Guest and one Australia’s most awarded and respected financial experts, and is regularly contacted by the Australian Media for the latest on what is happening with the Australian Dollar. Connect with Andrew: Email

Every day currency markets are being bought and sold by institutions and banks and large speculators based on economic news announcements that are released. But why do currencies react strongly to some news announcement and not to others? Let me explain.

Financial institutions, banks and large speculators often have access to a Bloomberg or Reuters terminal which allows them to receive the latest economic data announcements instantly upon release. Meaning they will see the economic data before the average mum and dad investor ever gets to see it on a website and react. Mum and dad investors usually have to wait for a journalist to type the news up on a computer and then publish it online which can take minutes.

Institutions, banks and large currency speculators pay thousands of dollars a month to gain access to the economic data from Bloomberg because they know they will likely be first to see it and they can instantly trade the Forex market and get in and out before the balance of the currency herd. Gaining access to the news instantly is one thing, knowing whether to buy or sell the news is another thing entirely. As a general rule banks, institutions and large speculators will place their forex trades based on their interpretation of what “was expected” vs “what really happened.” Let me give you can example.

Let's say that at 11.30am the latest GDP growth numbers for Australia are due for release. Bloomberg, CNBC and other major financial news networks will have surveyed their favourite top economists and asked them for their consensus on what they think the GDP number will be. Bloomberg will come up with an average of all the economists and publish an “expected” GDP number on its terminal.

Let's assume that number is 2.1% but when the data is released the number comes in at 1.8%. This would immediately be seen as “out of line with expectation” and this is when banks, institutions and large speculators often trade and can move the forex market very swiftly. If the news came out and the GDP number was 2.1% as “expected” then it would be unlikely the same traders would bother trading the news event.

Those same traders before an economic data number is released will also be looking at the history books and thinking back to what happened previously when the data was out of line with expectations last time for this news event and they will also have a very good idea about how their colleagues in other banks will likely trade if the data number is “out of line with expectations.” So in a nutshell, the forex market reacts to economic data releases or comments made by Central Bank officials if the news is “in line” or “out of line” with expectations. Andrew Barnett | Director / Senior Currency Analyst Andrew Barnett is a regular Sky News Money Channel Guest and one Australia’s most awarded and respected financial experts, and is regularly contacted by the Australian Media for the latest on what is happening with the Australian Dollar. Connect with Andrew: Email

On GFC’s 10-year anniversary, one cannot help but wonder about the current dispersion in the financial markets. Developed Markets (DM) equities are now divided between US and non-US, with the US outperforming every other major market. S&P is hovering around its all-time highs whereas DM are still well below their 2018 highs.

S&P 500 (White Line) Vs DM (Orange Line) In the Emerging Markets (EM) space, a problem that began with a select few countries managed to end the golden performance of 2016-17, creating an emerging market rout. Based on MSCI EM index, emerging markets were down by almost 21.5% from February highs to the mid-lows in September. MSCI EM Index In line with EM equities, the EM currencies have seen some significant moves.

Argentine Peso, Turkish Lira and Brazilian Real are all down by 49.97%, 39.62% and 18.29% respectively against the greenback (year-to-date) at the time this report was prepared. EM Worst Performers Commodities have been interesting too. Whilst a higher USD pushed commodities down in general, oil has remained relatively strong and is now trading close to a 3-year high.

Thompson Reutters Core Commodity Index (White line) Vs WTI Oil (Orange Line) Given the above mix, in this article we take a look at the levels and catalysts traders need to watch. US Equities: In the past few weeks, prominent market timing indicators called for a correction in the US markets. The first was issued in late August by Tom Demark, whose indicators and analysis are closely watched by the institutional traders, and the second, which was released a couple of weeks ago by Jason Goepfert from Sentiment Trader, in which he drew attention to the emergence of the so-called Hinderberg Omen pattern.

This pattern gauges indecision in the markets and is designed to predict a market correction within 40 days. The yellow dots in the chart below represents the occasions when this indicator has issued warnings. Hinderberg Omen on NY Composite Index For S&P to decline, there needs to be a catalyst.

In our view, this catalyst will likely have something to do with Trump and his trade tariff war. JP Morgan has recently undertaken an interesting exercise - they used the latest text mining algorithm to scan through 7000 earning transcripts and conference calls. The exercise concluded that companies are now more worried about the trade war and its impact on their bottom-line rather than that the usual suspects: tax cuts, macro headwinds., etc.

Therefore, we would be closely following the US-China trade war developments now that China has announced an additional set of tariffs on $60b worth of US imports. For the time being, the trade war doesn’t seem to have had much impact on S&P 500. However, since there is a confluence of technical warnings (both fundamental and technical), we would be looking at the 2860 area in the S&P daily chart (below).

Should this level be broken in the next 2-4 weeks, prospects for a correction can increase significantly. S&P 500 An interesting point in the chart above is the abnormally high volume on last Friday’s close, which happened to be a down day. Volume spikes at the peak of a trend are traditionally signs of inflection points.

Emerging Markets: Still a Concern Given that EM economies are often interdependent and share the same attributes, analysts did not see the EM developments in isolation and were quick to talk about a contagion risk when Turkey followed Argentina only three months later. Today, a problem that began with a select few countries has turned into an overall EM issue. The combination of a higher USD (driven by higher rates in the US) and issues such as the trade war, sanctions and domestic matters in EMs have created a vicious cycle.

On one hand, risk-averse investors are selling their emerging market assets due to economic downgrades, slower growth and trade war risks. On the other hand, by repatriating their investments back to the funding currencies (mainly USD), they force emerging market currencies to go lower, which in turn would intrigue more EM assets sales as investors fear their EM asset returns to be diminished by currency depreciation. Emerging Market Index (Orange Line) Vs US dollar index White Line) EM Short Term Rebound: Emerging markets, along with most risk assets, have recovered somewhat over the past couple of weeks.

However, we believe this recovery is mainly due to profit taking as opposed to a change of fundamentals. For the trend to reverse, we want to see the EM index to stabilise above 1100. MSCI EM Emerging Markets and Risk currencies The reason FX traders need to be aware of the EM developments is that the EM rout has a direct negative impact on high beta DM currencies such AUD and NZD.

This is shown in the chart below, where the orange line is the EM index, the blue line is AUDUSD and the red line is NZDUSD. Emerging Market index (Orange and AUDUSD (Yellow) and NZDUSD (Blue) Therefore, as long as the EM rout exists, one should expect further depreciation in the price of AUD and NZD against the USD, and other safe-haven currencies such as JPY and CHF. NZDCHF in particular looks very interesting, with a clear medium-term downward trend.

NZDCHF Commodities: While commodities in general will be heavily affected by USD, oil may remain the exception. Many analysts previously believed that cutting Iran out of the production line (as Trump’s deadline is approaching) would only have a minimal impact on the markets – this is because Iran’s relative oil production was deemed to be “just a drop in the ocean”, with Saudi Arabia and other oil-rich countries promising to pick up the shortfall immediately. However, we’ve now seen that these analyst estimations were only good on paper, where what actually is happening is far from theory.

The story went like this: Saudi Arabia announced to the world back in April that they could increase their output to 12.5 million barrels a day to fill in Iran’s gap. The reality is different: Saudi Arabia is presently only producing 10 million barrels a day. To get to the 12.5 million barrels mark, they’ll need to do a lot more drilling, and sooner rather than later.

Elsewhere in Russia, production has gone up by 250,000 barrels a day, but this won’t be enough to fill in the 2 million barrels a day gap which would be created when Trump’s sanctions on Iran becomes fully functional. Production in other OPEC countries hasn’t yet increased much either. Therefore, purely from a basic supply-demand point of view, risks seem to be on the upside rather than the downside.

From the technical point of view, oil is now in a strong and healthy bullish channel, which if it remains intact (a likely scenario), an $80 WTI won't be out of sight. WTI Crude