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Forex Trading- Goldman Sachs, The Carry Trade and UK Election

Mon, 19 Apr 2010 08:41:00 GMT

The Financial Fixed Odds update from David Evans, Market Analyst, BetOnMarkets.

The new trading week is only a few hours old, but we are already seeing some significant moves afoot.

Two major news items are responsible for this. The first is the news from Friday Goldman Sachs is being charged with fraud by the SEC with follow up analysis and speculation throughout the weekend from various sources.

Financial and forex markets are not just selling off because of the impact on Goldman, but because of the implications for the wider financial system. Investment Bank profits have bounced back recently and some would argue that this has been due to a return to the use of leverage by investment banks such as Goldman to increase profits (and exposure to losses).

The wider implication is that any investigations could mean greater than expected regulation of the derivatives market, which despite the credit crisis have largely escaped without a re-appraisal.

Impact on the Forex Markets?

Firstly, traders may simply be spooked away from taking ‘risks’ in currencies such as the Aussie and New Zealand dollar and switching back to the US dollar and Japanese yen.

Secondly, many traders have used the leverage that derivative trading affords to make over sized bets on the currency markets, especially on the carry trade which involves borrowing in yen to buy Australian dollars. Which can be good…until your carry trade unwinds and you have leveraged losses.

If risk taking and the leverage that investment banks help provide is curtailed, currency pairs such as the Australian Dollar – Yen and New Zealand Dollar – Yen could see some major volatility in coming months.

UK Election

The second major piece of weekend news is the latest UK general election polls which push the Liberal democrats into second place, throwing the outcome further into doubt and making a hung parliament even more likely.

Traders have been selling the pound in droves this morning as further analysis and polls were released over the weekend. With a hung parliament now more likely than not, traders fear that there will be too much in fighting and horse trading for a coalition government to sort out the UK’s fiscal deficit.

The Pound-Dollar spread is down 0.73% and the Pound – Yen spread down 0.81%. The pound is by far the stand out loser today, but the commodity currencies of the Canadian, Australian and New Zealand dollar are also falling back as oil price.

Investors are generally rotating out of risk with the US dollar and Japanese yen seen as the safer places to be right now.

The volcanic eruption appears to be having very little impact on financial markets so far.

Today’s only planned announcement of real note is Fed chairman Ben Bernanke speaking at 14.00.

This website content does not constitute investment advice. No individual contributor, contributing company, BetOnMarkets nor Online-Spread-Betting.com accept any responsibility for any use that may be made of the content.

Dax On Course For 6400

Thu, 15 Apr 2010 14:16:00 GMT

I hate to say this, but I think there’s a good chance that the Dax hits 6400 soon. To me the Dax has looked a reluctant participant in the recent global rally, to the extent that I’ve been running a small short bet for the past week. However, now I’m looking at taking a loss [...]

Midday Market Report 15 April

Thu, 15 Apr 2010 11:03:00 GMT

European equities opened higher on the back of strength in Asian equities after good economic figures from China and Japan as well as better than expected earnings from the likes of Roche and Danone in Europe. However, following persistent concerns over Greek fiscal situation, equities tumbled and moving into the North American open are trading [...]

Crude Oil Placed For Next Leg Higher

Wed, 14 Apr 2010 12:44:00 GMT

Brent Crude has eased back from last week’s high, but looks well placed for the next leg-up towards $90. Last week I wrote that a short bet in oil might be worthwhile but for me there were too many support lines to make the risk/reward pay off (Brent Crude Tops 86 Dollars). In the event the [...]

Greek Euphoria Fades And Alcoa Disappoints

Tue, 13 Apr 2010 13:48:00 GMT

Looking across markets this morning I am struggling to identify consistent themes. Perhaps a little disappointingly, equities have largely failed to kick on despite confirmation of the Greek aid package over the weekend. That said, US markets did close up small enough to see the Dow close just above 11,000 and the VIX has declined [...]

ICAP Resumes Upward Trend

Tue, 13 Apr 2010 08:19:00 GMT

ICAP shares have found a new lease of life and look set to break the 400p barrier. Back in March I closed out my ICAP long for a reasonable profit, my reason being that this was a trade, not an investment, and that the short-term move looked to have come to an end (Taking [...]

CFD Guide Update

Mon, 12 Apr 2010 14:30:00 GMT

After successfully updating spread betting section and bringing better experience to all our visitors we have decided to update the CFDs section as well.

Now our visitors can enjoy easy to navigations, easy-to-read and understand trading tutorials, have access to latest market news and strategies. Besides that, it is easier than ever to compare CFD brokers as we have added extra sections on what to look for from your CFD account and how to choose the account that will suit your trading needs.

It has never been easier to learn about investing and trading options in the UK and get the latest broker and trading news. The benefit of the recent developments is that you do not have to read the whole contracts for difference section but instead just jump to the section of your interest and complement your knowledge.

Double Bottom In EuroDollar

Mon, 12 Apr 2010 13:53:00 GMT

In the case of the Euro it was just as good arriving as travelling; this morning the Euro hit $1.3690 on confirmation of a Greek deal. None of the old “buy the rumour, sell the fact” business so far for the Euro. Thursday’s Hammer candle was followed by a 150-pip rise as rumours of [...]

Greek Bank Woes Hit Dax

Thu, 08 Apr 2010 09:10:00 GMT

The Dax has taken a real thumping this week, but remains in an uptrend-for now. At last a little boy (or a top man at PIMCO) has pointed out that the Greek Emperor isn’t wearing any clothes. Life isn’t all fine and dandy and now there’s market talk of a German bank pulling its repo [...]

Spreads Are Cut Again

Wed, 07 Apr 2010 23:03:00 GMT

Competition is financial spread betting is intensifying day by day and we hardly have to wait for a week before a new spread betting broker emerges or existing one cuts the spreads on popular markets.

It has hardly been a few month since Capital Spreads slashed their spreads on currency markets sending GBP/USD spread to just 2 pips and EUR/USD to the ultra tight spread of just 1 pip.

Just a few weeks back IG Index puts more pressure on Capital Spreads with introducing extremely tight spreads on major indices (rolling daily only) and setting DAX and FTSE100 at 1 point and Wall Street 30 to just 2 points.

Now CityIndex joins the party and goes even further by introducing historically low spreads on all major rolling daily indices including FTSE100, DAX30, CAC40 and most amazingly on Wall Street 30 to just 1 point.

In the end of the day spread bettors and day traders are set to benefit to the tough competition and it is great news for all of us. Bet they will attract even more novice traders who would be eager to benefit from such low commissions.

For the latest information and spreads refer to our spread betting comparison service and compare spread betting companies by overall rating, spread index and spreads for individual markets.

Gilts Fall After Poor Auction Result

Wed, 07 Apr 2010 15:30:00 GMT

Since I sold gilts just before the budget the price has fallen 160 tics. Is it time to buy them back? The day before the UK Budget I sold my long position in gilts (Two Markets To Watch For The UK Budget); this was for one of my ‘cautious ISAs’. I must say that in [...]

Stocks Drift Lower Ahead Of Bernanke Speech

Wed, 07 Apr 2010 13:39:00 GMT

Market sentiment has been weighed down overnight after a newswire report suggested that the Greek Government was looking to exclude the IMF from participation in a potential rescue package (a claim later denied by the Greek Prime Minister). This report has seen Greek 2-year bonds yields rise 1.2% and 10-year yields rise 0.44%. Despite that, [...]

The Dumbbell Strategy and How Stocks Fit into That

Sat, 03 Apr 2010 14:04:00 GMT

Talibi’s books “The Black Swan” and “Fooled by Randomness” argue, reasonably convincingly, that extreme events are under priced in the current market due to a lack of experience and the over reliance on mathematical models in trading.

To take advantage of this they advocate a “dumbbell strategy” which basically is that 80% of assets are kept in the safest types of stocks, blue chip corporate bonds or government gilts which slowly bear interest. The other 20% of assets should be kept in stocks that will pay out big when the market either goes into unexpected overdrive or goes catastrophically wrong.

The only problem for the smaller investor is that Talibi advocates the use of “out of the money” derivatives. These are options that either gives a right to buy a stock at a far higher price than the current market price or sell a stock at a far lower price. This can be difficult for a smaller investor as it can be rather expensive for a person with a small amount of capital and not amenable to the large amount of small bets that the strategy entails.

However spread bets and contracts for difference are very good for the small investor looking to implement this strategy. This can be done with a tiny amount of money which means that a large portfolio of positions can be built up that will be relatively inexpensive to close and that will pay out in a big way if the market goes ballistic, one way or the other.

Once again CFDs and spread betting fill in the gaps to enable a strategy for the smaller investor that was previously only the preserve of the big players.

The British Sovereign Debt Crisis Unfolds

Fri, 02 Apr 2010 08:01:00 GMT

The British government is deliberately ignoring the budget crisis that is unfolding before it, which is understandable as that is what governments do. However the market also seems to be ignoring this. What does this mean for spread betters and people who use contracts for difference?

The recent budget was a political masterpiece, and there are bound to be a few money raising and money saving ideas that are hidden in the fine print. However to really start reducing a deficit as large as Britain’s you need to bring in some drastic action in the open day. And that did not happen.

In Britain the market and everyone else assumes that this government is going to be replaced by their conservative opposition, and that the conservatives are just itching to get the whole thing in balance with tough measures and that they will have a convincing majority to do this. It all ignores the fact that the British public are convinced that budget cuts and tax rises do not need to affect them (whichever group they are in) and that the electoral system is rigged against the Conservatives.

A snap back to fiscal sense is still priced into the pound, government gilts, interest rates and the stock market. There’s money to be made (for full disclosure I’m short on the stock market – but I have lost a lot of money on this position so far, however nothing makes me see why it keeps going up and so I keep my short position).

We know from personal experience that debt when left to fester very rarely sorts itself out. We also know that government debt around the world is festering. So it is reasonable to guess that government debt will not sort itself out. Why is the market assuming that it is?

April Fool Rally In Stockmarkets

Thu, 01 Apr 2010 11:12:00 GMT

So was this morning just an April Fool’s rally or is the wall of worry getting easier to climb? Taking an Easter look at the FTSE I’ll be honest, I’m surprised. I’ve felt over the past few days that the UK was the most vulnerable to a sell-off and that the market had started to tip [...]

Book Review: Reminiscences of Stock Operator by Jesse Livermore

Thu, 01 Apr 2010 06:56:00 GMT

This book treats stock trading as an adventure, but it is also a good introduction to the mentality of stock trading.

This autobiography is set in the first half of the twentieth century and stars Jesse Livermore, who was a natural speculator. Jesse Livermore was very much larger than life, even though that is a metaphor that is far too overused generally. He was one of the most influential speculators of the early twentieth century who won and lost fortunes, and often did this on the margin.

Livermore just knew when a market would turn and won his fortune on backing these hunches. He lost his fortune when he did not back these hunches. One of his most famous moves was shorting shares in the company that operated many of California’s railroads – just before the San Francisco earthquake.

The book also offers an insight into the way that some of the less scrupulous “bucket shops” would operate. These were pure gambling operations that tried to look like stockbrokers. Their trick was to trade on an incredible margin (sometimes as little as 1%) and then call in the margin – or liquidate the position without giving any money back – when the stock dipped under 1%. No money ever went on to the stock market. They would also withhold ticker prices from the punters in the shop so that they would be able to deny winning bets.

Livermore could still make enough money off them that he was banned from their premises – which forced him on to the stock market.

There are plenty of lessons in how to follow your hunches with stock trading here and it is written in a very readable format. This book can be downloaded for free as well as bought off Amazon.

Brent Crude Hits 82.50 Dollars Ahead Of Data

Wed, 31 Mar 2010 13:44:00 GMT

Forget OPEC producers being happy with a $70-80 price range; darker forces are at work in pushing the price higher. The cosy $70-80 price range disappeared with the old decade. Now we’re seeing US Crude above $83 and our own Brent Crude now breaking above $82. As I write, the market has just hit a new [...]

The Power of Leveraging and Its Danger

Tue, 30 Mar 2010 13:55:00 GMT

Leverage has a bad name at the moment, and deservedly. Warren Buffet calls it “the only way a smart person can go broke” and is not too kind about the idea of people who aren’t smart using it, either. Leverage was also the way in which many sound businesses became suddenly poor as the downturn turned sharply against them.

Leverage is like a sharp cooking knife – incredibly effective when you are doing what you want to do but rather dangerous when you are being careless. Leverage can dramatically increase returns. If you were to put in £5,000 of your own money into an investment, and have £15,000 leant by the broker then you would be four times more exposed to price movements. So if your investment moved up by a respectable but not exciting 4%, your gain would be a far more impressive 16%. Obviously if the price went down by 4% the loss would be equally as impressive.

Contracts for difference allow for leverage in two ways. Firstly they can be bought or sold on a margin, like shares but unlike spread bets. This means that for a good customer a broker may extend a line of credit although this is not going to be available to all clients and for those clients that do get this extended they are vulnerable to “margin calls” when a holding goes below a certain amount and the broker insists on money being advanced to make up for the deficit on the borrowing.

Contracts for difference and spread bets have another way to bet on the price movements that imitates leverage, and that is to buy or sell at prices that are “out of the money”, that is that are quite a way above or below the price currently offered. These will be considerably cheaper than prices closer to the market price as many counterparties or betting exchanges will see this as a way of taking easy money.

A note of caution when using leverage, although it’s a powerful tool it should not be used for a core holding in a portfolio. If used for backing hunches but as a small part of any portfolio it can be a very good way to profit from stock market movements. If used to juice up a core holding it can make an investor very rich – or lead to the bankruptcy court.

Kazakhmys Poised For Upside Break

Tue, 30 Mar 2010 11:22:00 GMT

Yesterday Kazakhmys made a new 2010 high and now looks poised for a break to the upside. A long position in Kazakhmys has been a good bet since the hammer candle on the 22nd March, and after this morning’s results the price has rallied off the rising trendline support. January’s high of 1557p has [...]

New 2010 High For The Dax

Mon, 29 Mar 2010 13:05:00 GMT

Whilst the Dow and FTSE look a touch unsure about returning to their recent highs, the Dax continues to push ever higher. Last week’s forecast of the Dow reaching 11000 before April looked to be the kiss of death, although the market has since recovered and still looks capable of putting in 100 points over [...]

11000 On The Dow Before April?

Thu, 25 Mar 2010 16:19:00 GMT

Here’s a thought; the Dow hitting 11,000 before April? Ridiculous! Well, that’s what I’d have said a few days ago, but now it’s looking more tempting than Kylie in a swimsuit (OK, perhaps not). Check out the chart: Like the S&P, there’s a trendline to die for, and all the indicators are supportive. I’m happy to admit that [...]

Sovereign Debt Concerns Abate For Now

Thu, 25 Mar 2010 14:56:00 GMT

US stocks fell Wednesday, pulling benchmark indexes down from 18-month highs, on concern government deficits will hamper a global recovery as Fitch Ratings cut Portugal’s credit rating and a UBS economist Paul Donavan said Greece will default. Procter & Gamble and Chevron helped lead the Dow lower. The positive spin is that the S&P 500 did [...]

Dollar Breaks Y92

Thu, 25 Mar 2010 12:10:00 GMT

Yesterday’s Dollar strength helped the USDJPY break several key levels. I’m now looking for a pullback as an opportunity to go long. It’s pretty rare to see a 200-pip move in USDJPY, but we had one yesterday, and it gave the impetus to break through several key levels: - [...]

Book Review: Liar’s Poker by Michael Lewis

Thu, 25 Mar 2010 07:34:00 GMT

Liar’s Poker will not give you many good trading ideas. It will also give a rather out dated view of how the financial markets operate today as it misses out on the computer revolution in the market. However it is useful in setting the rather mad, borderline insane, scene that makes up for many professional financial market operations. And this in itself leads to a very important lesson.

Firstly this is a true story. Michael Lewis was an art history graduate who got a job on Wall Street. In itself this was unusual as the days of a bright graduate from a good university with a good generalist degree getting into Wall Street firms was declining. The age of the specialist was already starting in the 1980s. But what a time the 1980s were!

In the firm that Lewis was in (I won’t spoil this too much by naming the firm) another thing that was dying was the partnership ethos. This was still clinging with the avid loyalty shown by some of the old guard to their firm, one of whom was loyal because when he was a new employee a partner, without question, paid for his wife’s much needed medical expenses. But this was dying and a new breed of money conscious trader was emerging.

Lewis worked on the desk that dealt with mortgage securities. This is not the interesting part – although the idea that mortgage securities is a new thing should be put to rest. What is interesting is the testosterone soaked environment that the traders were playing in. This is the real eye opener of the book. Billions of dollars were governed very directly by greed and fear.

It is often lamented that the amateur investor cannot compete with the resources available to professional investors. This is true to an extent. Arbitrage opportunities will never be available with the growth of superfast computers.

What the small investor has that many professional investors lack is the most valuable commodity. Sanity.

Is Inflation Due to Come Back?

Wed, 24 Mar 2010 09:31:00 GMT

The Bank of England’s Monetary Policy Committee has raised the spectre of inflation. The question could be; what took it so long?

Inflation is already quite high. The Bank of England has breached their inflation limits already. It doesn’t feel like it because many people are losing jobs and those who aren’t, and who aren’t in the private sector, are either having to accept pay freezes or are even seeing pay cuts as firms rebuild their profitability. It doesn’t feel like inflation.

Inflation isn’t just a rise in prices (however poorly noticed) it is also a rise in the money supply. And this has gone through the roof. QE, or Quantitative Easing, may be coming to an end but it has led to a massive expansion in the amount of money on bank’s books. And where has this newly printed money gone? Mostly it has gone to the government bond market.

The money is tied up as firms and consumers don’t want to spend it (the government is a different matter). It is like denying that there is a lake behind the dam as there is only a trickle in front of it. The trickle is no evidence of the health of the dam itself.

Inflation only needs a spark, and if Labour gets re-elected (or the Conservatives don’t have a solid majority) there will be no political will to deal with inflation.

So what should an investor do if inflation is coming along? Here are a few modest suggestions:

Short currencies, particularly the pound

Short fixed interest securities, these are currencies by another name if inflation comes along

Go long on commodities, particularly gold (yes, gold)

Beware of property and shares, yes they should go up in inflation but they already have a large increase in revenue priced in

Speculators: You Are Doing God’s Work

Tue, 23 Mar 2010 06:28:00 GMT

The Financial Times have an opinion piece that is worth reading. Speculators are doing God’s Work. The God’s work is from the boss of Goldman Sachs, Lloyd Blankfein, who made a throwaway question to a journalist about the work of the bank, a quote that hit the front page and that he has regretted ever since.

Speculators are getting a bad press at the moment. How can people make more money by guessing future prices than by making useful things?

Some people would answer, does it matter? Money is, after all, being made. So I might as well make it. But other people are a bit more reflective and will wonder whether what they are doing actually has any social value. Even if they do make money they will feel guilty about it.

Well speculation fulfils a very basic need. There are people who either hold assets or will need assets in the future who put the wrong value on this asset. Perhaps they are a miner who’s making enough of a profit by selling coal (let’s be old fashioned) at the current market price. A speculator thinks that the price will rise and therefore offers to buy the good at a higher price. The miner therefore gets a higher price. On the other side a manufacturer may have underestimated future demand for their product and so totally underestimated the amount of coal they need. When they come to buy it everyone else is doing the same. In comes the speculator with their coal, which they will sell at a slightly lower price compared to the market.

As well as keeping a market fluid, speculators also allow for a more predictable economic future. The same miner can sell his future production to these speculators and therefore have a good idea of his future income, in the same way the factory owner can buy – often from the speculator – their future coal requirements. Hedging is made possible by the speculators, including those on the spread betting and contracts for difference markets.

There is no need to feel guilty about winning; speculation is doing the economy an almighty favour.

Taking My ICAP Money Off The Table

Mon, 22 Mar 2010 16:43:00 GMT

I cashed in my chips on ICAP today, not for any clever reason other than to avoid falling in love. I bought ICAP back in early February at 307p when the shares got slammed on a profit warning. After taking some early profits at 329p I allowed the balance to run, setting 380-400p as a good [...]