It’s been over 2 years since the global economic crisis. The global economy seems to be gradually recovering. However, it is too early to consider a sustainable recovery. Even the US and Europe are still seeing multiple problems.
Not so long ago HY Markets, one of the world’s most reliable brokers, published their report for Q1 2012 to show what assets were popular with HY Market’s traders and investors in Q1 2012:
Following on from 2011
A snapshot of key events in 2011
Despite being over 2 years since the heart of the global financial crisis, the rippling effects can still be felt throughout Europe, the U.S. and other major economies.
Early 2011 was dominated by the sovereign debt crisis and the fate of the euro. Many speculated that before the end of the year there would be a euro break-up, or at least the euro would not continue in its current form as a union of 17 countries. It was even recently revealed that one of those anticipating some form or euro break-up was the Federal Treasury, with their outlook on the currency union being quoted as “highly uncertain”. Elsewhere inflation in the UK remained way above the Bank of England target rate of 2%, and China became the second-largest economy after surpassing Japan.
Natural disaster struck Japan in March when it was hit by an earthquake and tsunami. Havoc in the markets saw the nearly $500 billion wiped of equities listed on the Nikkei 225. Trading was so volatile that the Japanese yen surged to a post- World-War-2 high against the U.S. dollar, on expectations that Japanese investors would need to cash-in foreign assets to cover the cost of the crisis.
Greece and Spain were downgraded by credit rating agencies, and increased borrowing costs for weaker eurozone countries were of concern. Bond yields in Portugal and Italy were approaching dangerous levels of unsustainability. Larger more established economies also carried threat of downgrade; in particular the AAA credit ratings of Britain and the U.S. were brought into question. Uncertainty in the markets delighted gold bulls as gold exceeded $1,500 per troy ounce as investors sought safe-haven assets. Saving the euro remained the main themein mid-2011 as world leaders set about finding a solution to save the single currency.
Traders of the Swiss franc were surprised in August as the Swiss National Bank (SNB) intervened to counteract what they described as “a massive overvaluation” of the national currency. Interest rates were pegged at, or near, to 0%. In light of the Eurozone crisis investors had been turning to the Swiss franc as a safe haven asset; over the previous months the Swiss franc had jumped 18 percent against the euro, and 22 percent against the U.S. dollar. As can be seen below HY Markets traders traded the Swiss franc most heavily when the Swiss franc was subject to high volatility in March, due to the catastrophe in Japan, and August, when the SNB cut interest rates:
Figure 1: HY Client USDCHF distributed trading volume 2011
Moving forward to October, the euro was once again in trouble, with French president Sarkozy and German chancellor Merkel holding emergency talks, leading to the European financial stability facility being boosted to around $1 trillion. Hope was quickly quashed when in November Italy and Greece call for a referendum on the deal which saw both their respective bond yields above the critical 7% level. After much optimism for 2011, the year ends with the global economy still in the balance.
Figure 2: Top 5 Products for HY Clientsby traded vol. 2011
HY Client trading was dominated by major eurozone currencies and precious metals, making up four of the top 5. This reflects some traders’ willingness to speculate on the fate of Europe, whilst other more cautious investors turned to safe-haven assets.
The Picture So Far in 2012 – Q1
Themes following on from 2011
Underlying themes of 2011, namely the uncertainty over the future of Europe due to the sovereign debt crisis, and the continued hope of a U.S. recovery, still remain going into 2012. Many issues and faults in the economy were highlighted in 2011, but few have been successfully resolved.
The fate of the euro underpins stability in the global markets, and will continue to do so unless an effective solution can be found, something that wasn’t in 2011. The world will look to China and the U.S., the two largest global economies, to drive global growth. China however revised its growth forecast from 8% to 7.5%, dealing a major blow to other major economies.
Top 10 Traded Products In 2012
Figure 3: Top traded products in 2012, by volume, for HY Market traders.
The top three remain the same as 2011, which is to be expected as market conditions and underlying themes remain similar.
The Australian dollar moves into the top five, occupying fourth. The currency has been one of the strongest performers in 2011, but in 2012 it has already retreated nearly 500 ticks. Disappointing performance in Chinese equities could be attributed to its recent decline.
Select Product Performances in 2012
Euro vs. U.S. Dollar
President of the ECB, Mario Draghi, claims that there are signs of stabilization of economic activity at lower levels, and some data so far in 2012 would support that claim. The Euro has remained relatively stable against the dollar in early 2012, recording slight gains.
Markets breathed a sigh of relief in March after Greece secured sufficient backing for a debt swap deal which will avoid defaulting on its debt pile. Although it leaves Greece far from secure, it will allow the country to remain part of the euro for a little longer. But skeptics won’t rule out the prospect of an un-orderly default in 2012.
Figure 4: Euro vs. U.S. Dollar 2012
EURUSD is gaining increased interest with HY Markets traders in 2012; with the exception of a slight dip in December, there has been a 6 month upward-trend in the products favorability over alternative investments. In March, EURUSD volume alone has accounted for 63% of all traded volume by HY Markets traders. In 2012 it has recorded a price range of nearly 1000 ticks.
Figure 4: Euro vs. U.S. Dollar: Monthly trading volumes as a % of total traded volume of all products.
Spot Gold
Spot Gold has been one of the most volatile products in 2012, with a price range of around $270 per ounce. Gold approached highs of $1,800 on speculation that the U.S. Federal reserve would start another round of quantitative easing, although gains quickly evaporated when Ben Bernanke failed to even mention QE3 in his March speech. The sharp sell-off saw gold retreat over $100 per ounce.
The price of gold is still heavily linked to the perception of the global economy; continued uncertainty could keep gold volatile in 2012. Although the U.S. economy is showing signs of improvement, it remains delicately poised. A further slowdown in growth in China could have a rippling effect on the U.S. economy.
Figure 5: Spot Gold 2012
Interest in gold trading with HY Markets traders has remained relatively stable in 2012, with gold accounting for approximately 15% of all traded volume each month. Interest in trading silver has slightly declined compared to gold, but its price remains closely correlated to gold.
Figure 6: Spot Gold (Blue) and Spot Silver (Red) trading volumes as a % of total traded volume of all products
WTI Crude Oil
WTI crude oil struck a 9-month high in February on promising data from the U.S., leading to suggestions that it’s economic growth prospects could be improving.
The other big mover of oil prices has been related to on-going disputes with Iran over its controversial nuclear program.
Oil prices moved significantly higher in February on supply concerns when the EU imposed embargos on imports of Iranian oil. China, Japan and other Asian nations, who are all importers of Iranian oil, have moved to reduce imports as they seek a waiver from U.S. imposed sanctions. The U.S. energy department anticipates that the E.U. collectively accounted for 18 percent of all Iranian oil exports in 2011.
Figure 7: WTI Crude Oil Price 2012
HY Markets investors remained cautious in February when WTI crude showed its largest price swing, but interest in trading crude oil continues to rise in March as the price has stabilized. Traders instead favored euro trading in February.
Figure 7: WTI Crude Oil trading volumes as a % of total traded volume of all products
Market Leader, and HY Markets would appreciate if you could participate in a survey. Please, visit the Academy’s forum for traders and investors and answer the following question:
In your opinion, what assets allow traders to earn high profits in crisis?
