Relief Rally Fades as the Reality Bites

It was inevitable that the very strong relief rally the markets enjoyed yesterday was unsustainable. Has there ever been a time in recent trading history were merely the mention of possible solutions by European policy makers can lead to such wild swings of sentiment? We’re still some distance away from implementation of the various mechanisms to firstly avoid a Greek default and secondly contagion of the sovereign debt crises and yet the markets’ collective desire for solutions appears insatiable. This surely indicates that we have reached a crucial tipping point, an equilibrium from which the main stock markets could either rally to the year highs experienced in Jan 2011 or potentially crash to 2008 levels.

He acquired the nickname Doctor Doom during the 2008-2009 crash, I always felt that was a bit unfair on Nouriel Roubini, he was doom laden alright, but the X-Men reference didn’t work for me. He had a touch of the night about him, I visualised him more as The Count from Sesame Street, carefully and with a perfect Transylvanian accent, explaining how the numbers ‘worked’, and doing the ‘face palm’ when we didn’t get it. It became an increasingly cheap shot to label Nouriel as batty in 2008-2009, and the mainstream media did a cracking hatchet job on him, describing his Manhattan apartment as a lair, listing his female ‘conquests’, following him to bars and night clubs. Perhaps he wasn’t enjoying his notorious reputation, simply drowning his and our sorrows in anticipation of the events about to unfold.

The ‘stopped clock is right twice a day” analogy is often hurled in Mr. Roubini’s direction, well hey, guess what? He was right in 2008 and he’s right now. His prediction then; that ‘saving the system’ in 2008 by using one dimensional QE tactics, zirp and bailouts, would cause sovereign debt crises within a couple of years has been proven spot on. Arguably the first renowned economist to put forward the words “avoiding this recession will create a depression” was only bettered by his summation that “main street needed rescuing before Wall St”. The inference being that no discipline would be attached to the major players, the masters of the universe, if ‘they’ got away with it once they’d simply do it again and again. His reference to main street was also apt, the belief being that if you re-primed average Joe, and allowed him to write off or re-set his debt, his life, his optimism, then the economy would recover and flourish far more quickly.

Roubini is now, once again, being quoted in the mainstream media and is being treated with respect. However, this may change and follow the pattern witnessed in 2008-2009. His own website is subscription only for his major clients, which is a shame, in my humble opinion he could and should create a ‘lite’ version for public consumption. So for now we have to contend with quotes and soundbites from the usual suspects. In the Telegraph recently he’s suggested that the USA and UK are already back in recession, further he appears to suggest elsewhere that technically recession was exited but fundamentally both the UK and USA never escaped recession. He also has interesting views on inflation versus deflation, believing that inflation will soon be the last problem that central banks will fear.

Nouriel Roubini:

“While monetary policy has limited impact when the problems are excessive debt and insolvency rather than illiquidity, credit easing, rather than just quantitative easing, can be helpful. The European Central Bank should reverse its mistaken decision to hike interest rates. More monetary and credit easing is also required for the US Federal Reserve, the Bank of Japan, the Bank of England, and the Swiss National Bank. Inflation will soon be the last problem that central banks will fear, as renewed slack in goods, labor, real estate, and commodity markets feeds disinflationary pressures.”

The European Union faces the biggest challenge in its short history, as the crisis of confidence compounds economic and social problems, the European Commission President Jose Manuel Barroso has stated in his annual State of the Union address during a session of the European Parliament in the French city of Strasbourg.

“It’s a crisis of confidence that has not happened for decades”. Barroso also re-affirmed that Greece would remain a member of the euro single currency area and that if there had to be deeper economic integration among European Union member states, if not the 27-member bloc faced break up.

Tuesday’s relief rally did not overlap to Asian markets as overnight and early morning the main indices faded. The Nikkei ended flat, the CSI closed down 1.03%, the Hang Seng closed down 0.66%. The ASX closed up 0.87%. In European markets morning trade has been subdued, the FTSE is currently flat, the STOXX is down 1.05%, the CAC is down 0.98%, the DAX is currently down 0.88%. The SPX daily equity future is currently up marginally at 0.3%. Brent crude is down $65 a barrel, gold is flat.

Data publications for the New York session to be aware of include;

12:00 US – MBA Mortgage Applications Sept
13:30 US – Durable Goods Orders Aug

The durable goods orders could affect sentiment as focus shifts back to the USA’s domestic travails. It’s a government index that measures the quantity of new orders placed with US manufacturers for delivery of durable factory goods, such as machinery, vehicles and electrical appliances. Durable goods are defined as items that have a normal life expectancy of three years or more. Analysts surveyed by Bloomberg gave a median forecast of -0.2%, compared with the last release which was 4.00%. Excluding transportation, the expectation is -0.20% (previous =0.7%).

Source: FX Central Clearing Ltd. (FXCC BLOG)
http://blog.fxcc.com/relief-rally-fades-as-the-reality-bites/

Spread the Word, Headline Forex Spreads can be Misleading

A friend of mine is a director of a leading UK spread betting firm. He has every right to be incredibly proud of his and his company’s achievements over the past two decades. That industry has also made massive strides to improve its quality of service and moreover the basic cost of doing business – the spread. Financial spread betting firms can no longer be regarded as the ‘bookies’ of the trading world. It’s not uncommon for spread betting firms to offer spreads similar to Forex brokers, for example, one pip spread on the Euro. The SB firms offer a wide range of products to bet on; indices, CFDs, shares, commodities and the huge attraction (for UK based traders) is the apparent tax free element of any trading profits.

If you regularly visit any trading forums (where spread betters exchange views) you quickly realise how they not only wear their trading naivety on their sleeves, but also betray their overall levels of ignorance towards the forex industry in particular. The constant battles, with any representatives of the industry who venture onto the forums, generally concern the cost of the spread. “ABCD firm is doing cable at one pip but you’re still at two, when are you going to get competitive?” is a typical question which is met with good humour and grace through gritted teeth by the firms’ representatives. But alas the same question keeps on coming, day after day, month after month from the inexperienced, those locked in a ‘denial loop’ and those who are desperately in need of a reboot of their badly corrupted personal trading hardware. If you interject by suggesting that; “anyone that rate sensitive must be either attempting to scalp or day trading off low time frames, the absolute death of a spread better”, the answers are incomprehensible and very defensive.

Similarly suggestions that anyone using a spread betting firm for anything but swing and position trading is “picking up pennies in front of a steam roller” is met with equal hostility. But the facts (straight from the horse’s mouth) are incorruptible; only 20% of spread betters’ trades are winners and 80% of those winners are swing and position trades. Therefore no one should ever contemplate using a spread betting firm for any trading other than swing and position. If swing trading, aiming for perhaps a minimum return of 100 pips profit per trade, but ideally 200 with a R:R of 1:2, why would a spread of 1 pip or max 2 pips be relevant, would the spread better be happy with 99 pips profit as opposed to 100? Or consider it this way; if the spread better’s set up worked perfectly on GBP/JPY would the spread better avoid the trade given the spread on that currency pair was minimum 6 pips? Whilst spread betting has its place in the trading world arguably it has no place in forex trading, particularly if you’re a specialised scalper or day trader, and judging by the majority of responses from spread betters on trading forums sadly they have no business trading on any time frames until they have gained a thorough education.

With ECN NDD straight through processing you know your broker is dealing your trade through to the liquidity providers, there is no intervention, it’s an instant fill (depending on market conditions which we’re all subject to), and that fill, as instantaneous as state of the art technology can deliver, is one of the most important differences between the spread betting industry and the ‘pure play’ forex provider. Is there any point in a spread betting firm publicising spreads of 1pip if they have a delay of second causing your fill to actually make the spread two to three pips? The inexperienced, obsessed with headline spreads, would have no metric or technique to judge the efficiency of the spread. Whilst they’re constantly seduced by the narrow ‘headline spread’ they could be getting poor fills and no ‘designer’ slippage, only a true reflection of market conditions but be none the wiser, still believing they’re getting zero spreads.

The overall quality of execution measured over a protracted period of time is just as important as the headline spreads you’re trading on. low spreads should simply be an absolute given with a true ECN NDD broker, FXCC are amongst the best for spreads if not the best in the industry, but that small cost of business only illustrates one aspect of the quality of execution. With ECN NDD execution, there are no re-quotes, there’s no dealer referral, and no restrictions on how close you can place stops and limits to the current market price. These are tools that market makers (such as spread betting firms) can use to manage their own risk and these tools can be used to disadvantage the individual trader.

If you’re an experienced forex trader you’ll have no doubt experienced positive slippage, you’re very unlikely to experience that from a market maker or spread betting firm and it’s actually a brilliant test to ensure the probity of your broker. You’ll only ever experience true marketing behaviour which, as experienced traders will testify, can be quite random at times, quite simply a broker such as FXCC doesn’t ‘make the market’ for forex transactions. The pricing engine from FXCC’s liquidity providers automatically takes the quotes from the liquidity providers and offers the best bid/ask with a pip “mark-up”’, the small profit for transacting the business. The spreads can and do vary due to liquidity and market volatility, but when you can click on the ticket from an ECN NDD broker you can have absolute confidence in the clarity and cleanliness of your trade.

Source: FX Central Clearing Ltd. (FXCC BLOG)
http://blog.fxcc.com/spread-the-word-headline-forex-spreads-can-be-misleading/