20 / 06 / 2018 | Market News

BoE likely to keep interest rates unchanged at June 2018 meeting

In a poor week of economic data releases, the Bank of England’s (BoE) governing board meeting scheduled for Thursday June 21st 2018 will attract the attention of investors and traders. The June 21st meeting will be the first of two BoE’s board meetings during the summer with the second one scheduled for August 2nd 2018. 

The BoE’s meeting is important because its results will indicate how the central bank’s policymakers perceive the condition of the United Kingdom’s (UK) economy. Right after the meeting, the BoE will publish its monetary policy summary and will announce whether it’s going to lift interest rates or keep them on hold. 

Monetary Policy Committee (MPC) to convene

The majority of economists polled by Reuters on June 19th 2018 suggested that the Monetary Policy Committee (MPC) will decide to keep the BoE’s benchmark interest rate unchanged at 0.5%. Some of them appeared doubtful that the BoE will consider raising its borrowing costs even in the August 2018 meeting because, as the report accompanying the poll, noted “inflation fell to 2.4% on an annualised basis in April 2018, which is a one-year low according to the Office For National Statistics (ONS), while the industrial and construction output data in the same month was strikingly weak.”

The BoE’s board decided to raise borrowing costs for the last time in November 2017. The board decided to lift the benchmark interest rate by 25 base points, reaching 0.50%. This was the first pick up on interest rates in the UK since 2007.

Economists debate over the timing of the next interest rate hike

 Analysts at BNP Paribas commented on June 18th 2018 that “the MPC will be wary of providing any firm guidance over the likely timing of the next hike as it won’t want to tie its hands.” Fabrice Montagne, one of the chief economists at Barclays bank, noted while speaking to Reuters’ reporters that “August 2018 would be too much of a gamble and we see the November 2018 BoE meeting as the next best opportunity for an interest rate hike, assuming data strengthens more than we expect, and that Brexit remains free of major disruption.”

James Smith, a Developed Markets Economists at ING (Internationale Nederlanden Groep), wrote in the bank’s latest report that the mixed UK economic data released during the last month may mean that the chances of a summer rate hike are still hanging in the balance. “Data since May 2018 has been pretty mixed and hasn’t given a clear steer on whether the economy is fully recovering, prompting markets to temper their expectations for the August 2018 meeting. However, with wage growth picking up, we still suspect policymakers would like to hike rates then if they can. Based purely on recent BoE commentary, we still feel an August hike is slightly more likely than not – but there’s a long way to go before the next meeting,” the ING’s economist noted.

The same Reuters poll, published on June 19th 2018, showed that economists forecast the UK’s economic growth to come in at 1.4% in 2018 with the figure being a bit higher than their previous forecast. They also anticipate that the UK’s inflation will hover around 2.5%, on a year-to-year basis, during 2018 and is expected to decline to 2.1% in 2019. 

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19 / 06 / 2018 | Market News

Fundamental Analysis 19.06.2018 – Market Outlook

With little data out, the market is focused on the growing “trade war” between the US and China. Shortly after the US Senate passed a bill with an amendment that would kill US President Donald Trump’s rescue of Chinese telecom firm ZTE, Donald Trump directed the US Trade Representative to identify $200bn of Chinese goods for additional 10% tariffs. Needless to say, China has threatened to retaliate with “comprehensive measures” if the US goes ahead with this plan. China-related stocks are down sharply this morning, e.g. the CSI 300 -2.85% and the Shenzhen Composite -4.35%. The S&P 500 held up fairly well yesterday (-0.2%) but the futures were trading -0.9% this morning.

Clearly it’s a risk-off environment. Against that background, it’s no surprise that the commodity currencies did badly and the “safe haven” JPY and CHF did well. AUD was particularly hard hit, for two reasons:  first off, it’s often traded as a more free-floating proxy for CNY, and secondly, Australia’s economy would be hardest hit by a slowdown in the Chinese economy. USD fell, as is to be expected in a trade war that’s likely to take an increasing toll on the US economy (see Mr. Bostic’s comments below).

So far the “trade war” has been confined to trade. The fear however is that it may spill over into the financial world. Specifically, China could start selling off some of its massive holdings of Treasury bonds. The country owns some $1.18tn of Treasuries, or 30% of all foreign official holdings of Treasuries, which is not to mention their holdings of agency bonds and others.




Of course to some degree it would be shooting themselves in the foot to sell these bonds aggressively, because once the market realized what was happening, bond prices would plunge. However, US mortgage rates would soar as a result, and China might feel the pain was worth it to make middle-class US voters sit up and take notice.




Would that be good or bad for the dollar? Oddly enough, it might be good for the dollar. As you can see, in general USD has risen and fallen along with US yields over the past several years.



We had some interesting Fedspeak yesterday, with two voting members presenting quite different assessments of the outlook.

Atlanta Federal Reserve System (Fed) President Raphael Bostic said, “I began the year with a decided upside tilt to my risk profile for growth, reflecting business optimism following the passage of tax reform. However, that optimism has almost completely faded, replaced by concerns about trade policy and tariffs. In contrast, incoming NY Fed President John Williams said, “Our economy’s in great shape; we’re in the second-longest expansion in history,and economic data from both the United States and countries around the world continue to trend upwards.” So a mixed view on the FOMC.

Today’s market

A relatively quiet schedule today.

In Europe, European Central Bank (ECB) President Draghi will be giving the opening speech at the ECB’s forum in Sintra, Portugal on Price and wage-setting in advanced economies. His speech is to last 30 minutes. Then, ECB Chief Economist Peter Praet will chair the first session, on Macroeconomics of price and wage setting. Participants include St. Louis Fed President James Bullard. They break for lunch at 13:30 local time and that’s it for the day.

The only major data out from the US today is housing starts and building permits. The market is looking for a 1.9% mom increase in starts, a rebound from the fall in the previous month, but a 1.0% mom decrease in permits. A fall in permits of that degree wouldn’t be particularly worrisome though as the upward trend seems to be still in place. This could be positive for USD.



Overnight, New Zealand announces its current account balance for Q1. It’s expected to be slightly in surplus. However, the 4-quarter calculation of the current account as a percent of GDP will show a slightly wider deficit, because the Q1 2017 surplus, which now falls out of the calculation, was a bit larger than the Q1.



Early in the European day Wednesday 20th of June 2018, Bank of France Governor and ECB Board Member Villeroy de Galhau will hold a press conference on the Annual Report of the Banque de France. According to Google Translate, he’ll talk about the economic situation of France and the Eurozone. We might get more insights into the ECB’s recent decision.

The Fundamental Analysis is provided by Marshall Gittler who is an external service provider of Claws and Horns (Cyprus) Limited, an independent analytical company. Any views and opinions expressed are explicitly those of the writer. Any information contained in the article, is believed to be reliable, and has not been verified by STO and is not guaranteed to be accurate. References to specific products, are for illustrative purposes only and are not a form of solicitation, recommendation or investment advice. Past performance is not a guarantee of future performance.
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19 / 06 / 2018 | Market News

What are cryptocurrencies?

The financial world has gone through radical changes in recent years because of the technological developments that have affected the way businesses come in contact with clients and the changes in the ways transactions are made. The Internet and the various mobile devices such as laptops and cell phones connected to it have enabled people to buy and sell products and services instantly across the world, expanding the range of targeted markets.

The financial crisis that hit the United States in 2008 and transmitted to the countries of the European Union in 2009-2010 had the consequence of changing the monetary strategies of several central banks, including the US Federal Reserve and the European Central Bank (ECB). The strategy changes resulted in fluctuations of currency values. Exchange rates changed with some currencies strengthening against others while investors and traders suffered losses. 

What are cryptocurrencies?

Some programmers thought that the financial crisis was an opportunity to find ways to bypass the monetary policies of central banks and the problems that they create to simple consumers. One of the most important ideas that came up was the invention of new currencies that wouldn’t be affected by any financial crisis or by any decision of a central bank’s governing board. 

The term “cryptocurrency” refers to a currency associated with the internet that uses cryptography, the process of converting legible information into a code, to track purchases and transfers. Cryptocurrencies are digital currencies that use cryptography – complex mathematics and computer science – to secure and verify transactions. They operate in a very different way to traditional (“fiat”) currencies, because they are not issued or backed by a central authority such as a government. Instead, cryptocurrencies are decentralised and run across a network of computers.

Cryptocurrencies make it easier to transfer funds between two parties in a transaction; these transfers are facilitated through the use of public and private keys for security purposes. These fund transfers are done with minimal processing fees, allowing users to avoid the steep fees charged by most banks and financial institutions for wire transfers.

However, because cryptocurrencies are virtual and do not have a central repository, a digital cryptocurrency balance can be wiped out by a computer crash if a backup copy of the holdings does not exist. Since prices are based on supply and demand, the rate at which a cryptocurrency can be exchanged for another currency can fluctuate widely.

Blockchain technology

A blockchain is a digitized, decentralized, public ledger of all cryptocurrency transactions. Steadily growing as ‘completed’ blocks, which represent the most recent transactions, are recorded and added to it in chronological order, it allows market participants to keep track of digital currency transactions without central recordkeeping.

In 2008, a person allegedly called Satoshi Nakamato designed distributed blockchain. It would contain a secure history of data exchanges, utilize a peer-to-peer network to time stamp in order to verify each transaction, and could be managed autonomously without a central authority. Blockchain technology became the base that Bitcoin, the most known cryptocurrency in the world, functions.

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18 / 06 / 2018 | Market News

Fundamental Analysis 18.06.2018 – Market Outlook

The trade war heated up on Friday 15th of June 2018, with the US slapping tariffs on $50bn in from China, and China quickly announcing reciprocal tariffs on $50bn of US imports, mostly agricultural products. You can see how the Bloomberg grains sub-index (comprised of corn, soybeans and wheat) has plunged 11% in just a few weeks since its recent high on 28 May 2018.



The relatively muted reaction in US stock markets (S&P 500 -0.10%, Russell 2000 -0.05%) shows though that the move was already anticipated and discounted by the US stock market, although Asian markets were hit harder today – Japan’s TOPIX and South Korea’s KOSPI were both down 1.2% at the time of writing, while China’s Shenzhen Composite was off 1.8%. Fears of a trade war or other disruption certainly didn’t boost precious metals, which fell as that market looked forward to higher US interest rates.

Oil collapsed nearly 5% as the trade war threatened global growth. As the graph shows, the price of oil (roughly) follows the volume of world trade, as world trade is an indication of world output and the health of the world economy. This Friday’s 22nd of June 2018 Organization of the Petroleum Exporting Countries (OPEC) meeting, which raises the possiblity of an increase in OPEC production just at a time when demand might be slowing, is also pressuring the oil price.



The tit-for-tat-tariffs plus the fall in oil hit the commodity currencies, particularly CAD as the currency plunged (along with MXN). US President Donald Trump’s willingness to get into a trade war with China suggests he might also be willing to dig in his heels with North American Free Trade Agreement (NAFTA). Things look bad for CAD until later this week. In the face of such uncertainty OPEC may decide to keep the output ceiling in place for now, while an expected acceleration in Canadian inflation (to be released Friday 22nd of June 2018) may also boost the currency.

USD weakened on the trade dispute, while EUR gained as a result. However, I expect EUR to come under pressure as Chancellor Angela Merkel faces dissent within her fragile coalition. It took several months for her to form a government in the first place. Now, Minister of the Interior Horst Seehofer, who is also the head of one of the coalition partners, is refusing to follow her instructions with regards to immigrants. Note that Seehofer said over the weekend that “nobody in the CSU” has an interest in ending the coalition or kicking Merkel out, so they will certainly try to find a solution. If nothing else, this means the problem of immigration will be one of the key issues to address at the 28-29 June 2018 EU summit.

Commitment of Traders

The market stopped cutting its overall USD shorts over the past week and instead increased those positions. In particular there was only a small fall in EUR longs, which are still at a relatively high (but not overextended) level. That may help to explain why the market dumped so aggressively on Thursday 14th of June 2018 following the European Central Banks (ECB) decision! Investors actually increased their long GBP positions and closed out some short CHF, CAD and AUD positions. On the other hand though they increased their DXY longs, which suggests that maybe some people are turning bullish USD but just don’t know what it’s likely to go up against.

Speculators increased their positions in both gold and silver.

WTI longs increased, which is interesting with the OPEC meeting coming up – perhaps the market doesn’t expect the group to agree to a hike in its production ceiling.



A quiet day ahead, insofar as scheduled events are concerned.

Nothing on the schedule for Europe.

In the US, the New York Federal Reserve System (Fed) is holding its annual conference on “Reforming Culture and Behavior in the Financial Services Industry: Progress, Challenges, and the Next Generation of Leaders.” According to the NY Fed’s website, “This event will build upon previous New York Fed conferences in 2014, 2015 and 2016 on reforming culture and behavior in the financial services industry. The program will focus on assessing progress to date; exploring ongoing and new challenges; and preparing the next generation of leaders to continue driving cultural reform.” Speakers include retiring NY Fed President William Dudley and his replacement, John Williams (previously San Francisco Fed President). They won’t speak for very long however. 

The National Association of Home Builders (NAHB) housing market index is expected to stay at the relatively high level of the previous month even though mortgage rates in the US have recently been at a 4 ½ -year high. For perspective, the recent high of 74, set back in December 2017, was the highest level since Aug. 1999. During the peak of the housing boom, 2004-05, the index averaged 68. So the current level of 70 in the face of rising mortgage rates is really good. This could be positive for USD.

 


Atlanta Fed President Raphael Bostic speaks on the economic and monetary policy outlook. He’ll be the first voting member of the FOMC to speak since last week’s decision to raise rates. Bostic is considered a neutral/middle-of-the-road kind of guy. It will be interesting to hear his take on the upgraded economic projections and the increase in rate expectations and to see how his views have changed, if at all, because that could indicate a shift in the center of the Committee’s thinking.

ECB President Mario Draghi will give some opening remarks at the ECB’s annual conference at Sintra, Portugal. This is one of the highlights of the week. The theme this year will be “Price and wage-setting in advanced economies.” This is a big issue for central banks. They’ve all been counting on an improving labor market to push wages higher, and for higher wages to push up prices, but it just isn’t happening like the textbooks say it should (although the Phillips curve, which relates the unemployment rate to the inflation rate, does seem alive and well in the US – see graph). The highlight of the forum will be the closing policy panel on Wednesday 20th of June 2018 featuring the heads of the ECB, Bank of Japan, US Federal Reserve and the Reserve Bank of Australia.

Last year, Draghi used the Sintra forum to signal a possible change in ECB policy when he said that renewed reflationary forces may provide room for “adjusting the parameters” of the ECB’s stimulus measures. His comments sparked a rally in EUR. This year however the focus is likely to be on the divergence in wage and inflation trends around the world, which may weaken EUR. 



Overnight, New Zealand holds its biweekly dairy auction. The relationship between dairy prices and NZD seems to have broken down somewhat recently, however.

The minutes of the Reserve Bank of Australia (RBA)'s June 2018 meeting are unlikely to hold any surprises. The Bank left both the cash rate and its broad policy assessment unchanged at the meeting, which suggests there wasn’t much new in the discussions.

The Fundamental Analysis is provided by Marshall Gittler who is an external service provider of Claws and Horns (Cyprus) Limited, an independent analytical company. Any views and opinions expressed are explicitly those of the writer. Any information contained in the article, is believed to be reliable, and has not been verified by STO and is not guaranteed to be accurate. References to specific products, are for illustrative purposes only and are not a form of solicitation, recommendation or investment advice. Past performance is not a guarantee of future performance.

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18 / 06 / 2018 | Market News

Digital currencies change the financial world

A currency refers to money in any form when in actual use or circulation as a medium of exchange, especially circulating banknotes and coins. Some suggest that a currency is a system of monetary units in common use. Various currencies are recognized stores of value and are traded between nations in foreign exchange markets, which determine the relative values of the different currencies. 

Currencies can be classified into two monetary systems: fiat money and commodity money, depending on what guarantees the value which could be the country’s economy itself or the government’s physical metal reserves. However, the technological developments in recent years brought forward a new currency concept called digital currency. 

Digital currency is a payment method which exists only in electronic form and is not tangible. Digital currency can be transferred between entities or users with the help of technology such as computers, smartphones and the internet. Although it is similar to physical currencies, digital money allows borderless transfer of ownership as well as immediate transactions. Digital currencies can be used to purchase goods and services but can also be restricted to certain online communities such as gaming or social networks.

Digital currency currently has a limited user base and the regulatory framework as well as tax treatments of digital currencies is still evolving. The infrastructure needed to support digital currency is still being determined and developed. Cryptocurrencies and virtual currencies are categories of digital currencies.

Virtual currency is a type of unregulated, digital money, which is issued and usually controlled by its developers and used and accepted among the members of a specific virtual community. The U.S. Commodity Futures Trading Commission has warned investors against schemes that use virtual currencies. In 2014, the European Banking Authority (EBA) defined virtual currency as "a digital representation of value that is neither issued by a central bank or a public authority, nor necessarily attached to a fiat currency, but is accepted by natural or legal persons as a means of payment and can be transferred, stored or traded electronically".

Virtual currencies have been called "closed" or "fictional currency" when they have no official connection to the real economy, for example, currencies in massively multiplayer online role-playing games. This type of currency has also been used for a long time in the form of customer incentive programs or loyalty programs.

Cryptocurrencies have become a global phenomenon known to most people. While they are still not understood by most people, banks, governments and many companies are aware of its importance. A cryptocurrency is any form of currency that only exists digitally, that usually has no central issuing or regulating authority but instead uses a decentralized system to record transactions and manage the issuance of new units. It also relies on cryptography to prevent fraudulent transactions.

Cryptocurrency is essentially a fiat currency. This means users must reach a consensus about cryptocurrency's value and use it as an exchange medium. However, because it is not tied to a particular country, its value is not controlled by a central bank. The cryptocurrency’s value is determined by market supply and demand, meaning that it behaves much like precious metals, like silver and gold.

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15 / 06 / 2018 | Market News

Fundamental Analysis 15.06.2018 – Market Outlook

The European Central Bank (ECB) announced the end of its quantitative easing (QE) bond purchases. They will continue buying €30bn a month until the end of September, after which they’ll reduce it to €15bn a month until end-December, then stop net purchases.

Note though that they hedged their bets by saying the end of the program was “subject to incoming data” that would confirm their outlook for inflation. Contrast this with the change in the FOMC’s comment Wednesday, when they removed the section saying that rate hikes were dependent on the economy performing as expected. Thus the ECB’s policy stance is still far more dovish than the Fed’s.

Furthermore, the ECB said it expects rates “to remain at their present levels at least through the summer of 2019” and in any case for as long as necessary to get inflation back on track. This statement shocked the markets as it was the first time that the ECB has committed to a rate policy for a specific period of time. (It did have a time-based commitment for its asset purchases). Up to now it has always refused to “pre-commit” to any action on rates and stressed that its commitments were data-dependent.

Moreover, ECB President Draghi said the Council didn’t even discuss when to start raising rates. So while they are ending their bond purchases, they seem in no rush to start raising rates any time soon. On the contrary, Draghi noted that “significant” stimulus is still needed to build up inflationary pressures. Thus the ECB will continue to reinvest maturing debt, in contrast to the Fed, which has for months now been reducing the size of its balance sheet. Furthermore, Draghi reiterated his usual statement that “the Governing Council stands ready to adjust all of its instruments as appropriate,” meaning it’s all still data-dependent and that they could even restart bond purchase if necessary, at least theoretically.



The news was a surprise to many investors –only 30% of respondents to a Bloomberg poll expected them to announce the end of the QE program at this meeting, while I would guess few if any people expected any forward guidance on rates yet.

While the announcement of an end to the QE program may have come earlier than many people expected, the pledge to keep rates unchanged “at least through the summer of 2019” means rates will stay low for longer than had been previously expected. It also means the risk on rates is only in one direction – it’s possible that the ECB tightens later than investors had thought, but it’s no longer possible to tighten earlier. Estimates of when the ECB would start hiking rates collapsed.



The market now sees a higher likelihood of a cut in rates by mid-2019 than a hike.



That hit the currency and EUR was lower on the news. USD by contrast soared as the monetary policy divergence theme came roaring back.

Just as the European day begins, the Bank of Japan finished its Monetary Policy Board meeting. They maintained their policy rate and bond yield at the existing levels and retained the ¥80tn annual bond-buying target even though they haven’t actually been hitting it recently. They are no doubt wary of even hinting that they might be withdrawing stimulus from the economy. They did accept reality and downgrade their assessment of inflation – they now see core CPI in a range of 0.5% to 1.0%, whereas previously it had just been 1.0%, although they still imagine that it’s likely to trend upwards towards the fabled 2%.

The contrast between the BoJ, the ECB and the Fed couldn’t be sharper. The Fed is approaching normal policy, the ECB is starting on the road to normalizing policy, and the BoJ is wary of even hinting that it might normalize policy. Thus it’ll be no surprise if JPY weakens vs USD and EUR over the longer term.

Elsewhere, CAD and the other commodity currencies slipped. I assume this is because Trump approved tariffs on about $50bn worth of Chinese goods, signaling that the global trade war is about to begin. You can see from the graph how USD/CAD has tracked the Shanghai stock market index recently.



Today’s market

Finally, after a busy busy week, we get a relatively calm day.

The highlights of the day may be two speeches by central bank officials.

The European day starts with a speech by ECB Executive Board member Benoit Coeure at a “Chief Investment Officer – Chief Financial Officer” conference.

Then later in the day, Dallas Fed President Robert Kaplan speaks at an event in Texas. While there won’t be a text of his speech, there will be a Q&A session with both the audience and media. This is likely to give us further insights into Wednesday’s 13th June FOMC meeting.

As for the indicators, Canada manufacturing sales are forecast to slow after two above-trend months. Nonetheless, the expected pace of growth is enough to raise the six-month moving average. That suggests the rising trend in sales is still intact, which should be positive for CAD.


The Empire State manufacturing survey kicks off the monthly Fed surveys for June. It’s expected to be down slightly but still at a relatively high level. In May, all five regional Fed surveys plus the Chicago national survey all rose, which is quite unusual. Some decline in these manufacturing sentiment indices was to be expected. A gradual decline shouldn’t be any big case for concern as long as they don’t collapse. On the contrary, sentiment remains firmly in expansionary territory, so it should be neutral to good for the dollar.




The US industrial production data for May will be released shortly afterwards. This is expected to show a marked slowdown after three months of fairly robust growth. The monthly employment figures showed that factory hours worked fell during the month, while manufacturing jobs gained were below the recent average. Also auto sales were weak in May, which means auto companies probably slowed production. This figure could be negative for USD.




Finally, the U of Michigan consumer sentiment survey is expected to show a small improvement in sentiment for June. With the stock market rising and the unemployment rate falling – the two major determinants of consumer sentiment – that seems entirely possible. The improvement, modest though it may be, should be positive for the dollar as it would suggest that the trade disputes that are roiling financial markets don’t necessarily bother the average individual.




The Fundamental Analysis is provided by Marshall Gittler who is an external service provider of Claws and Horns (Cyprus) Limited, an independent analytical company. Any views and opinions expressed are explicitly those of the writer. Any information contained in the article, is believed to be reliable, and has not been verified by STO and is not guaranteed to be accurate. References to specific products, are for illustrative purposes only and are not a form of solicitation, recommendation or investment advice. Past performance is not a guarantee of future performance.

 
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15 / 06 / 2018 | Market News

3 useful strategies for a long-term investment plan

Some people believe that investing is a difficult task. The reality is that investing requires certain skills that an investor should have in order to achieve his targets. Committing capital to an endeavor and expecting an additional income or profit to be obtained looks like an attractive concept for the majority of people but few actually do it.

Experienced investors suggest that one of the pillars of a good investment plan is the strategy to be applied. A strategy is a concept that each investor should consider before proceeding in committing his capital. It requires research, updated information and being flexible in order to be able to take advantage of the market’s volatility. Strategies are separated into two large segments, the short-term and the long-term ones. In this article, you will read about tactics that could be useful when implementing a long-term investment strategy.

Set up a cash flow management plan

Experienced investors suggest that setting a cash flow management plan is a major element of every investment plan. They believe that a consistent person should dedicate a part of his available capital each month to his investment plan. The idea is that the person becomes more disciplined and dedicated as time passes and the investment plan doesn’t run out of “fuel”. 

Have investments and cash reserves separated 

In order to make an investment people need a certain amount of cash or other capital. Some people try to invest using money coming from their monthly salary while others use income from sources such as inheritances, rents etc. Investors who are experienced and have seen the market upturns and downturns through the years insist that an investor should prefer to have a part of his capital in cash and the other part used in investments. In the past and in times of financial crisis, such as the one that hit the United States (US) and Europe in 2008-2009, many investors put themselves in difficult positions because of spending an excessive percentage of their income on investments. The danger of becoming unemployed or reductions on monthly incomes pushed them to sell their investments at low prices. Many experienced investors believe that one of the first priorities of people taking their first steps in the world of investments is to have an account with liquid funds that can be used, in case the financial conditions get worse.

Portfolio diversification

Reading stories about investments on the internet can be quite interesting but, sometimes, also frightening. Beginner investors will read about successful investment strategies that resulted in large profits but there are also stories about mistakes that led to loss of funds. One of the most common mistakes is to invest the whole capital in just one stock or other type of investment. In this case, if an economic downturn occurs, the investor becomes vulnerable as there is no back up plan to cover potential losses. 

Diversification is one of the best ways to increase the stability of investments and decrease the risk of losing money in the event that a single area decreases in value. Although diversification won't protect from general market slowdowns, it will likely maintain an investor’s portfolio stability over time.

STO and Investo

Our consolidated experience in portfolio management has helped us develop an investment strategy for STO clients called “Investo”. Our “Investo” strategy is suitable for individuals who seek long-term investment goals, who want to trade Forex and CFDs but lack the advanced knowledge of a professional portfolio manager or the necessary time to trade. Trading CFDs requires potential investors to have sufficient knowledge and experience to understand the nature and the risks involved in trading CFDs and the management of their portfolio of   leveraged derivative products. 

Trading Forex and CFDs (Contracts For Difference), which are leveraged products, are high risk investments and puts your capital at risk. You may sustain a loss of some or all of your invested capital. Only speculate with money you can afford to lose. 
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14 / 06 / 2018 | Market News

Fundamental Analysis 14.06.2018 – Market Outlook

The US Federal Open Market Committee (FOMC) raised rates, as was almost universally expected, and also just barely upped its forecast for this year to four rate hikes from three as one person changed their end-year forecast to 2.375% from 2.125%, which shifted the median up a notch. The Committee still sees three rate hikes in 2019 but now only one in 2020. The rate hiking cycle is forecast to end at the same level but just get there a bit faster. The longer-term forecast was also unchanged.



The change came as the members forecast that growth this year would be stronger, unemployment would be lower and inflation would be higher than they had thought in March 2018. Note that core Personal Consumption Expenditures (PCE) inflation is expected to be slightly above target for 2019 and 2020, in line with the statement’s stress on the “symmetric” inflation target (i.e., allowing for short-term overruns as well as periods of below-target inflation). 



 

The Committee expects that further gradual increases in the target range for the federal funds rate will be consistent with sustained expansion of economic activity, strong labor market conditions, and inflation near the Committee's symmetric 2 percent objective over the medium term.

This is quite a significant change. Previously, they had said that “The Committee expects that economic conditions will evolve in a manner that will warrant further gradual increases in the federal funds rate…” In other words, they had been saying that future rate hikes were dependent on the economy; now they’re saying that future rate hikes are coming, period. It shows much more conviction about the hiking cycle.

Still, there’s no sense that they are behind the curve or overly concerned about inflation. As Fed Chair Jerome Powell said that the press conference, “If we thought inflation would take off, we would be showing higher rates.” On the contrary, while the pace of rate hikes this year may accelerate, all told they are still targeting the same end-point. Jerome Powell said the Federal Reserve System (Fed) was continuing to discuss the metrics it will look at to determine when it has reached a “neutral rate” for the fed funds, that is, a level that is neither boosting nor slowing the economy. “We know that we’re getting closer to that neutral level,” he said.

The market is pricing in about 68 bps left to hike – a little bit less than three more hikes, vs the five that the FOMC is forecasting.



The press leaks proved correct; Jerome Powell will start holding a press conference after every FOMC meeting, starting in January 2019. This brings the Fed into line with European Central Bank (ECB) and Bank of Japan (BoJ) practice.

Given the hawkish tone, why did the dollar then decline? Probably because the market sees the end of the hiking cycle coming, whereas elsewhere – notably the Eurozone – it’s just beginning (see below). Also although US bond yields initially took off after the announcement, they closed mixed:  higher (2yr) unchanged (5yr) to lower (10yr). It looks to me like a typical “buy the rumor, sell the fact” reaction. Or perhaps with the Fed out of the way, the market is once again focusing on trade:  the US administration Friday 15th of June 2018 will release a final list of targets for tariffs on trade with China, and US President Donald Trump said he’ll confront China “very strongly” over trade in coming weeks.

AUD was weaker on disappointing employment data. Although the unemployment rate unexpectedly fell, this was more due to a fall in the participation rate than an increase in employment, which missed estimates. Furthermore the mix of employment was disappointing, with a fall in full-time jobs more than offset by a rise in part-time jobs. The currency was subsequently hit again by the weak China data: retail sales, industrial production and fixed asset investment all missed estimated. AUD is likely to remain under pressure as a currency that’s unlikely to see a rate hike any time soon.

Today’s main event:  ECB meeting

The European Central Bank (ECB) will be grappling with the question of what to do with their asset purchase program. The program is scheduled to run “until the end of September 2018, or beyond, if necessary,” according to the ECB’s statement. That means they either have to announce what they intend to do at this meeting or the one in July 2018, as there isn’t an August meeting.

In fact, ECB Chief Economist Peter Praet specifically said last week that “the Governing Council will have to assess (at the June 2018 meeting) whether progress so far has been sufficient to warrant a gradual unwinding of our net purchases.” He reiterated the ECB’s three criteria for changing rates, namely getting inflation back to the target level, getting it there on a sustained basis, and having it stay there without support from the ECB. He implied that they’ve met the first two criteria and will just have to evaluate the third. I expect that they’ll determine that they’ve met all three criteria and that they’ll decide to end the quantitative easing (QE) program, probably by December 2018. This could be positive for the euro.

There is a possibility that they “assess” the progress but don’t make any decision. Given the turmoil in Italy and the problems facing world trade, they might well decide there’s no harm in keeping the market in suspense for an extra month. On the other hand, they might not want the Italian government to think that the QE bond purchases will bail out the country and so they could take an earlier decision just to avoid this moral hazard. In any event, the recent plunge in Italian yields makes the country’s needs less important a factor. Regardless, they could decide that even if the first two criteria are met, they want another month to make sure they’re met sustainably.

Like with the FOMC yesterday, a lot depends on the new economic forecasts. The staff growth projections are likely to be revised down. If inflation is revised down as well, they may have a hard time deciding to end the QE program. Even though headline inflation hasn’t met their March 2018 forecast, they could use higher oil prices and the weaker EUR to justify revising inflation higher even while they revise Gross Domestic Product (GDP) growth lower.



Market impact:  A clear decision to end the asset purchase program in December 2018 could be positive for the euro. No matter how well telegraphed the move is, there must be some doubt about it. At the same time, if the decision is put off another month, that’s likely to be negative for the euro, because there must be some people who are expecting it at this meeting. All told, much greater volatility is expected in EUR than usual around this ECB meeting.



Other indicators

The day starts with UK retail sales. The mom figure is expected to be down from the previous month, but at least it’s up, as warm weather and the Royal Wedding probably boosted spending a little. That should boost the yoy rate of growth to the highest level since last June 2018 and perhaps calm fears that the Q1 slowdown might be continuing. This could be positive for GBP.



The US retail sales figures are expected to show a modest bounce in sales, following April’s 2018 relatively sluggish growth. Growth in May 2018 was depressed by falling sales of autos. Nonetheless, the figure is expected to be slightly above trend as the strength in the labor market and high levels of consumer confidence support consumption. This could be positive for USD.



US import prices are expected to rise sharply. Especially on a yoy basis, the rate has been between 3.2% yoy and 3.5% yoy since last November 2017, but is expected to break out to +3.9% yoy. That could add to the idea that US inflation is on a sustainable upward trend and would therefore be positive for the dollar. Note that the rise in import prices is not due solely to higher petroleum prices. Excluding petroleum, the index is forecast to be up 0.2% mom, which would translate into a 1.9% yoy rate of increase, an acceleration from +1.6% yoy in the previous month.




The Fundamental Analysis is provided by Marshall Gittler who is an external service provider of Claws and Horns (Cyprus) Limited, an independent analytical company. Any views and opinions expressed are explicitly those of the writer. Any information contained in the article, is believed to be reliable, and has not been verified by STO and is not guaranteed to be accurate. References to specific products, are for illustrative purposes only and are not a form of solicitation, recommendation or investment advice. Past performance is not a guarantee of future performance.
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14 / 06 / 2018 | Market News

Markets focus on Eurozone May 2018 inflation data and BoJ meeting

A week full of interesting economic data releases from various countries around the world will be coming to an end on Friday June 15th 2018. However, even Friday will be quite interesting for economists and financial analysts as the publishing of inflation data in Europe and an interest rate decision coming from Japan are expected to make the headlines. 

Eurozone CPI inflation in May 2018

On June 14th 2018, Eurostat, which is the official statistical office of the European Union (EU), is expected to publish data regarding the Eurozone’s Consumer Price Index (CPI) inflation in May 2018. Economists polled by Bloomberg on June 11th 2018 suggest that the Euro-bloc’s headline inflation rose to 1.9%, on an annualised basis, during May 2018. If the figure is confirmed, it will be the highest since April 2017. 

The CPI is an indicator used to measure the rate at which the prices of goods and services bought by households rise or fall, which is the rate of inflation, referred to as the CPI inflation. Eurostat will also include core CPI inflation data in the release, which measures price movements excluding the ones of volatile components such as food, energy, alcohol and tobacco.

According to the economists’ forecasts, the core CPI inflation in the Eurozone is likely to have remained unchanged at 1.1% in May 2018, on a year-to-year basis. Some market analysts suggest that the core CPI inflation figure provides a better presentation of inflation in the economy. 

Eurostat had released its Eurozone’s April 2018 CPI inflation report in May 16th 2018. In that report Eurostat had announced that the Euro-bloc’s headline inflation had come in at 1.2%, on a yearly basis, slightly lower than the 1.3% figure recorded in March 2018. Core CPI inflation had come in at 1.1%. The Eurostat’s report had attributed the low figures to a softening of services’ inflation.   

The Bank of Japan decides on interest rates

On Friday June 15th 2018, it's the turn of the Bank of Japan (BoJ) to have its monthly governing board meeting during which its policymakers will decide on interest rates. The BoJ will be the third major central bank that will announce whether it's going to raise borrowing costs or not, after the US Federal Reserve (Fed) and the European Central Bank (ECB), this week.

According to a poll published by Reuters the majority of economists expect the BoJ to retain its short-term interest rate at minus 0.1 percent and the 10-year government bond yield target at around zero percent. Analysts project the Japanese economy will return to a moderate growth trend in the second quarter of 2018 but there is a possibility that the economy is peaking just as trade friction with the United States escalates.

Another topic for discussion among BoJ's policymakers is expected to be the timing of the unwinding of the central bank's stimulus plans. The Reuters poll showed that half the economists believe that the BoJ will start tapering its stimulus programme some time during 2019 while the rest expect that this will happen in 2020 or later. Most of the economists suggested that the Japanese government should implement the sales tax increase during 2019 and stressed the need for innovations and investments which would help strengthen the Japanese economy. 

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13 / 06 / 2018 | Market News

Fundamental Analysis 13.06.2018 – Market Outlook

Market Recap

Relatively low volatility in the FX market, given the big news in the real world. The summit between US President Donald Trump and North Korean Supreme Leader Kim Jong-un, didn’t have that big an impact on market sentiment – the S&P 500 for example was up only 0.17%, and even the South Korean Composite Stock Price Index (KOSPI) index was off slightly this morning. Nor did the US Consumer Price Index (CPI) data, which came in almost exactly as expected, have a big impact on markets.

USD was boosted by a report in the Wall Street Journal (WSJ) that Federal Reserve System (Fed) Chair Jerome Powell is considering holding a press conference after every Federal Open Market Committee (FOMC) meeting. He had said back in March 2018 that this was an idea he was “carefully considering.” The implication of this change would be that every meeting would be “live,” i.e. they could conceivably change rates at any meeting, rather than just the four a year that currently have press conferences. Actually, there’s nothing preventing them from changing rates at any meeting, just custom – and this custom only dates back to 2011. Before then there were no press conferences anyway. Nonetheless, the report does suggest ahead of tonight’s FOMC meeting that the Committee could be headed towards a steeper path of rate increases than the market is currently forecasting. That’s bullish for USD. As you can see from the graph, the market doesn’t entirely believe the Fed’s current estimates for rates, especially for 2020. But a move like what Powell is contemplating suggests that they are really serious about hiking further and indeed could do so even faster than they have suggested. 



 

Sterling rallied after Prime Minister (PM) Theresa May won a crucial Brexit vote in Parliament. The UK lower house rejected an amendment that the House of Lords had put forward that would have required the government to accept the direction of Parliament in case of a Brexit stalemate. The PM had to offer several concessions to win this vote, concessions that make it less likely the UK will crash out of the EU without an agreement. The vote was therefore bullish for GBP. Sterling was unable to hold the gains vs USD however, indicating the underlying bearishness concerning the currency, and I expect today’s inflation data to encourage the bears further and send GBP lower (see below).

AUD was the big mover, although it’s hard to see why AUD in particular should’ve weakened so much. There was no AUD-specific news out at the time the currency plunged – rather, the move coincided with the appearance of the WSJ report speculating about the change to the FOMC’s press conference schedule. As you can see from the graph, AUD and CAD both fell vs USD simultaneously (USD/CAD, the orange line, is multiplied by -1 in order to have the two pairs moving in the same direction), indicating that this was a general USD move, not necessarily anything related to AUD. Bloomberg attributed the move to unspecified “trade concerns,” but the lack of any details makes this doubtful.




The Big Event:  the FOMC meeting

The Big Event of the day is obviously this evening’s meeting of the Federal Open Market Committee (FOMC), the US Federal Reserve System’s policy-making body. There’s no question about whether they’re going to raise rates; the market puts an 89% likelihood on that probability. The questions surrounding the meeting are a) the “dot plot” giving FOMC members’ estimates of where rates will be at the end of each year and b) the tone of the statement and Federal Reserve Systems (Fed) Chair Powell’s press conference following it. 

As for the “dot plot,” a lot depends on whether they revise their economic projections, and if so, by how much. As you can see from the table, while growth so far this year has been below estimates, unemployment has already met their year-end projection. Inflation is still below their year-end forecasts, but not by much, and it’s at or above if we look at the qoq SAAR figure. They are expected to revise their forecasts to show lower unemployment and higher inflation – i.e., faster achievement of their goals. They therefore ought to revise up their expected path of interest rates too.
 

The tone of the statement should reflect this improved outlook. The overall view of the economy is likely to be somewhat more optimistic. In the first paragraph, last time they said inflation measures “have moved close to 2 percent.” This time they might change it to “remain close to 2 percent” or otherwise acknowledge that inflation is getting closer to their target. In the second paragraph, they have said they see the risks to the economic outlook as “roughly balanced” – they might tip the balance towards optimistic (although the trade issue could delay a change there).

Several Fed officials have signaled that they may change or even eliminate the “forward guidance” in the statement. The statement each time includes the pledge that “the federal funds rate is likely to remain, for some time, below levels that are expected to prevail in the longer run.” This statement was an important part of the Fed’s Quantitative easing (QE) program – it was meant to reassure investors about the future and thereby strengthen the impact of the Fed’s loose policy today. However, now that the Fed has more or less achieved its targets of stable inflation and full employment, there’s little need for this help. Fed Governor Lael Brainard said in a recent speech that the phrase is “growing stale and may no longer serve its original purpose.” San Francisco (soon to be New York) Fed President Williams recently identified “a new normal for short-term rates of around 2½ percent.” Since today’s hike will bring the fed funds rates up to 2%, that would imply just two more hikes to achieve “normal” – hardly what the statement means by “for some time.” Removing that phrase would be an important step in the process of normalizing monetary policy.

Today’s indicators

Before the FOMC meeting, the European action starts in Britain.

The UK consumer price index (CPI) is forecast to look exactly like the previous month, with all the major rates of change the same, except for producer prices, which are forecast to rise at a faster pace. In other words, no sign of any acceleration in inflation at the consumer level. Coupled with yesterday’s employment data, which showed the rate of increase in wages slowing, this would mean less need to tighten rates any time soon, which could be negative for the pound.






US producer prices come out shortly before the FOMC decision. The message emerging from this data is forecast to be the same as that from yesterday’s US CPI: continued upward creep in US inflation. This could be positive for USD.





Overnight, Australia announces its employment data. The expected rise in employment of 19k is somewhat below trend but not significantly so (the six-month average is 25k) while the unemployment rate is forecast to remain in the 5.4%-5.6% range that it’s been in for the last year. All told a largely no-change figure that should make for no change in AUD, either. 


China announces its retail sales, industrial production (IP) and fixed asset investment (FIA) figures for May 2018. In fact, while retail sales are forecast to accelerate a bit, growth in IP and FIA is forecast to remain the same.




Before 2011, China’s industrial production seemed to be closely aligned with the credit cycle. However since about 2012, there hasn’t been any connection at all – production steadily slowed even when the credit impulse was highly positive, such as 2013, and it’s been quite stable even when credit once again picked up in 2016 and the slowed in 2017. The picture is pretty much the same with retail sales and FIA. 




In any event, no change in the data means no reason to change the outlook, so AUD and NZD ought to be little affected. 

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