What is Forex trading and how can you start?

If you’re a newcomer to the world of forex trading, it might seem a bit intimidating. In this beginner’s guide, we run through the basics so you can start your FX trading journey.

Forex trading?

What is forex?

Forex, also shortened to FX, stands for foreign exchange. In practice, it’s the exchanging and trading of different currencies.

FX is the most popular trading activity in the world. Every day, $6 trillion – more than the GDP of the UK and France put together – exchanges hands.

A number of different types of traders are involved in the FX trader, including banks, companies, individual retail investors, and even governments.

There is no centralised exchange when it comes to Forex. It’s typically done over-the-counter. Essentially, anyone can get involved – but please only commit any capital if you are comfortable taking any losses.

In our case at Markets.com, we offer FX trading via contracts for difference (CFDs). With CFDs, you do not own the underlying asset. These are leveraged products. That means you gain exposure for a fraction of the total trade’s value. However, profit and loss is gauged by the total size of your position, not your deposit, and can far outweigh your initial deposit. Your risk of loss is higher.

What makes FX trading appealing?

There are lots of reasons why foreign exchange is so popular, such as:

  • Market size – roughly $6 trillion changes hands every day!
  • Variety – We offer over 60 different currency pairs to trade at Markets.com
  • Accessibility – Unlike stocks and other assets tied to exchanges, currency can be traded 24/7
  • Leverage – As mentioned above, currency pairing CFDs allow you to open a trade at a fraction of the trade’s total value

There is also a degree of flexibility with forex.

CFDs allow speculation on price movements in both directions. If you think the currency pairing is going to lose value, you will take a short position. If you think it will gain value, you’ll take a long position.

What are currency pairs?

Currency pairs are the financial instrument used in foreign exchange.

It is a quotation for two different currencies. It’s basically the amount you would pay in one currency for another.

Let’s look at an example.

The currency pair is GBP/USD at 1.15.

That means you could exchange 1 GBP for 1.15 USD.

If one of the paired currency’s value changes, then the currency pair’s value will change too.

For example, GBP/USD has started the day at 1.15. By the end of the day, it has risen to 1.16. That is because the strength of pound sterling has risen in value against the US dollar.

If the currency pair starts the day at 1.15, then drops to 1.13, for instance, that means the value of pound sterling has weakened against the US dollar.

At Markets.com, our currency trading offer is split into three categories: Majors, minors, and exotic.

Majors are some of the most popularly traded pairs on the market, coming from the largest global economies. They’re essentially the engines of global commerce and economics. Major currency pairs include:

  • GBP/USD – Pound sterling to US dollar
  • EUR/USD – Euro to US dollar
  • JPY/USD – Japanese yen to US dollar
  • USD/CHF – US dollar to Swiss franc
  • AUD/USD – Australian dollar to US dollar
  • NZD/USD – New Zealand dollar to US dollar
  • CAD/USD – Canadian dollar to US dollar

The minor pairings are still from important economies but do not include the US dollar. These are still popular trading assets. Take a look at some examples below:

  • AUD/CAD – Australian dollar to Canadian dollar
  • CAD/JPY – Canadian dollar to Japanese yen
  • EUR/GBP – Euro to pound sterling
  • USD/DKK – US dollar to Danish kroner

Exotic pairings are pairings featuring potentially more volatile currencies. In the past, such currencies may also have had unique or difficult conversion requirements. Many come from emerging economies.

  • CHF/PLN – Swiss franc to Polish zloty
  • EUR/RUB – Euro to Russian rouble
  • GBP/TYR – Pound sterling to Turkish lira
  • USD/ZAR – US dollar to South African rand

What factors affect the currency market?

Like any financial instrument, currency pairs are affected by numerous external factors. If you’re looking to enter the world of forex trading, be aware of the following:

  • Central bank policy & interest rates – It’s the job of central banks to essentially watch over all aspects of a nation’s monetary policy. That will give it oversight over many things that can affect currency prices. Interest rates are a key part of this. If a central bank increases its overnight rate, then currency traders looking to enjoy higher yields may end up buying more. This can make currency prices rise.
  • Economic releases – Big economic releases, such as monthly, quarterly, and annual GDP growth figures, manufacturing and services PMIs, employment figures, and inflation all have an influence on FX prices.
  • Politics – It goes without saying that political tussles can affect a currency pairing’s valuation. Think how the pound slid dramatically after the Brexit vote, or how the USD wobbled in the wake of the US/China trade war under the Trump administration.
  • Volatility – The above factors will have an impact on price volatility, which can then affect how traders trade. Some may prefer to trade on volatile currency pairs; others may wish to hold off until markets fall back to normal. Be aware that some currency pairings are more volatile than others.

Some currency trading tips for beginners

  • Research – Don’t commit any of your money until you’ve done your research. Study the markets. Take time to head over to our news and analysis section. You’ll find plenty of pieces on what’s moving markets and how major currency pairs are currently fairing. The old adage fail to prepare; prepare to fail runs true here. Make sure you’re informed before placing a trade.
  • Practice – A com demo account lets you practice trades with $10,000 in demo credit to play about with. That way you can get a feel for currency markets, familiarise yourself with our platform, and see how tools can help impact your trades, in a risk-free environment. You won’t be spending any money.
  • Tools – We have a suite of powerful trading tools designed to help you. From various different charts to sentiment indicators, and much more besides, these are all designed to give you a potential trading edge. Click here to learn more about our tools.
  • Know your limits – Only trade if you are comfortable taking losses. Don’t be afraid to cut your losses either if you feel you are losing too much. Do not overextend. At the same time, don’t be tempted to take all of your potential profit out the first time it appears. You can be confident – but only you will know your own limits.

Remember: trading is inherently risky. The value of your trades can down as well as going up. Bear this in mind if you decide to take the forex trading plunge.

Stocks firm, oil runs into technical problems

Morning Note

European stocks moved higher in early trade Tuesday after a sizeable down day in the previous session and a rather limp handover from Asia. The FTSE 100 recaptured 7,100, rising 0.5%, after slipping below this level yesterday, having closed down 0.9%. European indices continue to trip along recent ranges having set post-pandemic highs earlier this month as the market looks for more direction re inflation and bond yields. Everyone seems happy to buy the line that inflation will be transitory: the super-hot peaks we are getting right now will be, we knew that as base effects and pent-up demand played out; the question is what sort of new inflation regime persists beyond this summer. Once the inflation genie is out the bottle it is hard to put back in easily.

 

US markets are grinding higher along the path of least resistance but on lower vols and declining breadth. As bond yields remain in check and inflation expectations cool, big tech and other bond proxies are providing the heavy lifting for the indices. The S&P 500 inched to a new all-time high with just healthcare and utilities up and twice as many advancers as decliners. Energy was smoked, registering a decline of 3%, with Valero, Halliburton, Phillips 66, Occidental and Marathon all down 5%. Cruise operator stocks sank 6-7% as Carnival announced an additional stock sale of $500m, whilst Disney delayed a planned test voyage. Growth is beating value right now as the reflation trade unwinds: the Nasdaq rallied 1%, whilst the Dow fell 151pts as the likes of Chevron and Boeing pulled back. US 10yr yields are back under 1.5%, and this morning US stock futures are flat. After a pause, AMC rallied more than 7%. SoFi (Nasdaq: SOFI) is the most talked about stocks on Wallstreetbets, with WKHS, WISH, CLOV, BB, SPCE and GME also still garnering some of the most mentions. 

 

Among the big tech leaders making gains was Facebook, which rallied 4% to take its market capitalisation above $1tn for the first time as it saw off a monopoly legal threat. A judge rejected two antitrust lawsuits brought by the Federal Trade Commission and a coalition of 46 states. The news removed a significant headwind for the stock, though the FTC has a month to refile its complaint. It seems that the judge’s rejection of the case was based on the lack of evidence, or the way it was presented, which could be remedied with a new lawsuit.  

 

Elsewhere, in FX the dollar is mildly bid with GBPUSD testing the Jun 22th low around 1.3860 and EURUSD creeping back to 1.1910. Chart pattern looks a bit bearish and flaggy.

 

EURUSD price action chart.

Crude oil turned lower through the day after touching its best levels in almost three years. So far this market has been a buy-the-dip affair, and market fundamentals seem solid as supply remains tight, but we just need to be mindful from a technical perspective. Yesterday’s outside day bearish engulfing candle is one red flag, the bearish MACD crossover on the daily chart is another. Not necessarily the top but would call for a potential near-term pullback such as a ~10% correction as seen in Mar/Apr this year. Anyway, market fundamentals remain firm and OPEC+ has scope to increase in August – it would be about 1.5m bpd short of demand without any additional output from OPEC or Iranian oil coming back online.

Oil price movement chart.

Bitcoin – still holding under the 200-day SMA but the selling may be done now as bears tire and weak hands are out; there is a potential rip higher incoming.

Bitcoin price action chart.

ECB preview: no big changes ahead of Jun 10th meeting

Forex
  • No material changes expected 
  • More hawkish (EUR positive) more likely than more dovish 
  • Brighter economic outlook since March 

The European Central Bank (ECB) convenes on Thursday (Jun 10th) amid a much rosier economic outlook than at the start of the year. But with the central bank having communicated its plans to front-load asset purchases, there is not expected to be any material change in policy or communication. It will be hard to avoid taper talk so how the ECB responds to questions around tapering will be of central importance to the market’s expectations and the euro. 

At the March meeting the ECB said it would pick up the pace of asset purchases, front-loading the PEPP scheme, but that it could still use less than the full envelope of €1.85tn if favourable financial conditions can be maintained without spending it all. The outcome of the March meeting was very much that the PEPP programme is more likely to end by March 2022 than be extended, albeit policy will remain very accommodative well beyond that point.  

To taper? 

Yields have been pressing higher but have retreated from the May peaks. The increased pace of asset purchases that was agreed in March came as a response to rising yields at the time. But the economic outlook – chiefly driven by a strong vaccine rollout that was slow to start but is now firing on all cylinders – has improved greatly since then. The ECB has been taking the line that inflation is temporary and rising bond yields reflect better fundamentals, so I don’t think it will be unduly concerned by a higher rate environment now due to the better economic picture. This will make talk of a taper very difficult to ignore. The language around the speed of asset purchases may change somewhat, and this could drive EZ yields + EUR higher. It will be very interesting to see what the ECB says about the state of financing conditions and it is sure to continue to tie PEPP purchases to maintaining these as ‘favourable’.  

The big risk for EUR crosses around this meeting is: does the ECB silence taper talk with enough vigour to keep yields in check, or does it allow the market to think the more hawkish voices are winning the argument about when the central bank eventually exits emergency mode. 

New projections 

Inflation has picked up since the last meeting, which could see the forecast for 2021 and 2022 revised upwards from the March level. EZ inflation rose to 2% in May from 1.6% in April, the first time it’s been on target in over two years. With growth in Q1 a little light, the rebound in the summer should mean GDP projections remain broadly unchanged. 

What has the ECB been saying lately? 

ECB speakers have been offering a few titbits since the last meeting. Of particular importance to the speed at which the ECB will exit emergency mode, Christine Lagarde stressed that inflationary pressures will be temporary – sticking to the global central banker script. At the April meeting she said tapering talk was premature. 

Kazaks and Lane made it clear policymakers will look at the asset purchase programme again in June, which could involve scaling back the programme if the economic situation is better.  There were dovish comments from the Panetta in late May, noting that it was too early to taper bond purchases. Banque de France Governor, Villeroy de Galhau, stressed that the ECB is going to be at least as slow to tighten as the Federal Reserve. 

But we’ve also had warnings about financial stability risks stemming from rising levels of sovereign debt. Vice president de Guindos warned of a “legacy of higher debt and weaker balance sheets which … could prompt sharp market corrections and financial stress”. 

Technical outlook 

Right now, the price action has flipped above the 5-day moving average (RHS), so we look for a confirmation of this move (close above today and a green candle again tomorrow) for a bullish signal. On the LHS, the longer-term view of the daily MACD divergence is raising a warning flag. 

WeWork to go public via BowX SPAC

Equities

WeWork is to go public via a SPAC merger with BowX Acquisition Corp in a deal valuing the company at around $9bn. Shares in BowX (NASDAQ: rose 5% in pre-market trade to above the nominal $10 it listed at. The move will allow WeWork to trade a publicly-listed stock without the kind of scrutiny that kyboshed its abortive 2019 listing. The $9bn is substantially below the roughly $47bn discussed when it filed for its 2019 IPO.

The deal is funded by $483m in cash raised by BowX plus $800m in private investment from investors including Fidelity, BlackRock and Starwood Capital. The deal provides WeWork with about $1.3bn in capital “which will enable the company to fund its growth plans into the future”, it said. Upon completion, the company will have approximately $1.9 billion of cash on the balance sheet and total liquidity of $2.4 billion, including a $550 million senior secured notes facility to be provided by SoftBank Group.

As noted on Tuesday, WeWork announced losses of $3.2bn last year as it pitched for a SPAC listing and $1bn investment. This was a narrowing from $3.5bn burnt in 2019 because it slashed capex to the bone, cutting investment from $2.2bn to $49m. Occupancy fell to 47% from 72%, but the company expects to rebound to 90% next year, which seems optimistic. As does an expected doubling of revenues to $7bn by 2024. We looked at the leasing structure back in 2019 in some depth and it hard to see how WeWork will gain more customers as the effects of the pandemic seem set to linger. In particular, having had experience of the WeWork goldfish bowl cubicles, they are exactly the opposite of what workers will desire as they return to offices – more open plan please.

As noted on Tuesday: Investors who might have got swept up in a WeWork IPO in 2019 will be grateful the listing got pulled. Now they get another chance to get burnt by WeWork’s ambitions. SPACs mean it’s even easier to go public and I’m sure they will find some willing backers for this serviced office provider tech platform. The pandemic has radically transformed the services office landscape from 2019 but WeWork has also been forced to change for other reasons too and is more streamlined than the bloated entity it once was, but it remains overly optimistic both about its prospects and those of the market in which it operates. It’s just all too easy with a SPAC and only underlines the concerns about this craze and the misallocation of capital it is fostering.

Elsewhere, GME stock trades +6% in pre-market after yesterday’s 52% jump. Dow and S&P 500 futs suggest Wall Street will add to Thursday’s gains. European stocks are holding onto early gains and trade broadly positively. Eyes on US bank stocks after the Federal Reserve said Thursday they can accelerate dividend and buybacks after June 30th as long as they pass the latest round of stress tests. US 10s trade up at 1.675% post the 7-year auction yesterday.

In FX EURGBP is the one to watch as the pair takes a fresh look at the key 0.8540 support, with little in the way below this to block a move to an 82 handle.

Stocks wobble again, oil up, Musk tweet lifts Bitcoin

Morning Note

Stocks are looking a bit wobbly again this morning, whilst the US dollar is bid and the euro trades at a four-month low. European bourses are broadly lower as indices continue to retreat in the face of rising cases, a recovery that could be already priced in, doubts about the sustainability of monetary and fiscal support etc, etc. If you look at this we are just seeing a bit of a pullback from the recent highs (record highs for the DAX, US, Global), whilst the FTSE 100 is simply around the middle of its 4-month range. One year into the bull market – the S&P 500 had its best 12 months since the 1930s – US markets were lower yesterday as Treasury Secretary Janet Yellen said Biden’s $3tn economic would need to be paid for by tax rises. RobinHood has confidentially filed documents with the SEC in preparation to list, whilst GameStop shares fell after-hours following the company’s first earnings since the January frenzy.

Just as Britain’s excess death level falls below the 5-year average for the first time in months, the EU is set to announce fresh rules to allow it to control vaccine exports. Officials are playing down the importance of it, saying it’s nought but a scrap of paper to let governments take action if required, but it smacks of protectionism and is not going to down well in Britain. Meanwhile, after questions were raised by the US National Institute of Allergy and Infectious Diseases (NIAID), AstraZeneca said it will reissue vaccine data within 48 hours, saying that the numbers released Monday were based on a “pre-specified interim analysis” with a cut-off date in mid-February. The all-seeing Dr Fauci said the press release from AstraZeneca could be misleading. Another blow to confidence, another PR nightmare for Astra, which has been dogged by doubters ever since it released its preliminary results for the vaccine last year. It’s a lesson in how, no matter how good you are, you need to be good at communicating this to people or they just won’t believe it.

Suez crisis: Oil prices moved higher today after a massive container ship blocked the Suez Canal in both direction, which followed the sharp demand-driven fall on Tuesday amid doubts about the demand-led recovery from Europe this summer and another build in oil inventories. The API said crude oil stockpiles rose 2.9m barrels last week – EIA figures on tap later are expected to show a build of 1.4m barrels.

Bitcoin jumped above $56,300 from under $54,000 earlier this morning as Elon Musk shilled, I mean tweeted, about it again. It’s not a clear break and not that big a deal given how much Bitcoin moves around at these levels but there was a discernible sustained rally after Musk tweeted:

You can now buy a Tesla with Bitcoin.

Tesla is using only internal & open source software & operates Bitcoin nodes directly. Bitcoin paid to Tesla will be retained as Bitcoin, not converted to fiat currency.

Bitcoin rises after Elon Musk tweet.

European flash manufacturing and services PMIs show bullishness despite rising infection rates. I think this is interesting since although new restrictions in some of the major economies, businesses remain upbeat. The survey data was collected between March 12th and 23rd, so it is very much up to date. Whilst compilers IHS Markit note that the outlook as deteriorated amid rising infection rates, business activity is strong, particularly in manufacturing. (read DAX outperformance in the cyclical recovery). The flash Eurozone composite PMI rose to an 8-month high at 52.5, with a clear two-speed recovery evident with Services still in contraction territory at 48.8, albeit this was a 7-month high, whilst manufacturing hit a record high at 62.4.

Inflation, inflation, where art thou, inflation? Inflation in the UK fell last month as cars, clothes and games dragged the consumer prices index (CPI) lower. CPI rose by 0.4% in the 12 months to February 2021, down from 0.7% to January 2020. As with the recent US data, this is going to be the last easy print ahead of the spring as base effects and –fingers crossed – cyclical recovery boost inflation readings. The pandemic has skewed a lot of the usual seasonal data so we need to be careful about reading too much into any one print.

Everyone’s favourite stock, GameStop shares fell over 12% in after-hours trade as fourth quarter earnings missed on the top and bottom line. EPS came in at $1.34 on $2.12bn in revenues, both a little light. But e-commerce sales rose 175% – woohoo the next Amazon of gaming is here. Well not quite. There was not a whole lot of detail about the strategy, though it does seem they will raise capital by selling shares. This may have hit the stock after-market as it initially rose on the earnings release. Meanwhile many investors were left disappointed by a lack of a Q&A session. GameStop has been pretty tight-lipped through all of this frenzy, but you would have thought that this earnings call would have afforded management the opportunity to speak to investors openly. YTD gains remain solid at +864%.

On the tape today there are several Fed speakers, including Williams, Daly and Evans, as well as Jay Powell and Janet Yellen’s second day of testimony in Congress on the CARES Act. ECB chief Christine Lagarde is also due to speak. On the data front watch for the US flash manufacturing and services PMIs and durable goods orders.

Fedspeak

Powell and Yellen did their double act yesterday, delivering testimony to lawmakers about the economic response to the pandemic. It wasn’t quite Kris and Rita, but the way Treasury and Fed are in harmony is new. Full MMT? Not quite. Biden’ $3tn stimulus plans on top of the $1.9tn just launched – and all the stimulus last year – suggests the government just doesn’t care a heck of a lot about deficits. Except Yellen stressed that the $3tn economic plan would require tax hikes. Investors sat up, the Dow sold off in the afternoon after trading flat in the morning. What is unclear is the degree to which this could be debt-funded, and to what extent increasing taxes could amount to fiscal tightening (the idea is that it won’t as it will be targeted at those who exert the lowest marginal impact on spending, in other words, the rich). Powell said that the economic recovery from the pandemic had “progressed more quickly than generally expected and looks to be strengthening.” Yellen thinks the economy will be back to full employment next year.

Fed governor Lael Brainard said the central bank will show “resolute patience while the gap closes between current conditions and the maximum-employment and average inflation outcomes in the guidance” rather than taking “pre-emptive” action.

Dallas Fed president Robert Kaplan said he expects rates to back up further, but this would be a healthy signal and he would not want to get in the way. Kaplan also came out of the closet to say he was one of those on the FOMC calling for a rate hike in 2022 – hardly a surprise given he is one of the most hawkish members. Also worth noting he is not a voting member this year or next, so his hawkishness won’t have any real effect on Fed policy over the next 22 months. The Dallas Fed president also said: “the first step for withdrawing accommodation would be to reduce the Fed’s asset purchases,” which matches our expectations that the Fed will seek to taper its $120bn bond buying programme before it looks to think about thinking about raising rates. If the current market positioning is right, this would indicate that the Fed may need to start the tapering wheels in motion as early as its June meeting. Kaplan reiterated the Fed’s central stance that inflation will rise this year but not be sustained, and that it’s good to do a lot now rather than waiting. And he suggested than anything to distort the yield curve any more than the Fed is already doing by its massive bond buying programme would be less helpful – ie no Twist.

FX

No one can escape dollar strength right now. The Dollar index has popped above the recent swing high to its highest since November with the 200-day SMA firmly within the bulls’ sights at 92.6720, which should offer resistance near term at least.

The euro trades this morning at its weakest in 4 months after breaking down at the 200-day SMA at 1.1850.

The euro trades this morning at its weakest in 4 months.

GBPUSD has cracked key trend support and now bears will eye a squeeze back to the 100-day moving average a little above 1.36.

GBPUSD has cracked key trend support.

Mixed start for European equities, dollar retreats

Morning Note

A mixed start for European stock markets this morning with equities failing to struggling out of bed after yesterday’s session left indices in the red. The FTSE is really struggling to peel away from the 5,800 level, while the DAX either side of the flatline in early trade as investors try to make up their minds.

US stocks finished higher amid a choppy session on Wall Street. Ten out of 11 S&P 500 sectors rose as the broad market closed up 0.3% at 3,246 having tested the lows at 3.209, its weakest intra-day level since the end of July. When the selling at the open didn’t force further selling, there was an opportunity for dip buyers to come in. Nevertheless, the index is down 2.2% for the week still.

The Dow rose 0.2% but is –3% for the week. The Nasdaq also rose but is down –1% on the week and is on course for its fourth straight weekly decline, which would be the first such run of losses since August 2019. European markets are on course for 3-4% losses on the week.

Can stimulus and vaccine headlines prop up risk appetite?

Some positive headlines around a US stimulus deal and vaccine news may be supportive of risk today but sentiment is fragile, and it’s been a turbulent week – I think we need to see how it shakes out at the close for a better read on where the next move goes.

Whilst the market finished a tad higher yesterday, the S&P 500 keeps making new lows and sentiment seems to hinge around several downside risks. Right now, the up days are not as strong as the down days, which tells me momentum is with the bears for now. Any bounce we get needs to be seen in the context of a very sharp pullback on Monday and on Wednesday.

Until we clear last week’s levels – 3400 on SPX, around 3300 on Stoxx 50 and 6,000 on the FTSE, the bias looks to the downside for me.

UK facing jobs crunch despite new government scheme

For the UK, there is looming unemployment crisis, despite the government’s new jobs scheme. Whilst extending support for another 6 months, the chancellor’s plan will only help those in viable jobs – the crunch comes in November. Just how many are viable longer term? How many of the roughly 3m on furlough won’t have a job at Christmas?

Needless to say with all this support, UK public borrowing is soaring. This raises concerns about tax rises down the line to ‘pay for it’. But as previously discussed, deficits shouldn’t matter: rather than taxing the recovery and stifling it, the government ought to consider outright debt monetization, given the extraordinary circumstances we are in.

House Democrats prepare stimulus bill, Senate leader promises orderly transition after election

House Democrats are working on a $2.2 trillion coronavirus stimulus package – we’ve been before, so I wouldn’t assume it will pass. Indeed, House Republican leader Kevin McCarthy immediately dismissed the package, but we cannot rule it out entirely. Is this too much of a temptation for bulls?

Meanwhile, the nonsense worries about Trump refusing to leave the White House have thankfully been largely put to rest after Senate majority leader Mitch McConnell vowed there will be an orderly transition just as there has been after every election since 1792. However, I still believe the election will be contested and we are unlikely to know the final result on November 4th.

On the vaccine front, there more and more clinical trials happening. Sanofi says it is ready to produce 1bn doses of its vaccine with partner GSK from early next year. Dr Fauci sounded optimistic this week, telling Congress there is “growing optimism” there will be one or more safe and effective vaccines ready either by the end of 2020 or early 2021.

King dollar takes a breather, pressure off precious metals

The re-emergence of king dollar has been a big weight on stocks in the US – it’s no coincidence that the dollar reversed its slide at the start of September just as stocks rolled over. This in can turn can breed defensiveness in other regional equity markets.

The dollar index retreated from resistance around 94.60 – this is an important level with an upside breach calling for a return to 95. However, with the 14-day RSI rolling over this may be a time for a pullback and consolidation around the 94 region with a test of 93.70 on the cards.

With the dollar coming off its highs there has been some relief for precious metals. Both gold and silver seem to put in a near-term bottom after some nasty price action in recent days. Gold found support at $1,850 and rose to $1,870. Silver has rallied back above $23 after the $22 level held.

Sterling is finding bid with GBPUSD making solid progress towards 1.28 as the dollar comes off. Trend resistance above with the confluence of moving average and Fib support offering decent base.

Looking for clearance of 46 on the RSI for bullish signal. Look also at the bearish 21-day SMA crossover with the 50-day at the 1.30 pivot. The 38.2% retracement at 1.2690 is the major support after the 200-day EMA around 1.27650.

BoE quick take: negative rates on the table hit cable

Forex

Sterling dropped sharply along with gilt yields, with GBPUSD down one big figure to take a 1.28 handle and 2-year gilt yields dropping to -0.1% after the Bank of England delivered a dovish statement which included overt references to introducing negative rates.

It looks like Bailey is prepared to go big and fast if there is an unemployment crisis once the furlough scheme ends. For the time being he is keeping his powder dry.

Whilst the MPC kept rates on hold at 0.1% and the stock of asset purchases at £745bn, it looks like it is on the cusp of delivery further accommodation. The Bank ‘stands ready’ to do more, it said, adding that will not tighten monetary policy until there is ‘clear evidence’ of achieving its 2% inflation target in a sustainable way.

But it was the mention of negative rates that seems to led to sterling being offered.

Bank of England puts negative rates on the table

The bit that did the damage was included right at the bottom (underlines my own):

The Committee had discussed its policy toolkit, and the effectiveness of negative policy rates in particular, in the August Monetary Policy Report, in light of the decline in global equilibrium interest rates over a number of years. Subsequently, the MPC had been briefed on the Bank of England’s plans to explore how a negative Bank Rate could be implemented effectively, should the outlook for inflation and output warrant it at some point during this period of low equilibrium rates. The Bank of England and the Prudential Regulation Authority will begin structured engagement on the operational considerations in 2020 Q4.

It also set the stage for more QE, with the MPC noting that the Bank ‘stood ready to increase the pace of purchases to ensure the effective transmission of monetary policy’. With the current QE ammo due to run out by the end of the year, the Bank looks likely to expand the asset purchase programme by around £100bn in November.

We can now also start to worry about negative rates being implemented – a lot will depend on the unemployment rate as we head towards Dec with the furlough scheme ending.

On the economy, the Bank thinks the UK economy in Q3 will be 7% below Q4 2019 levels, which is not as bad as previously forecast. Inflation is forecast to remain below 1% until next year.

Chart: Cable breaches near-term trend but tries to find support at 1.29.

Looking to see whether this move reasserts the longer-term downtrend – lots depends on the Brexit chatter taking place in the background.

Nikola shares tumble (again)

Equities

Volume leaders today include Apple as normal, as well as Peloton after a blow-out earnings report – EPS of $0.27 almost treble the street consensus of $0.10 indicating the stay-at-home Covid trend is playing out well for the brand. A new cheaper version of its bike should help, too. Apple shares were flat, with Peloton up just +1%, well below its highs.

Hidenburg Research slams Nikola, shares tumble

Nikola shares fell about 15% on high volumes after the Hindenburg Research article. Whilst shares had fallen yesterday following publication, it seems investors have taken fright at the lack of any detailed refutation by Nikola.

A statement today from the company only said the allegations are not accurate and described the report as a ‘hit job’. If it is a hit job, it’s been a very well timed one with the stock having jumped only a couple of days prior on the tie-up with GM. But the lack of detail from the company so far has left investors unimpressed.

Without being able to comment on the details of the report, short attacks can and do happen, and more often than often there is rarely smoke without fire.

Equities move higher into the weekend

Elsewhere, the S&P 500 ticked higher after testing yesterday’s cash close at 3,339, with the 50-day line offering further support untested at 3,321.90. Yesterday’s tap on the 21-day SMA at 3,425 looks a long way off. Nasdaq also higher as risk is catching some bid into the weekend.

European equity markets are closing the day out with some decent weekly gains in the bag. Overall we have seen a real divergence between the US and Europe this week with equity markets this side of the pond doing better. Partly that is down to the rotation out of tech, but also we need to be aware of election risk that will play an increasing role in driving sentiment over the next month and a half.

Crude oil found some bid as the risk sentiment improved as the US session progressed.

Listening to the usual talking heads it seems there is more appetite for value after the three-day tech rout saw the penny drop for many that valuations had gotten out of hand. Let’s see how that goes with Ocado and Next on stage next week.

Brexit headline risk keeps pressure on GBPUSD

In FX, DXY ran out of gas at 93.38 as it tries to make another stab at the top of the descending wedge. GBPUSD tried three times to break below 1.2770 today but the level has just about held for now – sterling remains exposed to Brexit headline risks and bulls may be thin on the ground.

Post fix it looks pretty meek and liable to further downside into the weekend with UK-EU trade talks next week in focus. The current consolidation range looks pretty bearish and flaggy but we should always caution that sellers can get exhausted into the weekend just much as buyers can and there may be some profits being taken.

Pound at 6-week low, European stocks stabilise but risk sentiment fragile

Morning Note

Tech stocks bled heavily again for a third straight day as trading resumed on Wall Street following the Labor Day weekend. Tesla slumped a whopping 21% to notch its worst day ever. The other major tech giants also dropped heavily as the Nasdaq fell 4% and entered correction territory – down 10% from its recent peak.

Whilst this began as more of a technical correction within tech following the astonishing ramp in August than a broad risk-off move, it is nonetheless bleeding into the broader market and dragged down the majority of stocks. US benchmark yields have retreated and oil prices have rolled over.

SPX not far behind after Nasdaq enters correction territory

There was some rotation going on – Disney, Nike, McDonald’s, Ford and GM rose – but the S&P 500 still declined almost 3% and is not so far off correction territory itself. On the whole there is a sense that this selloff represents that sentiment has become too exuberant and needed to correct.

We may expect the US market now to chop in W-pattern over the coming months and follow the path taken by European equities since June with the loss of momentum in the economic recovery and US election risks likely to become more visible in equity markets.

Asian equities fell with the weak US handover. European stocks opened a little bit higher in early trade but risk sentiment appears very fragile. The FTSE 100 is enjoying the pound’s distress with heavyweight dollar-earners like BP, Shell, Unilever and British American Tobacco among the best risers.

In dollar terms the market is flat. The index got a confidence boost as Barclays raised their call on UK equities to ‘market-weight’ from ‘underweight’.

Increase in coronavirus cases weighs on recovery outlook

Nevertheless, investors are becoming worried again about rising Covid cases across many developed markets which threaten the trajectory of the recovery and may well weigh on demand in a number of sectors.

The evidence is evident in a couple of markets. Oil prices have rolled over with WTI dropping under $37 to hit its weakest since the middle of June. Another tell that this tech-led selloff is more than just a simple technical correction are bond yields.

US 10-year Treasury yields logged their biggest drop in a month, sliding from 0.72% Friday to 0.682%. Despite the move in yields gold prices remain resolutely stuck to the $1930 anchor having tested $1906 and the 50-day SMA yesterday.

There is also some negative headlines around work on a vaccine which may weigh on risk a touch, or at least provide algos with a sell signal. AstraZeneca shares fell after it was forced to pause clinical trials of its Covid-19 vaccine candidate after a participant in the study was taken ill.

Such are the problems with pinning hopes on a vaccine for a return to normal to be possible. The worry is that while we have all kind of assumed that one company will come up with vaccine later this year, it’s not going to be plain sailing.

Tesla tumbles after S&P 500 snub

Tesla shares got well and truly smoked after it was not added to the S&P 500, to some surprise. Tesla stock hadn’t traded below its 50 day average price since April 13 and closed the day at this level at $330 – this level needs to hold or we could see further declines for the stock.

The market was surprised by Tesla not being included in the index. At the time, we talked a lot about how possible inclusion in the S&P 500 was a big driver of the stock’s rally earlier in the year and therefore being snubbed will force some funds to rethink whether they need to hold such a high beta stock if it’s not part of the index.

Pound sinks on Brexit worries, strong dollar

In FX markets, sterling is finding the going very tough, sinking to a 6-week low with the dollar catching a bid and Brexit risks weighing. DXY has advanced to clear 93.50 and test the top of the descending wedge, while EURUSD dropped further under 1.18 ahead of the ECB meeting which might be a lot more dovish than the market thinks.

This is not a pure dollar move by any means – the pound was also at its weakest since the end of July against the euro, too. For cable this has meant the build-up of downside pressure has blown out the stops at 1.30 and GBPUSD is running south with not a lot of support until 1.28.

Brexit risks are a major factor – the UK government admitted it will break international law in order to fix the withdrawal agreement should there be no deal by October 15th. Talks continue today between the UK and the EU and there are clear headline risks as traders see a higher chance of no deal emerging.

However, we should caution that a deal will likely emerge at the last moment after considerable brinkmanship from both sides that makes it seem as though a deal is impossible. Nevertheless, with still 5 weeks to go before the deadline imposed by the British government, there may be a very rough ride ahead for the pound.

Chart: Stops are out as GBPUSD trades below 50-day SMA

Chart: Having pushed clear of the 21-day SMA the dollar tests top of the descending wedge, 50-day SMA above

Primark sales recovering, sterling eyes Brexit talks

Morning Note

Is there a better guide to the health of the high street than Primark? The cheap-as-chips clothing jumble sale is about as good a barometer as any for what’s happening, with Next going increasingly online and M&S not what it once was in clothing and more of a grocer than ever. Primark also doesn’t do online so we get an unmuddied view.

So, it’s good news that AB Foods reports Primark sales have bounced back strongly since reopening. Sales to the year-end since reopening are due to hit £2bn, but in the UK sales are still likely to be down 12% from last year on a like-for-like basis. Shopping centre and regional high street stores are trading broadly in line with last year.

Large destination city centre stores, which rely on tourism and commuters, have seen a significant decline in footfall. Exclude the big 4 city centre stores and the LFLs are only -5%. Perhaps there is life in the British high street after all? A lot of this will be pent-up demand, but Primark’s low-pricing model makes it very resistant to cyclical downtrends.

ABF shares rose 4% at the open before paring gains to trade around 2% higher.

European stocks move higher, US markets shut

Stocks in Europe were broadly higher on Monday after a pullback at the end of last week seemed to run out of steam. US markets are shut for Labor Day, which will keep volumes thin. The FTSE 100 notched its weakest close since May on Friday, a whisker under 5,800. Early trade on Monday took the index back to the 38.2% retracement at 5850 and we are looking for this level to hold for the market to build any upside momentum.

Tech shares led the worst two-day decline for US stocks in some time, but the bulls fought back late in the day on Friday. The S&P 500 closed down 0.8% at 3,426 but this was some 75 points above its lows. Futures show weakness though at 3,400 on our indicative cash market.

Vix futures (Sep) have come down sharply from the highs hit last week in the depths of the sell-off, but are holding the rising trendline and the October contract remains solidly in contango implying election risk remains a problem.

Is the European economic rebound losing steam?

On the data front, Chinese exports rose a healthy 9.5% in August as its trading partners reopened their economies and pent-up demand for goods fed into the figures. However, imports declined 2.1%, indicating softer domestic demand.

Meanwhile German industrial production rose in August but at a much slower pace than July. Output climbed by just 1.2%, short of the 4.7% expected and the +9.3% recorded in the prior months. There are clearly signs that the bounce back in the Eurozone is running out steam – lots for the European Central Bank to consider when it meets this week.

GBPUSD trades above 1.32 despite Brexit focus

Brexit talks also resume this week (The Week Ahead: Brexit talks resume, ECB frets over exchange rate contains a full preview). Of course, we remain a long way from getting a deal done – at least if the pessimism from Michel Barnier is to be believed.

A lot of the chatter and commentary is very downbeat. But this should be expected – the nature of the brinkmanship means a deal always seems further away than it may be in reality. News that the UK is drawing up legislation to override the withdrawal agreement’s requirements for new Northern Ireland customs arrangements is likely to set a fire under the EU.

To me this looks like the Johnson government’s brinkmanship designed to show they mean it when they say that no-deal is an option. Expect negative headlines to weigh on sterling; although this morning it’s put in a decent opening trade, with GBPUSD finding bid north of 1.32. However, the near term downtrend remains in force unless bulls can regain the rising trend line at 1.3250 and push clear of Friday’s swing high at 1.33190.

Crude prices continued to slide after Aramco said it would cut prices in October as the pandemic keeps a lid on demand. WTI (Oct) declined towards $38.56 before paring losses to hold the $39 handle after a letter on Saturday said Aramco would cut its US-bound crude by 50-70 cents, with pricing for Asia discounted by 90 cents to $1.50. Gold remains a very narrow range at $1930.

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