The Chinese slowdown, Britain’s vote to leave the EU and Trump’s election all set off major market volatility in 2016. What lessons can we take from these events going forward?
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How do Australian traders react to global volatility events?
In the current political landscape, financial markets are constantly confronted with new dramas to give traders cause for concern. And there’s always bound to be more uncertainty round the corner, whether in the form of new leadership, major elections or influential legislation.
In anticipation of renewed volatility, we’ve taken a look at how IG clients in Australia traded three major market-moving events from 2016: China’s market slowdown, the UK’s vote for Brexit and the election of Donald Trump as 45th president of the United States. What were the patterns and behaviours present among previous volatility events, and what can we learn from them for next time?
China’s slowdown
It was an uncertain start to 2016, as China’s ‘circuit breaker’ shutdown measure came into effect for the first time.
The UK votes for Brexit
The UK’s unexpected vote to leave the European Union caused widespread unease in the financial markets.
US presidential election
Trump’s election as president upset all expectations – and continued to surprise as it kicked off a significant rally.
China’s ‘circuit breaker’ slowdown
Fears over China’s economic growth ensured 2016 kicked off with uncertainty, as indices around the world slumped and the Chinese regulator was forced to utilise its ‘circuit breaker’ shutdown measure for the first time – before abandoning the measure shortly after.
“Global equity markets are in freefall as yet another Chinese shutdown caused mass panic across European futures markets. For many in the City, there was a feeling that the show was over before it had begun, with the FTSE 100 already down almost 2% by 7am.”1
Joshua Mahony, IG Market Analyst, London, 7 January 2016
How was it traded?2
While undoubtedly a major market event, the impact of the Chinese slowdown on traders didn’t quite match up to that of Brexit and the US election. This is reflected in the number of trades and active traders, both of which were significantly lower.
China’s market slowdown also wasn’t a scheduled political event, meaning there wasn’t time to plan strategies in advance to the same degree. Of course, traders here had a major advantage over those in Europe – while Europeans woke to news of the China slowdown, Australians could follow it as it happened.
And they appear to have taken advantage of the opportunity: from 11am when markets first started tumbling up to 3pm when the circuit breaker hit, for instance, Australian clients traded more than those in the UK – despite UK volume over the 24 hours being 215% higher.
Compare this to Brexit, when UK traders once again had to follow results overnight but had the opportunity to plan in advance. Over the same time period, the UK saw 76% more positions opened than Australia.
With no need to follow markets and results throughout the night, Australian traders also appear to have been happy to stick to their work PCs and laptops. 56% of the trades made over the 24 hours were on desktop.
Findings in full
Data used: All positions opened by experienced Australian clients on our web platform, Android and iPhone from 7am on 7 January to 7am on 8 January 2016, and all China 300 positions opened by experienced Australian clients on our web platform, Android and iPhone from 31 December 2015 to 14 January 2016.
Platform/trader
- 56% of all trades were executed via desktop, with the highest volume of desktop trades arriving at 11am on 7 January
- 27% of all trades were via iPhone, compared to 17% via Android
- 63% of traders aged in their 30s used a mobile device to trade, whereas 75% of traders aged in their 50s traded via desktop
- The average age among those trading the Chinese slowdown was 43
Asset class
71% of trades opened during this event were on stock indices, 20% were on forex pairs, while 5% and 4% were on commodities and shares respectively.
Key markets
China 300
- The highest volume of trading on the China 300 occurred on the day after the circuit breaker measure was used for the first time
- On the day after the circuit breaker was removed, sentiment was 76% negative
USD/CNH
- Traders generally avoided the yuan: just 0.5% of all forex trades were on USD/CNH
Top markets
Top five indices
The most traded stock index during this event was the Australia 200 with 36% of all indices trades. The Germany 30 was second with 29% and third was Wall Street with 16%. Fourth was the US 500 with 6% and fifth, the FTSE 100 with 5%.
Top five FX pairs
The most traded currency pair during this event was AUD/USD with 44% of all forex trades. In second was EUR/USD with 18% and third was USD/JPY with 10%. GBP/USD was fourth with 5% and USD/CAD fifth, with 3%.
Top three commodities
Oil was the commodity with the highest volume of trading – 35% of all commodity traders opened a position on US crude, and 21% traded Brent crude. Gold came in third with 21% of trades.
Top five shares
8.2% of share traders opened a position on miner BHP Billiton. National Australia Bank was joint-second most traded with Apple, both on 4.6% of trades. Fourth was energy company Santos on 4%, and Commonwealth Bank of Australia was fifth with 3.5%.
The UK votes for Brexit
Former Prime Minister David Cameron kept his pre-election promise, holding a referendum on the UK’s EU membership. Despite polls pointing to a narrow victory for Remain, the UK voted to leave by 52% to 48%.
“UK stocks have so far proved fairly immune to EU referendum polls, suggesting an exit is almost as likely as a vote to remain. That will change if the UK electorate does vote for Brexit.”
Chris Beauchamp, IG Market Analyst, London, 25 April 2016
How was it traded?3
Perhaps unsurprisingly, given Australia’s cultural proximity to the UK – even if geographically China is closer – Brexit appears to have been a much bigger event for Australian traders than China’s slowdown. Overall, there were 38% more trades over this period, 26% more active traders and 21% more markets traded.
There was also a clear uplift in trading on key markets like the FTSE 100 and GBP/USD, with the FTSE 100 seeing 84% more trades and cable seeing an impressive 361%. That said, UK markets failed to overcome the clear preference that Australian traders have for local markets: in a repeat of the Chinese slowdown, the Australia 200 and AUD/USD dominated trading with over 42% of positions opened.
Traders may have stuck to local markets because they were wary of the global volatility brought about by Brexit. Certainly, the spike in gold trading over the event points to a risk-off mentality. During the EU referendum, 63% of commodities positions were opened on gold – a sharp contrast to China’s slowdown when that figure was just 21%.
In terms of key markets, GBP/USD saw a flurry of trading as early results arrived late in the morning – with the majority of positions opened taking a positive view. From 10am when the first result came in through to 5am when the result was all but certain, 56% of trades on GBP/USD were long.
Over the next five hours, trading was 64% negative. While many looked to the markets for an indication of how the result might play out, Australian traders appear to have been playing catch up just as much as everyone else.
Findings in full
Data used: All positions opened by experienced Australian clients on our web platform, Android and iPhone from 5am on 23 June to 5am on 24 June 2016, and all GBP/USD positions opened by experienced Australian clients on our web platform, Android and iPhone from 17 June to 1 July.
Platform/trader
- 47% of all trades were executed via a mobile device, with the majority of mobile trading taking place between 9am and midday
- 31% of all trades were via iPhone, compared to 16% via Android
- 61% of traders aged in their 30s used a mobile device to trade, compared to 25% of traders aged in their 60s
- The average Brexit trader was 41
Asset class
64% of trades opened during this event were on stock indices, while 22% of trades were on forex pairs. Commodities were the third most popular asset class with 10% of all trades. Share trade volume was at 4%.
Key markets
GBP/USD
- In the three days before Britain voted on 23 June, 81% of trades on GBP/USD were taking a negative view
- Three days after the vote, on 27 June, sentiment had swung back in favour of the pound, with 75% of trades positive
- On the day itself, sentiment was split with 51% of trades taking a negative outlook on the pound
- Trading peaked at 11am but again, sentiment was almost split evenly with 53% holding a positive view on the pound
FTSE 100
- Over the 24 hours, the FTSE 100 and GBP/USD were the fifth and sixth most traded markets respectively
Top markets
Top five indices
The most traded stock index was the Australia 200 with 52% of all indices trades. In second was the Germany 30 with 14% and third was Wall Street with 10%. Fourth was the FTSE 100 with 8% and fifth, the US 500 with 5%.
Top five FX pairs
AUD/USD dominated forex trading during this event, with 42% of all trades. In second was GBP/USD with 15.5% and third was USD/JPY with 9.3%. EUR/USD was fourth with 9.2% and AUD/JPY fifth with 7.5%.
Top five shares
BHP Billiton was the most traded company share with 8% of trades. Commonwealth Bank of Australia was second with 6.6% and Newcrest Mining was third with 3.8%. Fourth was Westpac with 2.8% and fifth was ANZ with 2.7%.
Top three commodities
65% of commodity traders opened a position on gold during this event. The second most popular market was US crude with 22% of all commodity trades, while silver came in third with 6% of trades.
US presidential election
Hillary Clinton and Donald Trump went head to head in a bitterly fought election contest, with polling once again proving unreliable as Trump stormed to victory. In the markets, initial pessimism gave way to a major Trump rally.
“We have finally arrived at the week in which the person who holds the fate for the next four years of the world’s largest economy will be made known. The markets are strongly favouring Democratic nominee Hillary Clinton over Republican candidate Donald Trump, the latter associated with heightened volatility.”
Jingyi Pan, IG Market Analyst, Singapore, 4 November 2016
How was it traded?4
While the short-term market impact of Brexit tended towards the negative – bar a FTSE 100 rally buoyed by weakness in sterling – the election of Donald Trump led to a sustained market rally.
Global markets may have chosen to get behind the new president, but Australian traders appear to have been more sceptical. 56% of trades on Wall Street between 7am on 9 November and 7am on 10 November took a negative view, even as the index surged.
Early on, when the result was in the balance, traders were favouring long positions on Wall Street by roughly 60%. But as Trump’s victory came into focus, this swung significantly in the other direction, with over 85% of traders choosing to adopt short positions once his win was confirmed. This marks a clearly contrarian view to the ‘Trump trade’.
Further evidence that UK traders were wary of President Trump comes again in the popularity of gold, a market traditionally viewed as a safe haven, over this period. As Trump won the election, 73% of all commodity trades were on the precious metal, an even higher percentage than during Brexit.
With 45,959 positions opened, the US presidential election is by far the most traded volatility event of 2016, beating Brexit by 50% and the China slowdown by 106%. Trading may have increased, but it didn’t focus as heavily on US markets as might have been expected. In contrast to the UK, where Wall Street was by far the most traded market with 28% of all positions opened, in Australia it wasn’t even the most popular index. And while two US companies snuck into the top ten most traded shares in the UK (Apple and Amazon), in Australia not one features.
Findings in full
Data used: All positions opened by experienced Australian clients on our web platform, Android and iPhone from 7am on 9 November to 7am on 10 November 2016, and all positions opened by experienced Australian clients on our web platform, Android and iPhone from 2 November to 15 November 2016.
Platform/trader
- 53% of all trades were executed via a mobile device, with the majority of mobile trading taking place between 11am and 2pm
- 36% of all trades were via iPhone, compared to 17% via Android
- 65% of traders aged in their 30s traded via mobile, compared to 41% aged in their 50s
- The average age of an Australian trading the US election was 41
Asset class
61% of trades opened during this event were on stock indices, while 26% were on currency pairs and 11% on commodities. Shares were the fourth most-popular asset class with 3%.
Key markets
Wall Street
- Positive positions on the Wall Street peaked at midday, just as overall trading was peaking
- Just over 59% of trades were positive at midday, but only 46% were by 4pm
USD/MXN
- USD/MXN, seen by many as a key indicator of which way the markets thought the election could go, was the eighth most traded currency pair on the day of the US election with 1.4% of all forex trades
Top markets
Top five indices
The most popular stock index was the Australia 200, with 37% of all indices trades. In second was the Wall Street with 25% and third was the Germany 30 with 14%. The US 500 was fourth with 8% and fifth, the Japan 225 with 6%.
Top five FX pairs
The most popular currency pair traded during this event was AUD/USD with 40% of all forex trades. In second was USD/JPY with 20% and third was EUR/USD with 16%. GBP/USD was fourth with 7% and AUD/JPY fifth with 4%.
Top three commodities
A massive 73% of all commodity trades were on gold, ahead of US crude (with 13% of all commodity trades), and silver (with 4%).
Top five shares
BHP Billiton was the most traded company share with 3.9% of trades. Macquarie was second with 3.8%. Commonwealth Bank of Australia was joint third with 3.7%, tied with Newcrest Mining. Fifth was Rio Tinto with 3.4%.
Conclusion
After a 2016 of electoral upsets and unexpected market developments, it’s clear that there are lessons to be learned to prepare for future major volatility events. So for all the factors we aren’t able to anticipate, what can we take from the last twelve months?
The markets to watch
Clearly no major event has the same repercussions, but it seems wherever there’s volatility, there are always a few markets first in line for traders.
Take those who traded on China, Brexit and Trump, for example. In every case, the top three indices they rushed towards were the Australia 200, Wall Street and the Germany 30. Meanwhile in FX trading, AUD/USD and USD/JPY consistently feature in the top three currency pairs.
In light of the globally significant nature of these events, it may come as a surprise that traders in Australia were so focused on local markets. But it also continues a trend seen in many other countries – in France, for example, the CAC 40 and EUR/USD were consistently the most traded index and currency pair.
Trading goes mobile
Given that traders in Australia didn’t have to follow any of these events overnight to nearly the same degree as those in Europe, it makes sense that there would be less mobile trading than elsewhere.
But we still saw a sharp growth in mobile trades over the course of the three events: starting at 44% of trades for China’s slowdown, growing to 47% for Brexit and finally overtaking desktop trading at 53% for Trump’s election victory.
There is also a significant discrepancy between older traders and younger, who are far more comfortable with this new way to tap into the markets. This suggests not only that the mobile trading sphere is more important than ever, but that how clients trade looks set to continue to evolve over the next few years.
Untapped potential in unfamiliar markets
Despite the significant market shift brought about by the Chinese slowdown, IG clients were more reluctant to get involved than they were with the US election or Brexit.
For those who took advantage, the Australia 200 and AUD/USD were the orders of the day, offering a way to gain exposure to the Chinese fallout indirectly. This is likely due to a lack of familiarity with the yuan or China 300. But with the Asian powerhouse’s ever-growing bearing on the world stage, it may well be worth getting to grips with new markets like these moving forward, as opportunities for shrewd traders start to arise further afield.
1 All times are Canberra time (GMT +10).
2 All positions opened by experienced Australian clients on our web platform, Android and iPhone from 7am on 7 January to 7am on 8 January 2016, and all China 300 positions opened by experienced Australian clients on our web platform, Android and iPhone from 31 December 2015 to 14 January 2016.
3 All positions opened by experienced Australian clients on our web platform, Android and iPhone from 5am on 23 June to 5am on 24 June 2016, and all GBP/USD positions opened by experienced Australian clients on our web platform, Android and iPhone from 17 June to 1 July.
4 All positions opened by experienced Australian clients on our web platform, Android and iPhone from 7am on 9 November to 7am on 10 November 2016, and all positions opened by experienced Australian clients on our web platform, Android and iPhone from 2 November to 15 November 2016.
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