Written by Gavin Pannu, MSTA, CFTe
Central Banks have been showing positive signs. The European Central Bank is looking to reduce its quantitative easing program which allows them to buy financial assets to put more money into the market to promote growth. The Bank of England is looking to resume raising interest rates after a blip in 2018’s first quarter poor economic data. In the US, the Federal Reserve continues to raise rates with not three as previously thought but now four rate hikes on the table. We remain positive of the stock market view and economic growth and forecasts.
Escalating trade tensions have made it a difficult investing environment. The recent G7 meeting left questions unanswered. Trumps administration made it official, with tariffs being applied on 1,102 products from China worth $50bn. This will become effective from the 6th of July. On this news, China had promised to retaliate in equal measures. Tensions escalate as President Trump looked into tariffs on potentially EU specifically targeting automakers. Among other nations, Canada and Mexico have been left with no clear path and NAFTA agreement not coming to a conclusion. More than 270 American business groups have warned of negative economic impacts with the latest company. Harley-Davidson has been the latest company to take action with moving part of its production away from the US.
We believe fiscal stimulus will offset proposed tariffs and that tensions between the U.S and China will ease and not turn into a full-blown trade war. With trade tariff concerns having an impact on financial markets in the short term and increasing volatility. It is easy to see why many investors are either feeling disappointed or sceptical of investing in the markets now.
What are the potential trade scenarios?
President Trump is using his hard-line business tactics to negotiate deals where he threatens tariffs or chaos by ripping up trade agreements in large part to gain leverage in negotiations and eventually easing tensions with an agreement which suits all parties, in particular, the US. Financial markets consolidate but eventually, show promising signs as economically the major nations have been showing positive data across the board.
If President Trump continues to retaliate against most major nations and trade tariffs escalate, with the US placing tariffs from $50bn to now $200bn Chinese goods. This could lead to a longer period of uncertainty and a continuation of the markets treading on water. The EU and China have recently joined forces to complain to the World Trade Organisation and stand up for globalism. This will mostly impact companies which import and export to the US along with other investments such as intellectual property in the US.
Worst case scenario, this could lead to a global trade war among most major nations and reverse globalism entirely with agreements going back to the 1930s among nations. This would be detrimental to global markets and could lead to a market sell-off and hinder Central Banks progress.
How to position during trade concerns?
With the recent escalation in trade tensions which continues to dominate market movements, here are the ways to mitigate risk and handle volatile movements.
Volatility can be good, volatility can create investment opportunities. It can bring asset prices down to attractive levels for long term buyers. It allows intraday traders to book larger rewards from market movements compared to the risk. Traders can take less risk but with volatile moves can aim for a higher reward.
Stay diversified, trade tariff concerns are unlikely to impact financial markets on a systematic level. There will be losers but also winners. By diversifying trades across different asset classes such as stocks, bonds, commodities and cash. This will overall limit the risk exposure to any trade tariff scenario.
Stick to your plan, it is always best to have a plan before taking a position. This will minimise emotional decisions made on the basis of market news which may not be the correct decision. Have conditions under what circumstances a position will be entered or closed will minimise irrational behaviour.
Cryptocurrencies have been considered weak after the sixth largest global cryptocurrency exchange, Bithumb, had recently suffered a cyber-attack where $31.6 million were stolen from its exchange. It started with the South Korean authorities investigating into cryptocurrency exchanges to check for compliance with tax laws. In the US, there has been a crackdown from the SEC on the manipulation of prices and fraud in ICOs. This was followed by a study from the University of Texas which had found that at least half of bitcoin’s returns last year may have been the result of manipulation. Mark Carney, Governor of the Bank of England, has recently claimed Bitcoin has been failing and is not being integrated as previously expected. This has become a concern for investors with the price of Bitcoin over a one month period losing more than 20% in value.
As with any emerging asset class which becomes mainstream, there is a tendency for price to become volatile as buyers are willing to pay a higher price, or any price, to hold this asset. This is usually known as a stock market bubble, where market participants drive prices beyond its intrinsic value. Most recent volatility has however been calm, compared to price movement six months ago. While the average bitcoin daily volatility is now between 6-10%, six months ago this type of volatility was taking place in a matter of minutes.
Due to the 2017 uprising in Cryptocurrencies -the first asset class where the retail investors and the general public were the first participants involved- there has been a significant disinterest in cryptocurrencies by the general public, as very few made a profit by closing positions before February market sell-off. On the other hand, Bitcoin futures listed on Chicago Mercentile Exchange reported its largest volume trades in a single day, showing that more institutional investors are now participating. We are seeing a shift. Where once an average Joe was able to move this asset, now becoming adopted by investment institutions.
The recent market downturn shows that the expectation of regulating this asset class is a concern for investors. Central Banks and Governments are investigating into this asset class to determine how best to regulate this market. Regulators have begun to investigate and crack down on illegal activities before determining the path of regulating this asset class. It is in Cryptocurrencies’ best interest for exchanges to become regulated, deter new ICO’s from committing fraud and minimise large traders working together, known as whales, from manipulating prices. Of all the fortune 500 companies have invested, a significant amount of research and development went into Cryptocurrencies. It is important to consider investing with good risk management and, as they say, not to bet your house on an investment.