Market news & insights

Deal or No Deal Brexit negotiations have been ongoing for some months now, and even while officials state that ‘sufficient progress’ in the talks has been made, the public are still unaware of what the details of said progress are. This week Theresa May was in Brussels and it was expected that here a deal would be agreed upon, with key issues worked out before talks would then move to trade and transition. However, a deal was not settled, as the Democratic Unionist Party did not agree with the proposed deal after discovering it would prevent Northern Ireland from leaving the European Union on the same terms as the rest of the United Kingdom.

What happens next? As a deal was not agreed, time is running out before the European Council meeting, which is to be held on December 14 th -15 th. Theresa May will be hoping a deal can be made before the meeting and will be returning to Brussels at some point this week to push a deal through.

It looks like the main issue is the Irish border between Ireland and Northern Ireland; no one wants a hard border between the two nations, as it would undermine the 1998 peace accord that ended 30 years of violence in the region, making it vital a deal is agreed on the matter. If not, it will hard to see Brexit talks moving to the next phase. A transition deal should be made by October 2018; if not, the United Kingdom may crash out of the European Union without a deal – a disastrous scenario.

Financial Markets It was highly anticipated a deal would be agreed between the two sides this week and we saw the Pound leaping higher against the major currencies. However, as the news of a no deal broke out, we saw the Pound drop against the US Dollar and the Euro. However, the Pound is up at around 10% against the US Dollar since beginning of 2017 but further development will certainly influence the Cable.

GBPUSD: Source: GO Markets MT4 The Euro strengthened against the Pound when the news came out, which has caused more uncertainty around the matter. The Euro is up by around 21% against the Pound since January and we could see more gains for the Euro as the UK economy keeps outperforming in the coming months. EURGBP Source: GO Markets MT4 As the Pound fell, we saw the FTSE100 jump higher as a weak Pound boosts the earnings for London listed companies with international profits.

The Index is up 3% since the start of the year. FTSE100 Source: GO Markets MT4

It was only one month ago when oil was the most hated commodity in the market. Analysts were pessimistic and forecasts for oil with a $10 handle were circulating in the financial media. However, against all odds, oil suddenly managed to hold losses and surprisingly recovered by some 53% from a 12-year low in February.

Given this sudden and strong change of direction, the obvious question traders now face is whether the recovery is going to continue. To be able to answer this question, we should first discuss the chain of historical events that drove oil prices lower and then see if anything is changed. The Days Of High Oil Prices The price of oil has significantly increased over the past 18 years.

It first went from being $10 a barrel in 1998 to $145 in 2008. This equates to a 1350% return which is way above the 75% return in stocks (represented by S&P500) during the same period. Then during the Global Financial Crisis, it got sold off heavily and declined by approximately 78% before finding a bottom in late December 2008.

Then from 2009 to May 2011, thanks to a global recovery in asset markets and pick up in the global demand, oil outperformed stocks again and rose by 276% to grab everybody’s attention on Wall Street. At this point, oil was only 24% lower than its all-time highs in 2008. The Technology Behind Oil Production The prolonged high prices encouraged further investments and developments in production methods previously deemed uneconomical.

By 2013, not only these methods (namely Shale and Fracking ) were profitable but they also helped U.S producers to significantly boost their production capacity. Based on the chart below, oil production in the U.S jumped from an average of 6,200 barrels per day (b/d) in 2012 to an average of 7,400 b/d in 2013 and continued going higher until 2016. US oil production since 2000 A Race To The Bottom As Oil Price Slips In the meantime, in response to the threat of new oil supplies from the U.S and to push those competitors (who mainly had higher production costs) out of business, the Persian Gulf oil rich countries, led by Saudi Arabia, decided to pump as much oil as they could to push the oil prices lower and keep their market share.

The combination of the above factors flooded the markets with so much oil that the world’s total daily supply exceeded the demand by a considerable amount. In January 2016, the International Energy Agency (IEA) warned that the world could “drown in oil” and markets may be left with a surplus of 1.5 million barrels a day in the first half of 2016. Average Daily Oil Surplus per quarter since 2012 The imbalance between supply and demand created such pressure that not only the price of oil dropped against USD, but according to the chart below, it significantly dropped against other major currencies as well.

Oil vs. Major Currencies Red line: oil in USD, Blue line: oil in Yen, Green line: oil in Euro and the black line is oil in AUD The Price Reversal No trend can last forever in the financial markets. At some stage during the life of any trend, prevailing market drivers will be replaced by new drivers that not only stop the trend but they reverse it.

In the case of oil, extremely low prices seem to have finally started to push higher oil producers (e.g. Shale oil companies) out of business. In their most recent report, the IEA suddenly changed their tone and said they now estimate that production outside of the Organization of Petroleum Exporting Countries (including the US) will decline by 750,000 barrels a day due to lower oil prices.

Less production is exactly the force needed to stop and reverse the bearish trend. U.S dollar coming off from its highs in both February and March was another factor that helped oil. Traditionally, commodities are measured against the greenback, so any weakness in USD will naturally put upward pressure on them.

Oil (the red line) vs. U.S Dollar (the black line) How far can the oil rally go? To answer this question, let’s take a look at the chart showing oil‘s major historical swings since 1992.

Eye catching in this chart is GFC’s 78% downwards move followed by a 276% rise. Collectively, between 2013 highs to the February 2016 lows, oil dropped by some 75% which is almost similar in size to the down move seen during the GFC. Whilst the size of the current move is similar to the GFC, it doesn’t make much economical sense to compare the aftermath of the GFC with the current situation, and target another +276% price increase.

Post GFC, asset markets in general embarked on a massive price appreciation wave driven by trillions of dollars of stimulus packages across the world. We don’t have the luxury of those market aids these days. If you exclude the GFC and get an average of the size of the uptrends that immediately followed pullbacks of 35% or more since 1992, you will get an average recovery rate of 151% from the downtrend lows.

If you apply this recovery rate to the closing price of the February low, you would get a target price of $65.16 which is only $3 shy of 50% Fibonacci retracement line drawn between 2013 high and the February low. Therefore, oil seems to have a fair bit to go. Daily WTI Crude Oil Closing prices Impact of Oil on Equities Usually higher oil prices equate to higher input costs that in turn lead to lower profit margins which is obviously not a good thing for the equity markets.

This time however, it is different and higher oil prices are actually supportive of the stock markets. The reason behind this is that during the crash days, investors got nervous about probable bankruptcies in the energy sector and their follow-on impact on the overall market. The energy sector is very capital intensive in nature and companies usually take on large amounts of debt to carry on their operations.

In the face of the sharp decline in oil and gas prices, these companies went under tremendous pressure to service their debts. Market noticed this pressure in mid-2015 and started pricing a wave of defaults amongst the energy sector. The fear of a potential credit crisis pushed up the correlation between stocks and oil to a degree that the pair started to move in lock steps from November 2015 up to now.

Higher oil price takes some pressure off the oil companies and helps markets restore confidence. Therefore, for now, higher oil is a good thing for equity investors. Stocks and Oil moving together since November 2015 Red line: oil, Black line: S&P500, Blue line: ASX 200 Impact of Oil on the Australian dollar Higher oil price can positively impact the Australian dollar on two fronts.

First, as discussed earlier, higher oil can restore confidence back to the markets and can create a risk on environment. Given that the Aussie dollar is mainly accounted as a risk on asset, higher oil can be supportive of the AUD (please refer to our last month’s article for a detailed explanation of risk on/off status). Second, being a commodity driven currency, the Australian dollar has a direct relationship with commodities, including oil.

The chart below shows AUD and oil. As you can see, the pair is highly correlated. Further up moves in oil can take Aussie higher.

AUD (black line) vs. oil (the redline) The Headwinds As discussed throughout this article, at the moment, the main driving force behind oil prices is coming from the supply side. Any new piece of information that explicitly or implicitly implies a production cut (increase) will immediately benefit (hit) oil significantly. Since Iran’s sanctions were lifted in late 2015, it has been desperately trying to increase daily production by 1 million barrels a day (b/d) to get back to pre-sanction levels of 4 million b/d.

So far, Iran’s production increase has been slower than predicted. However, any future news on Iran’s success to increase production is likely to have severe price implications on oil. What are the trading opportunities on Crude Oil?

Taking a look at the Light Crude Oil contract on a weekly chart, it is amazing to see the journey it has taken since mid-2014. The initial drop in the first 34 weeks saw an incredible 57% of the value wiped off the contract, dropping from around $107 to $45. It goes without saying, the trend is down but the recent price action on the weekly chart has seen the price pop its head above the longer term moving average.

In this case, we are using a 26 period moving average on the weekly chart. The key thing to note on the weekly chart is the successive lower highs and lower lows, and despite the impressive rebound over the last 6 weeks, Crude has been unable to break old highs. So right now, the weekly chart is well and truly showing overbought in the midst of a very strong downtrend.

We can also see 2 lines of support/resistance around the $40 level and the $45 mark. As we write this, Crude has broken above the first level of resistance and looks like a continuation in place to target the $45 level. We are seeing some distributive selling over the last 2 weeks, as nervous longs take profits off the back of this nice rally.

On the daily chart (shown below) we can see some previous highs getting broken and the lows rising as well. This is a positive sign in the short term, but all traders should keep aware of the bigger picture and identify the potential trading opportunities accordingly. Generally speaking, we look for two key factors, which are time and price.

Right now we have had a lot of price movement in a short space of time. Crude has the potential to consolidate at current levels whilst time catches up. It would not be unusual to see price hover around the $40-$42.50 mark for a few weeks before this next major move is underway.

Having said that, we are talking about one of the most volatile and active contracts of 2015-2016, so predictions are considerably challenging at best. You will notice the stochastics indicator showing overbought on the daily chart as well but the chart continues to hit higher highs. In addition, we are starting to see some bearish divergence as price heads higher but the stochastics slowly trends lower.

Divergence is usually one of the most powerful signals in the market, so short term traders will be well advised to keep an eye on how that plays out. What are the prospects for the AUDUSD? The Aussie dollar has been one of the surprise packets in early 2016 as it tracked lower at an alarming rate, with an impressive push lower right on the New Year period.

In all fairness, it seemed like all the global markets were crashing then as well, but fortunately our Aussie battler managed to find some support and rally off those newly established lows. Given Australia’s ability to dig natural resources out of the ground and sell them internationally, it comes as no surprise to see the AUD rising this quickly when we consider how strong Iron Ore, Crude and Gold have been since the start of 2016. So the weekly chart shows the AUD breaking new recent highs, hitting higher highs and successive higher lows.

In the short to medium term this bodes well. If we take a look at the support and resistance lines, you can see resistance is pressuring the AUD around the 0.7600 mark with plenty of distributive selling happening over the last 2 weeks, much like we saw in the price of Crude. This resistance extends back to early 2015 and again in mid-2015, so there is plenty of reason to keep a very close eye on current levels and tighten your trailing stops or wait for a pullback for potential long entries.

We also notice the stochastics is showing overbought, but do note that in an uptrend, the stochastics will always show overbought as it is plotting where is today’s close in relation to the high and low over the last 10 periods. On the daily chart you can see clearly the resistance levels that the AUD has powered through, taken no prisoners for those who may have been short. It is likely the sheer volume of those short the AUD that had to cover (buy back the AUD), resulting in the rapid escalation to the 0.7600 level.

There is no doubt for those who played the emotions of the market during this time, that they would have been smiling and are likely to still be smiling. Poking its head above the 0.7600 mark has produced a bevy of interested profit takers, taking money off the table, following a hand 250+pip run in 10 trading days. Remember, we mentioned on the weekly notes above how many times this level formed support previously, only to be broken at the middle of last year.

In addition, we can see some bearish divergence on the daily chart with the stochastics trending lower from well overbought. Right now the short and medium term trend is up, so best not to fight with that. The longer term 100 period moving average has also started to trend higher, so traders will want to pay attention there as well.

Given the strong move in such a short space of time, it would not be a bad thing to see the market pull back and provide a potentially handy level of entry to the long side. Having said that, momentum is favouring the bulls, so bargain hunters may not get a chance at a lower price for entry. The opinions and information conveyed in the GO Markets newsletter are the views of the author and are not designed to constitute advice.

Trading Forex and CFD's, including Crude Oil trading, is high risk. Ramin Rouzabadi (CFA, CMT) | Trading Analyst Ramin is a broadly skilled investment analyst with over 13 years of domestic and international market experience in equities and derivatives. With his financial analysis (CFA) and market technician (CMT) background, Ramin is adept at identifying market opportunities and is experienced in developing statistically sound investment strategies.

Ramin is a co-founder of exantera.com which is a financial website dedicated to risk analysis and quantitative market updates.

As a serious trader, one of the key areas you must work on is to develop an awareness of the way the market affects your mind, and subsequently the decisions you make whilst in a trading situation. What are trading biases? People have inbuilt set of belief and value systems that develop over the years through learning and instruction from others and experiences.

Many of these developmental factors are outside the trading context but when the trader interacts with the market, these individual natural ways of thinking and feeling become part of decision-making. Some of these natural in-built responses may not serve you well and are termed ‘cognitive biases’. In many instances in the ‘heat of the action’ when in OPEN trades, these ‘cognitive biases’ take over from your written and planned ‘trading system’ and become the major influence on your market behaviour.

Results that you may produce from your trading can reinforce these in-built biases making them more acute, and so have and ever-increasing influence on what you may do when in the market, until finally they potentially end up destroying the capital and also confidence of the investor. There are several of these outlined in the “behavioural finance” research literature and we intend over a series of articles to look at the more commonly described of these. Loss aversion A loss aversion bias is arguably one of the more common trading cognitive biases.

The trader has an overt focus on avoiding taking a loss in a trade. Obviously, taking a loss, with of course risk management to limit any such loss to a tolerable level (often 2-4% of trading account size) is an accepted reality of trading practice. However, in those with a loss aversion bias, there are two potential behavioural responses when in an open trade that may be damaging to capital and ultimately sabotage the potential for on-going successful trading outcomes. 1.

Stop losses are often moved downwards in a long position (and upwards in a short position) from that originally planned on entry. This is an attempt to regain a losing position with the hope that a price may move back in your desired direction. There may be multiple such “moves” of that stop, each potentially inflicting more damage on capital way beyond any planned maximum risk level.

Commonly, there will be an internal dialogue to justify staying in a trade. 2. Conversely, so potentially acute is the fear of losing a profitable trade that such trades are often exited prematurely throwing out of the window any pre-planned profit target or trailing stop system articulated within your trading plan. The internal dialogue we have occasionally heard form traders is “you will never go broke taken a profit”.

So, in practice these two factors result in a reversal of the traditional market wisdom of ‘keeping your losses small and letting your profits run’, in that losses are extended, and profits are cut short. The basis of such a bias maybe be multi-fold, including: • Previous losses in investments, • Lack of education and confidence, • Over-confidence in your ability beyond competence with a view that a loss in a trade meaning you were “wrong” (an underlying feeling of “I am better than that”), • Pre-set beliefs about how the market SHOULD move i.e. trading what you think not what you see, • taking on the “trades of others” without due diligence and perhaps against your plan (e.g. in forums, trading rooms), • Incorrect position sizing with a small initial trading capital where the effect of trading fees is more acutely felt. And it can get worse… One of the MAJOR problems with a loss aversion bias is that it becomes cyclical in its severity, as results continue to fall short of what you had hoped.

This is not only with individual trades where losses may become more extended and even smaller than possible profits taken. Desperation may eventually set in, with an obsession to get trading capital back, whilst account value continues to diminish until the trade reaches a point of “no more pain” and leaves the market completely. This unfortunately has double impacts - not only has there been a loss of a trading capital now, but in many cases have been sufficiently painful that the individual may never again return to trading (so eliminating any potential for future positive investment experiences).

What you can do If this resonates with you, then the purpose of this article is fulfilled, as recognising and “owing” that there is something that needs to be addressed is the VITAL first step in making a change. Obviously, there are steps you can take to address this (and you MUST). Here are some suggestions: a.

You have a complete trading plan that articulates trading actions once in trades i.e. an exit strategy. b. Start a journal. Sometimes the very process of formally recording what you are doing helps in doing the right thing more consistently. c.

Press the “reset button” on your trading account. What we mean by this is an acceptance that your trading capital is what it is now. Rather than a mission to regain your initial capital this needs to be replaced by a drive to achieve consistently positive trading results (and including that taking a loss within your tolerable level is a positive outcome).

The long-term reality is that through changing this focus as described, addressing the bias through developing that consistency in action, you could give yourself the chance for some sustainable results. d. Re-align with your trading plan prior to every trading session. e. Make it a mission to “challenge” your existing plan on at least a 3-monthly basis through gathering an increased weight of evidence that its component parts are working for you as an individual trader.

This breeds confidence in actioning a plan, enabling more disciplined trading. f. There are a couple of ‘unhealthy’ statements that fly around the investment world which you need to check to not become part of your thinking. The first, “do not invest with money you can’t afford to lose” although is from a well-meaning perspective, arguably can contribute to a mindset which gives some sort of permission to lose.

The second and more dangerous from a capital perspective is “it is not a loss until you take it”. This is a massive distance away from what is recognised as good trading practice and is completely contradictory to the positive idea that you should take a loss as soon as it hits your tolerable dollar level. g. Take regular breaks from the market during any session, particularly when trading shorter timeframes, to re-align with purpose and plan. h.

Ensure that you are trading within your level of competence, have a personal trading development plan that outlines your learning for the next quarter. i. Trade smaller positions until you have evidence of developing good consistent habits that break away from your bias. There are a few different ways to action this, reducing your tolerable risk level significantly e.g. from 3% to 1% of trading account capital, or trading micro-lots rather than mini-lots are a couple of examples.

Finally, be gentle on yourself in terms of your development, biases by nature are usually deeply ingrained and will take some work to replace. Our education programmes inluding the popular Inner Circle group are there to help you move forward in your trading and our team is there to support 24 hours a day, 5 days a week.

City of London Feeling the Brexit Effect Not a day goes by without Brexit being mentioned and we can expect more of this to continue for some time, even after Britain leaves the European Union next year. With the International Monetary Fund (IMF) cutting its economic growth forecast for Britain for the coming years, are we also starting to see the impact of it on the City of London – the biggest financial centre in the world? Morgan McKinley has shown that the number of jobs available in December 2017 fell by around 52% month-to-month, a much bigger decline compared to the 30% drop seen over the same periods in 2015 and 2016. “In December, the city is abuzz with holiday parties, not hiring, so a drop is to be expected, but for it to be such a seismic drop is alarming” said Hakan Enver, the operations director for financial services for Morgan McKinley.

Year-on-year we have seen 37% fall in vacancies which is a completely different picture to when we look at figures in 2015 and 2016 when we saw a 16% increase in job openings. A recent survey by account firm Binder Dijker Otte (BDO) has shown that the United Kingdom has dropped out of the ranking for top six countries for potential migrants from the European Union. Paul Eagland, managing partner at BDO said the government must act to secure the UK’s access to talent: “UK businesses are already struggling with a skills shortage.

The impact of the EU referendum and uncertainty around a new trade deal is likely to make this worse.” “It’s absolutely imperative that the Government makes it clear to the world that the UK is still a great place to do business and that we continue to attract the world’s brightest and best to our country”. UK’s former immigration minister, Brandon Lewis, said that the issue of skilled worker visas was up by 38% but that is unlikely to make up the difference. Mr Enver said: “On the one hand, it’s great that the UK is still being considered an attractive destination from countries outside of the EU.” “However, on the other hand, there are signs that European employees are becoming less captivated by the draw of working in this country.” “2017 was the year we were told we’d have an exit strategy and a transition plan.

We have neither. “As new rounds of talks kick off, let’s hope 2018 brings the much-needed clarity and stability everyone’s waiting for.” A challenging time for the financial sector in Britain.

The US official trade deficit number with China is $375.2bn in 2017. But According to China Customs General Administration, this number should be $275.8bn. Notice there is a vast gap between the versions from two sides.

So, which version is closer to the facts? Firstly, let’s start this debate by looking at the US perspective. Previously in the 1990s and early 2000s, most of the imports from China were low-value, labor-intensive products such as toys, clothes, footwear, etc.

And even now, China are still producing these kinds of products. However, over the past decade, an increasing proportion of US imports from China are more technologically advanced products (US calls it ATP). From the table below, we can see that, among the top 5 categories of import products, three of them are ATP by the US’s definition.

According to the U.S. Census Bureau, U.S. imports of ATP from China in 2017 totaled $171.1 billion. Information and communications products (i.e., Phones and Pads) were by far the most significant U.S.

ATP import from China, accounting for 91% of U.S. ATP imports from China and 60% of U.S. global imports of this category (see table below). This would generally go against common sense, right?

Let me explain. As we all know, Apple is the largest company in the world to produce mobile phones and IPads, and the second largest is Samsung, which is a Korean company. Although Huawei is the third largest mobile phones producer, the US government entirely banned Huawei from entering the US market due to “national security” reasons.

So how did phones and pads become the largest category that the US imported from the Chinese? An explanation from China's point of view helps reveal this mystery. Firstly, there are two terms that we learned in Economics 101, Finished Product and Intermediate goods.

An intermediate good is a product used to produce a finished product. For example, in the case of producing an iPhone, Chinese factories contribute only 6% of the components (which is Assembly). All the other significant parts such as Hardware, Touchscreen& Glass, Battery, etc. these typically come from other countries such as South Korea and Japan.

If we take all those parts which come from Korea & Japan out of the US/China Trade Balance, the trade deficit will decrease one-third straight away. Below is a breakdown of the costs for various components of an average iPhone. Moreover, when an iPhone finished assembly and shipped and sold to US customers, it was Apple, a US company, who earned most of the profits, not Chinese assembly factories.

However, just because the assembly is the last step of the manufacturing process, and the phones did “shipped from China to the US,” the US government defined this as “imports from China.” Based on this knowledge, it appears the US might be deliberately twisting the terminology to fool the general public, helping to fuel the current dispute against China. There are hundreds more similar examples like this. These include iPhone, Dell who assembles their laptops in Shanghai, Boeing who assembles their planes in Tianjin, and most recently, Elon Musk who announced that he wants to open an assembly factory in Shanghai.

In conclusion, the US government seems to be exaggerating the trade deficit figures to help justify starting a trade war with China. This idea may sound like a conspiracy, but when you consider the many influential world powers throughout history who have leveraged their strength and resources to suppress their competitors, it makes more sense. Particularly those deemed to be in second place.

Think about the cold war between the US and Soviet Union; it just passed not too long ago. Lanson Chen GO Markets Analyst This article is written by a GO Markets Analyst and is based on their independent analysis. They remain fully responsible for the views expressed as well as any remaining error or omissions.

Trading Forex and Derivatives carries a high level of risk. Sources: USCITC DataWeb, US Census Bureau, Teardown.com

Central Bank Interest Rates By Klavs Valters A central bank's interest rate is a rate at which it typically lends money to local banks. This interest rate is charged by nations’ central or federal banks on loan advances to control the money supply in the economy and the banking sector. Each central bank has its own annual schedule when announcing its rates.

In the trading world, it's prudent to keep a tab on these announcements as it impacts market volatility if there is a sudden interest rate rise or fall. These rates also have an impact on everyday life, as they often determine what you pay for borrowing money, as well as what the bank will pay you for saving money. Recent Rate Hikes The most recent rate hike came from the US Federal Reserve back in March 2018, when it increased its rates from 1.5% to 1.75%.

Additionally, the Federal Reserve also signalled its intention to further raise this rate in the future. This has been the sixth time the US Federal Reserve has raised its interest rates since the 2008 financial crisis. Bank of Canada increased its key interest rates back in January by 0.25% to 1.25% while quoting a number of upbeat news stories, including an economy that is running flat-out, healthy job gains, and the lowest unemployment rate in over 40 years.

This has been Bank of Canada's third rate hike since the summer of 2017, and the first time the overnight rate has been above 1% since 2009. Current Bank Interest Rates Central Bank Interest Rate Announcement Timetable for 2018 To keep up to date with other news announcements, visit our ‘Economic Calendar’ section on our website - https://www.gomarkets.com/au/economic-calendar/