Skip to content

CFDs are complex financial instruments and come with a high risk of losing money rapidly due to leverage. You should consider whether you understand how CFDs work, and whether you can afford to take the high risk of losing your money. CFDs are complex financial instruments and come with a high risk of losing money rapidly due to leverage. You should consider whether you understand how CFDs work, and whether you can afford to take the high risk of losing your money.

Trader's thoughts - The long and short of it

It was a "buy the dip" day yesterday, judging by price action in global risk-assets.

Market data Source: Bloomberg

Broad-based based bounce in stocks

It was a buy the dip day yesterday, judging by price action in global risk-assets. As has been the theme this week, there wasn’t any meaningful macro-news to change market participants behaviour. So: an explanation for the (almost) universally solid day for global equities ought to be chalked-up to internal market mechanics. What this may imply for the longer run is a touch obscure. This market is trading much in the way a plane rights-itself after some brief, but heavy turbulence. Some rough times must surely lie ahead once again, if not for the simple matter that fundamentals haven’t changed. Market participants will therefore remain glued to any developments that may reveal new truths about global growth.

Very little “new” news

There weren’t any such stories out last night. Outside the echoes of last week’s dovish Fed-tilt, European growth concerns, and talk of inverted yield curves, voices portending doom in financial markets were apparently much quieter. Ever the experts in hindsight, the collective wisdom of market participants seemed more interested in rationalizing away their previously held fears. This could be justified, and at that, telling in and of itself: traders are searching for reason to keep taking risks, and maintaining a bullish temperament. It certainly showed; not just in equities, but other asset classes. Bond yields climbed, at least momentarily ending their rout, and growth-proxy currencies lifted as currency traders sold-out of the popular safe havens.

US sector map totally green

A criticism levelled at this market is that it’s so preoccupied with macro that it lacks any level of true discernment. Capital is being allocated into equities as a total asset class, ignoring the differing prospects of the varied sectors within equity markets. Case in point, just last night, was the S&P 500, which has rallied across the board, on 81 per cent breadth. Of course, different sectors have benefitted more than others, with energy and financials leading the charge, and consumer discretionary and communications trailing the pack. But the general dynamic is clear: no matter where you look, when risk taking is being encouraged by a ubiquitous fall in global bond yields, flows go into equities of all stripes.

A desire for growth and yield?

This behaviour might be best conveyed by the juxtaposing of US tech's recent performance with the US utility sector. It gives a good read on the growth-versus-value dichotomy in equity allocation. On the whole, they've each performed remarkably well in recently -- a phenomenon which, generally, ought not to occur, as market participants either prioritise capital growth or yield. Once again, the catalyst behind this behaviour is probably attributable to fall in global interest rate expectations, as the world's biggest central bank's step away from tightening financial conditions. In short: lower yields in safe assets is fostering a simultaneous search for income from the conservative types, and an excuse to take bigger risks for the more daring types.

Something has to give

The problem is: the finitude of capital, plus changes in momentum in the market, all but necessitates market behaviour fall one way or the other. And this is where global growth prospects, and it's knock-on implications for earnings, become crucial. A fundamental case to bet big on growth stocks disintegrates when the global economic outlook shows signs of deteriorating. As such, market participants, though not acting on their impulse today, are sticking their fingers in the air to forecast which way the frosty-winds of the global economy are going. For the medium term, the conclusions aren't so good, and that's laying the bedrock for potentially choppy trade as traders attempt to fill the blanks of several prevailing uncertainties.

Markets hoping for a growth turnaround

But faith is being maintained that central banks may pull a rabbit from the hat and reverse course enough to put equity markets back into a steady, upward trajectory. Amidst no change in fundamentals, judging by yesterday's bounce in global equites, there are enough buyers in the market to take that punt. Apart of the matter, too, is that market participants are being given little choice but to chase risk. The fall in discount rates is luring them into taking on greater risk to achieve their required returns. Hence, even while the slimmest of opportunities exist in the market, until a categorical move towards capital preservation emerges, flow will be sustained and supportive of global equities.

ASX demonstrating less optimism

As it relates to the ASX 200, some late buying on Wall Street has translated into SPI Futures pricing in a flat start for the index today. Early indications are that Australian stocks will go without the broad-based buying that drove Wall Street activity overnight. The slightly stronger Australian Dollar and lift in bond yields will also enervate the market, given much of its recent gains has come courtesy of a fall in both. Energy stocks could be the clear winner today, as oil prices leap to 3-month highs. The overall success of the market probably rests on the financials though. The question is whether a rebound in global yields will override the domestic challenges confronting the financial sector.


This information has been prepared by IG, a trading name of IG Limited. In addition to the disclaimer below, the material on this page does not contain a record of our trading prices, or an offer of, or solicitation for, a transaction in any financial instrument. IG accepts no responsibility for any use that may be made of these comments and for any consequences that result. No representation or warranty is given as to the accuracy or completeness of this information. Consequently any person acting on it does so entirely at their own risk. Any research provided does not have regard to the specific investment objectives, financial situation and needs of any specific person who may receive it. It has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such is considered to be a marketing communication. Although we are not specifically constrained from dealing ahead of our recommendations we do not seek to take advantage of them before they are provided to our clients.
CFDs are a leveraged products. CFD trading may not be suitable for everyone and can result in losses that exceed your initial deposit, so please ensure that you fully understand the risks involved.

Live prices on most popular markets

  • Forex
  • Shares
  • Indices

Prices above are subject to our website terms and agreements. Prices are indicative only. All shares prices are delayed by at least 15 mins.

Plan your trading week

Get the week’s market-moving news sent directly to your inbox every Friday. The Week Ahead gives you a full calendar of upcoming economic events, as well as commentary from our expert analysts on the key markets to watch.

For more info on how we might use your data, see our privacy notice and access policy and privacy webpage.

You might be interested in…

Find out what charges your trades could incur with our transparent fee structure.

Discover why so many clients choose us, and what makes us a world-leading provider of CFDs.

Stay on top of upcoming market-moving events with our customisable economic calendar.