Posts Tagged “US”
Posted by John Forman in Forex, tags: autotrading, follow trading, forex ECN, forex volume index, LeapRate, mirror trading, regulation. Japan, retail spot forex, trading volume, US, volatility
LeapRate today announced a new forex volume index. It is intended to provide an estimate of retail spot forex trading volume. The reported inputs into the estimate are “…monthly and/or quarterly activity levels put out by various retail FX brokerage firms; similar activity levels announced by other FX aggregators such as Forex ECNs and FX settlement firms; as well as anecdotal evidence we encounter as part of our general research activities in the Forex sector.” This isn’t something that will be of much use on a day-to-day basis for traders, but it does offer some insights into the retail forex business in general.
The index shows volume rising from about $100bln per day back at the start of 2006 to having reached above $200bln a couple of times in the last few years. That’s not a bad growth rate over the span.
It should be noted, though, that even with the big increase in volume since 2006, retail forex volume remains only a tiny fraction of the overall forex market. The latest LeapRate estimate has average daily volume in the $175bln area. The latest data we have for the inter-bank markets in New York, London, Tokyo, Sydney, and Singapore put average daily spot volume at about $1.640trln (the $5trln figure often noted includes swaps, forwards, etc. as well). That means retail flow is about 11% of the global figure (see The Most Traded Currency Pairs for a more specific review).
Here is the current chart:
There have been some concerns expressed about flattening volumes of late thanks to increased regulation (particularly in the US and Japan) and lower market volatility. There’s no doubt that regulation has increased as the CFTC and NFA have moved on several fronts to tighten things up in the US (largely motivated by Dodd-Frank) and much has been done to reduce leverage in Japan. There’s been considerable discussion on those developments in the last few years – much of it derogatory. I, for one, think they have gone a long way toward getting rid of the old “Wild West” aspect to retail forex trading, at least in the US.
On the volatility side, as you can see from the weekly EUR/USD chart below, it has indeed dropped off in recent times. This is seen in the falling Average True Range (ATR) line in the lower sub-plot. It is telling us that weekly ranges (averaged over 14 periods) have fallen to their lowest levels since the financial crisis was developing in the latter part of 2007. This, however, is about in line with where volatility was during much of the 2003-2006 period, so we may just be seeing a reversion to more normal levels.
If volatility is indeed just mean-reverting then it has implications for the forex business. Things have already become increasingly competitive in recent years. That is only going to become even more intense if lower volatility keeps trading volumes subdued.
The interesting thing to watch will be whether the big push in the area of automated “mirror” or “follow” trading through initiatives like the Currensee Trade Leaders program draws in more investment oriented capital and thereby increases retail forex volumes, both outright and in terms of the retail share of the overall forex volume pie. That is certainly something which is very possible. New developments like that can help the retail forex business continue to grow over time, even if volatility doesn’t move back up to higher levels.
------- Be sure to read the full risk disclosure before trading Forex. Please note that Forex trading involves significant risk of loss. It is not suitable for all investors and you should make sure you understand the risks involved before trading. Performance, strategies and charts shown are not necessarily predictive of any particular result. And, as always, past performance is no indication of future results. Investor returns may vary from Trade Leader returns based on slippage, fees, broker spreads, volatility or other market conditions.
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Posted by Charlie Fell in Forex Volatility, Market Analysis, tags: 2011, bullish, copper, Dollar, gold, indices, October, September, St. Leger, stock market, US, Yen
Investors who obeyed the old stock market maxim, “Sell in May and go away,” have side-stepped the vicious downturn in equity prices through the summer and early-autumn. Indeed, global stock market indices peaked on the first trading day of May and subsequently dropped by almost 20 per cent, as a sharp slowdown in economic activity across the developed world, alongside the never-ending euro-zone sovereign debt crisis, shook investors’ bullishness.
The major market indices have already endured a near bear market decline, as a seemingly relentless stream of disappointing news has been digested, so it is reasonable to ask whether it is safe to reverse course and establish long positions. Indeed, the trusted market adage advises investors to throw caution to the wind and, “come back on St. Leger day,” the date of the world’s oldest classic horse race. The St. Leger Stakes was run at Doncaster last Saturday but, the historical evidence – coupled with reliable leading indicators – suggests that investors may well be better-served to remain on the sidelines for now.
The month of September has typically proved difficult for investors and, it is the only month to have generated a negative mean return through time. The mean return has been minus 0.25 per cent since 1802, and the seasonal effect has shown little sign of becoming less pronounced in the recent past. Indeed, one dollar invested in the stock market only in the month of September since 1971, would be worth less than 70 cents today or just 12 cents in real terms.
The historical record demonstrates that the economy and financial markets have been particularly crisis-prone this time of year, such that cash has typically generated higher returns than the stock market across the months of September and October.
Historical crises that struck this time of year include the Panic of 1819, the first major financial crisis in the United States, the Panic of 1857, which was triggered by the failure of the Ohio Life Insurance and Trust Company, the Panic of 1873 that followed the collapse of Jay Cooke Company, the run on the Knickerbocker Trust and the subsequent Panic of 1907, not to mention the Great Crash of 1929.
More recent episodes include Black Monday in 1987, the United Airlines mini-crash of 1989, the 1997 attack on the Hong Kong dollar, the terrorist strikes on the World Trade Centre and the Pentagon in 2001, and of course, the Lehman Bros bankruptcy in 2008.
Those of a bullish persuasion will undoubtedly argue that the historical record is purely coincidence and thus, of little value to tactical decision-making. That may well be true but, it is important to stress that recent market action has been accompanied by a whole host of indicators that give pause for thought.
First, both 10-year Treasuries and German bunds are trading at record-low yields below two per cent, which is simply not consistent with continued growth in the developed world. The respective yield curves may well have a positive slope but, is important to recognise that the spread between short-term and long-term interest rates loses its usefulness as a leading economic indicator when short-term rates are close to the zero-bound. The actual level of yields, at a five- to ten-year horizon, suggests that a recession in the euro-zone and the U.S. is imminent.
Second, the cost of corporate credit is rising and the recent widening of high-yield bond spreads from an average of 440 basis points in April to more than 730 basis points in recent weeks, warns of an impending downturn. Indeed, a recession typically follows whenever the spread is sustained above 700 basis points. This indicator did send a false signal in the latter of half of 2002 as an economic downturn did not subsequently materialise. However, this did not protect equity investors who endured a devastating decline in stock prices.
Third, leading economic indicators such as copper prices are in the process of breaking down, while the demand for safe haven assets such as gold, the Japanese Yen, the Swiss franc, and even the U.S. dollar, is strong. Furthermore, bank share prices are crumbling across the globe and funding costs are under pressure. It is clear that stress is building throughout the financial markets and tail-risk is rising.
Mark Twain, the celebrated American author, quipped in his 1894 novel, Pudd’nhead Wilson that “October…is one of the peculiarly dangerous months to speculate in stocks.” The truth of the matter is that both September and October have proved to be notoriously tricky for equity investors and, early indications are that the seasonal pattern looks set to be no different this year. Tail-risk is rising as economic growth falters and the euro-zone sovereign debt crisis moves closer to the end-game. Caution is warranted for now.
Originally posted on www.charliefell.com
Be sure to read the full risk disclosure before trading Forex. Please note that Forex trading involves significant risk of loss. It is not suitable for all investors and you should make sure you understand the risks involved before trading. Performance, strategies and charts shown are not necessarily predictive of any particular result. And, as always, past performance is no indication of future results. Investor returns may vary from Trade Leader returns based on slippage, fees, broker spreads, volatility or other market conditions.
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Posted by Lindsay Sutton in Events, Market Analysis, tags: Charlie Fell, debt, double-dip recession, downturn, economy, Europe, stock market, stocks, unemployment, US, USA, Wall Street
Charlie Fell may be Irish, but he draws upon our very own Massachusetts history to explain the misfortune that has fallen upon Wall St.–witchcraft! Well, not exactly, but he does use historical data to explain why a double-dip recession may not be in the cards. Let’s hope this bad spell ends before the situation gets even scarier! Read his full blog-post here.
On this day in 1692, John Proctor along with fours others, including the Reverend George Burroughs, were executed by hanging at Gallows Hill in the village of Salem, Massachusetts, having being pronounced guilty of witchcraft and sentenced to death two weeks previously. More than three centuries later and, the ‘black arts’ are clearly being practiced on Wall Street, as a coven of investment soothsayers has consulted their Ouija boards, amid the extreme volatility on financial markets, and divined that stock prices have already discounted the dreaded double-dip recession.
The diehard bulls on Wall Street stand accused of misplaced optimism that appears to be based on wishful thinking rather than hard facts. The notion that an economic downturn is already reflected in stock prices at current levels is simply not supported by the historical evidence.
There have been nine recession-induced declines in the major stock market averages since the mid-1950s. The mean and median drop in stock prices across these bearish episodes was 32 per cent and 28 per cent respectively, as compared with the 18 per cent fall from the recent cyclical high registered in late-April.
Furthermore, stock prices bottomed early last week on valuations – based on cyclically-adjusted earnings – that are several multiple points above the average recorded at the trough of previous recession-induced declines. For current valuations to contract to the typical price/earnings multiple seen at previous cycle lows, the major indices would have to fall by a further 17 to 31 per cent, based on operating and reported numbers respectively.
The verdict of history is clear – the recent decline in stock prices and the resulting valuation multiples do not incorporate an economic downturn. The historical evidence suggests that, given a recession-scenario, the S&P 500 could easily drop to 925 and, perhaps even further to below 775, as compared with a recent high of 1364. In this regard, it is important to stress that the lesser of the two outcomes is more probable, should a downturn materialise, for a number of reasons.
First, a ‘true’ double-dip recession, where the level of real GDP during the up-cycle fails to exceed the previous business peak, has never before occurred in the post-WWII era. The annual revision of the national income and product accounts, published by the Bureau of Economic Analysis (BEA) last month, revealed that the contraction in economic activity from the winter of 2007 to the summer of 2009 was greater than originally thought – at more than five per cent or half-way to a depression – while the subsequent recovery was not as robust as initially reported.
The lacklustre economic momentum since activity bottomed more than two years ago, means that slack in factor markets remains considerable – most notably in the market for labour. The civilian unemployment rate has been north of 8 ½ per cent for 31 consecutive months – the longest stretch since the 1930s – and the current reading of 9.3 per cent is four percentage points above the average of the rate recorded at the previous nine business peaks. Not surprisingly, real personal income, excluding transfer payments such as unemployment benefits, is still more than five per cent below the cycle peak, which suggests that households are decidedly short of firepower, even absent an economic downturn.
Second, the growth rate in nominal output – both year-on-year and quarter-on-quarter – has rarely been lower when the economy stood on the verge of recession. The current pace of year-on-year growth is roughly half the typical level registered at previous business peaks, while the annual rate of quarter-on-quarter growth is more than two percentage points below its comparable number.
It cannot be stressed enough that a low growth rate in nominal output, combined with debt levels that are close to record highs relative to GDP, means that the economy is vulnerable to a vicious debt-deflation cycle, whereby demand-side constraints lead to falling nominal GDP, soaring unemployment and a catastrophic decline in corporate profits.
The household debt-to-GDP ratio has declined by more than eight percentage points from its peak to below ninety per cent, but the current figure remains high by historical standards, while declining tax revenues relative to GDP, combined with automatic stabilisers and various fiscal stimulus programmes, means that consumers’ deleveraging efforts have been more than offset by the increase in both federal and state debt-to-GDP ratios. The bottom line is that the non-financial sector debt-to-GDP ratio has jumped from 226 per cent in 2007 to more than 245 per cent today.
Third, the prolonged ‘soft patch’ in the U.S. economy has already been transmitted to Europe. Eurostat revealed earlier in the week that growth slowed to just 0.2 per cent in the euro-zone during the second quarter, as compared with the previous three-month period.
Should a recession in the U.S. materialise, the negative impact on the economic environment in Europe would surface relatively quickly via financial markets, and exacerbate the stress in sovereign debt markets that has already moved beyond the ‘soft’ periphery to Italy and Spain. It is not unreasonable to argue that a full-blown recession in the euro-zone, at this juncture, would shut Italy out of the bond market, precipitate more than one sovereign default and a banking crisis that could bring an end to monetary union.
The notion that stock prices have already incorporated a double-dip recession is nothing less than bunkum. The downside risk to stock prices from current levels, should the developed world succumb to recession, is material and cannot be dismissed out-of-hand, given that both governments and central banks lack the firepower to push the economy forward. Tail-risk is high and caution is warranted.
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------- Be sure to read the full risk disclosure before trading Forex. Please note that Forex trading involves significant risk of loss. It is not suitable for all investors and you should make sure you understand the risks involved before trading. Performance, strategies and charts shown are not necessarily predictive of any particular result. And, as always, past performance is no indication of future results. Investor returns may vary from Trade Leader returns based on slippage, fees, broker spreads, volatility or other market conditions.
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Posted by John Forman in Pips Weigh In, tags: Bernanke, Fed, fomc, interest, market, QE3, S&P 500, treasury note futures, unemployment rate, US
The market is talking about QE3 again after last week’s shock miss on US payrolls. Those who think it’s coming are pointing to the minutes of the last FOMC meeting as evidence in support of their case as they noted that “some” Fed officials said some more easing might be need in the unemployment rate doesn’t start moving down and inflation returns to low levels. That latter part is the important one, as I think most folks right now will have a hard time suggesting we’re in a low inflation environment and “a number” of Fed officials see the inflation risks as biased to the upside.
In other words, if you’re expecting QE3 you may not want to hold your breath. One of my colleagues here actually thinks it would take the stock market falling about 20% to spur Bernanke & Co. into action. That would put the S&P 500 on the way down to 1000. I wrote a post recently on stock traders positioning themselves bullishly because they expected the Fed to protect their downside with more QE. Not sure how they’d be feeling 20% down. On the plus side, if that were to happen, it would likely mean the dollar had strengthened a fair bit, giving the Fed some market cover to do further easing.
But guess what? The Fed is actually tightening right now.
Follow me here.
The Fed has indicated its intent to roll over maturing securities to maintain a steady balance sheet. That means when they receive the principle back on a bond or note they are holding, they turn around in use the proceeds to buy Treasury securities. That’s why you’ll continue to see the Fed doing their reverse auctions periodically. What that will serve to do is slowly shift the composition of the holdings away from mortgage and agency paper to Treasury debt.
But here’s the rub. The Fed hasn’t said anything about reinvesting the income they get from those holdings – the periodic interest (coupon) payments. The income the Fed makes from those interest payments is largely getting passed along to the Treasury as part of its annual remittance of excess profits. That’s been tens of billions of dollars in recent years because of the size of the Fed’s balance sheet.
The money supply math of the Fed is that when it buys securities from the market it prints money, thus increasing the money supply (at the monetary base level). Flipping that around, when the fed sells securities to the market (as it’s expected to do when it finally gets around to unwinding QE) it drains money from the market. When the Fed is repaid its principal the money supply is reduced, so it goes out and buys more to keep the money supply level.
Interest payments to the Fed are just like principle repayments in terms of reducing money supply. It’s money from the market that goes to the Fed and is effectively destroyed. These interest payments are not being reinvested, so the money supply is slowly drained from the system.
Now, by comparison, these interest payments are a small fraction of the total money supply (only a few % given interest rates), so it’s not like we’d expect to see a major drop in M2 money supply as a result. Also, as the mortgage and agency holdings are slowly converted to Treasury holdings through the mature-and-reinvest process, the impact of the drain will decline. This is because the mortgage and agency interest is coming from the private sector while interest on Treasury debt is government money which isn’t part of the private sector money supply, and is largely returned to the government anyway.
Obviously, the small relative size of the interest income makes this money supply drain little more than a trickle (though tens of billions does sound like a lot). My point isn’t that the Fed has engaged in a noteworthy stealth tightening since ending the QE2 purchases. It’s more than we need to make sure we understand the mechanism of things to know what’s really going on.
------- Be sure to read the full risk disclosure before trading Forex. Please note that Forex trading involves significant risk of loss. It is not suitable for all investors and you should make sure you understand the risks involved before trading. Performance, strategies and charts shown are not necessarily predictive of any particular result. And, as always, past performance is no indication of future results. Investor returns may vary from Trade Leader returns based on slippage, fees, broker spreads, volatility or other market conditions.
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Posted by Michelle Heath in Weekly News Roundup, tags: china, Dollar, economy, EUR/USD, Fed, foreign exchange reserves, Greek, hedge funds, interest rates, investment, QE2, US, World Wealth Report
While cookouts and fireworks were certainly on our mind last week here in the US, we still kept an eye on the news. Here’s our roundup of top stories that we’ve read in between all of the celebrations:
After the Federal Reserve ended QE2 last week, many investors are now wondering what’s next for the U.S. economy for the rest of 2011. You can watch the experts debate what they think is next for QE2 by viewing our recent webinar. The good news, however, is that after two years of rapid decline, the dollar is now entering an uptrend, gaining against every major currency. In other news, the 2011 World Wealth Report that was recently released displays the staggering estimate that in 2010, 103,000 people out of 7 billion on the planet controlled 36.1 percent of the world’s wealth. Additionally, the report shows that hedge funds are no longer a favored alternative investment among the class of high net worth individuals. On the international front, the euro continues to weaken as interest rates rise, and China has begun to expand foreign exchange reserves using non-U.S. dollar assets – a sign that investment in the yuan may be on the rise.
- Picking the Brains of the Super-Rich, and Picking Up Tips, The New York Times, June 24, 2011
- The Dollar Rebound and What It Means to the Market, Seeking Alpha, June 26, 2011
- Euro Sustained in Widest Rate Gap Since ’09 as Greeks Vote, Bloomberg BusinessWeek, June 27, 2011
- China Moves Away From the U.S. Dollar; Invest in the Yuan, Seeking Alpha, June 27, 2011
- Why High Net Worth Individuals Are Running Away From Hedge Funds, Business Insider, June 30, 2011
- As QE2 ends, market debates Fed’s next move, Reuters, June 30, 2011
------- Be sure to read the full risk disclosure before trading Forex. Please note that Forex trading involves significant risk of loss. It is not suitable for all investors and you should make sure you understand the risks involved before trading. Performance, strategies and charts shown are not necessarily predictive of any particular result. And, as always, past performance is no indication of future results. Investor returns may vary from Trade Leader returns based on slippage, fees, broker spreads, volatility or other market conditions.
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