Hi thre! Now, this week's video is going to be slightly different than my recent
videos, and that we're going to be talking about the actual markets, the recent
moves that we've been seeing. I think it's important that you know why these
bigger moves in the global stock markets can be very good for us as Forex traders,
especially if you know what you're looking at. Now, before I
continue let me remind you to subscribe to the channel if you don't already do
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where I stream live absolutely free of charge discussing the trading
opportunities for the week ahead. Also, at this juncture, I want to say that
the views and opinions in this video are purely my own. They should not be
considered as investment advice. As always, please consult an investment
adviser before investing any money or any trading instruments that you are
unfamiliar with. Just the usual, disclaimer because today we're talking
about Markets.
So what caused this stock market sell-off? Well, like most things in
trading, it's easy to talk in hindsight but I guess, looking back the writing really
was on the wall: that a major correction was due. But as with trading, it's all
about timing. Always is! And, I'm going to be the first one to admit, I didn't pick
the top of the stock market there at 27,000 back at the beginning of October.
The reason why it dropped so rapidly so fast I think can be discussed from two
points. The first point I think is significant is what was happening to the
US bond market. Now, any of you that follow the economies of the world would
know that the US economy has been growing at a healthy pace more recently.
Up to almost 4%, but the problem that banks, Central Banks face when the
economy is growing so fast is that they have to control inflation. They've got to
keep a cap on inflation. That's what they're mandated to d, and in order to
control an inflation, to contain growth, they've got to move interest rates and
that's exactly what the Fed had been doing. Now, if the economy would grow and
and the Fed would going to contain interest rates then inflation could end
up out of control which is very very damaging. So,the Fed had been moving interest
rates as I've said. And they're also scheduled to move interest rates again
maybe for the rest of this year. One more time and possibly, three or four times
out into next year.Now, the US Treasury bond market was catching u. It was
reflecting these interest rate increases. Just before the global stock market fall
off, the US 10-year Treasury hit almost 3.25%. Now, the
two-year deposit rate was up at three percent. Now, when US got to this
level, I think there is a significant shift in the real money out of stocks
into the safer bonds. And it's no real surprise if after all you're able to get
a guaranteed 3% for tying your money up for just two short years.
It does become quite an attractive proposition certainly for
pensions and funds, and the like. So then there was a big selling of stocks and
the move into the Treasury market. Then you saw a drop of almost a thousand
points, I think, it was in one day and it got some investors nervous, saying all
their juicy gains that they've had over there, over the preceding months wiped
away. And it was bit painful and others then started thinking, okay, I don't want
to lose any more I want to lock in my profits now. And they started selling as
well. And the number two reason I think, or catalyst for the stock market drop
was likely to be, the trade tensions building up around the world with the US
and China fighting it out on a daily basis with tariffs and so forth. Now, this
has resulted in a real slowdown of the global economies in particular, the
Chinese economy which as you know, is the second biggest economy in the world.
Now, if China slows down generally affects commodity prices. They get
affected as well. A slow down in China could lead to a global slowdown and that's
obviously what the markets were thinking. And if the economies around the world
are slowing down, then it's time to move out of the stock market. And that is
exactly what was happening. So how does the Forex market get affected when you
see this shift in money out of stocks? Well, firstly let me say this it's all
about risk-on/risk-off. Stocks are considered more risky so they
are risk-on. Now, when does a move out of stocks that's a move to risk-off? Now,
risk-off generally sees the safe haven currencies such as the Japanese Yen and
the Swiss Franc benefit. There's a move into those currencies.So, why do these
currencies benefit in times of risk-off? Well, these are low yielding currencies.
Japan and Switzerland have negative interest rates so while you keep
your wealth in a currency that has a negative interest rates, it's better off
to buy global stocks. If you want to buy global stocks in a foreign country, you
first of course need to buy the currency of that country, and then for you be
selling the Yen and the Swiss franc against that other currency. Now, if the
reverse were to happen and stock starts going down, then the money is moved out
of those foreign currencies and repatriated back into the Japanese Yen
and the Swiss Franc- the low yielders. Remember, this is not an exact science.
Markets are living breathing entities and don't always
behave as they should, but this is a basic rule of thumb. So when stock
markets are growing and expanding, it usually means that the economies of
those particular countries are expanding, and if a country is expanding, that
basically means more factories are being built more plant is being made more
machinery is being built. So that generally means, the commodity prices
rise. When commodity prices are in demand, countries such as Australia which
produce iron and steel, New Zealand, Canada; these are known as the commodity
countries. These currencies should increase in value. Again, this is just a
basic rule of thumb. Now, you may have heard that expression in the past when
the USA sneezes, the whole world catches a cold. Well, it's pretty true! When the US
stock market drops, the whole world pays attention, and so it should. So basic rule
of thumb, if the US stock market global stock markets were to continue to fall,
you could see a drop in the commodity currencies like the Australian dollar,
the Canadian dollar, New Zealand dollar, and so forth.
You could see a rise in the safe haven currencies such as the Yen and the Swiss
Franc. Now, it does really open up some great opportunities for us in the Forex
markets which is why we're always looking at the global stock market as
well. With the use of controlled leverage, trading the Forex market can
turn your bad losses in stocks into a nice profitable gain somewhere else in
your portfolio. Look, I hope you found this useful; hope you found the video
interesting. Give me a thumbs up if you did, give me a thumbs down if you didn't.
Don't forget to leave a comment! I try to get back to as many as I can of course.
As I said, don't forget to subscribe to the channel if you haven't already done
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Facebook, I'll see you next Monday 2PM London time. 'till then happy trading
and goodbye!