FRANKFURT AM MAIN, GERMANY – NOVEMBER 09: A trader works below the graph showing the day’s course of the DAX index at the Frankfurt Stock Exchange on November 9, 2016 in Frankfurt, Germany. Stock markets around the world reacted with volatility to the surprise win for Republican candidate Donald Trump in yesterday’s U.S. presidential elections. (Photo by Thomas Lohnes/Getty Images)
By Naeem Aslam
Volatility always lingers back in the market and speculators waste no time on banking this. We have seen this time over time and the only certain thing is that sitting on the side-lines could only be beneficial if you do not have stomach for volatility.
There is nothing wrong with sitting on the fences if you are a passive investor because the last thing you want to do is to re-adjust your portfolio on every single whipsaw in the market. However, if you are looking for rapid moves in the market, you don’t need to get sold on participating.
There is no shortage of events that would move the markets this week. With the ECB meeting, the FBI director’s testimony and the UK General Elections on the agenda, this week has plenty to offer. The recent conflict between Saudi Arabia and Qatar is nothing to sneeze at. Markets across the Middle East have been rattled by this news and if the issue escalates further, then we could see the gold price moving towards the level of 1350.
However, in the UK, it is all about one thing and one thing only: General elections – 8th June. Mark the date. Long story short, both main parties have declared that they are not going to back down from Brexit and we expect them to respect the public wish.
But take this with a pinch of salt. We can only trust politicians as far as we can throw them. Jeremy Corbyn, the leader of the Labour Party, is hot on the heels of Theresa May, with the latest YouGov polling data indicating the gap is only 4 points between the Labour and Conservative party.
Gateshead is a key battleground for both parties because it voted to leave the EU in June’s Brexit election and the latest picture suggests that Jeremy Corbyn is well received in that area. He has focused on more pressing issues such as NHS, social care and taxes. If he succeeds in drumming this message well, we may be in for yet another baffling vote from the Brits on Friday morning
UK government bonds could be the first market to bear the burnt , should the opposition party win the election with institutional investors already going short on gilt futures and long on the US Treasury futures. The reason behind this is that a Labour victory is expected to lead to increased spending on infrastructure projects and the only way to achieve that is through issuing more guilt. Last but not least, if Labour wins, it would also mean a soft version of Brexit.
Back to the drawing board. What does all that mean for traders? For starters, speculators have increased their wagers once again. By looking at the one week Delta risk reversal, a measure which protects you from an unfavourable outcome, we see that investors are covering this risk the most in the Pound-Yen pair. Remember that the Japanese Yen is classified as a safe haven trade here.
Irrespective of who wins, the Brexit negotiation process remains the hot potato and that is where traders will focus once the elections dust has settled.