What Is Going on in Equities Markets Around the World

 

Global stock markets are agonizing through some of the worst selloffs in recent history. The performance of the Dow Jones Industrial Average, the NASDAQ Composite Index, and the S&P 500 has been nothing short of disastrous heading into the month of love. Equities traders, speculators, economists, and media talking heads have used every conceivable adjective in the book to describe the torrid time that markets are enduring. Equities traders have used terms like writhing convulsions to meteoric drops, bearish markets, corrections, and worst multi-year performance.

This begs the question:  Where are markets headed?

It’s important to take a step back from the current grim reality before simply weighing in on the otherwise lackluster performance of global markets. If we look at the following major indices, we can appreciate how well they have performed, and how significant the current market movements are:

  • The Dow Jones Industrial Average is currently down 6.58% over 1 month
  • The S&P 500 Index is currently down 6.05% over 1 month
  • The NASDAQ composite index is currently down 5.75% over 1 month

When we extrapolate further, we can see that the Dow Jones has a 52-week trading range of 20,061.73 on the low end and 26,616.71 on the high-end. Clearly, the current level of 23,715.44 (Friday, February 9, 2018) is firmly in the middle. The S&P 500 index has a 52-week trading range of 2,296.61 on the low end and 2,872.87 on the high-end. The current level is 2,583.74 – again right in the middle. The tech heavy NASDAQ composite index has a 52-week trading range of 5,685.15 on the low end and 7,505.77 on the high-end. It is currently trading at 6,744.55, 1,000 points above its 52-week low.

Why Are Markets Convulsing Right Now?

Major investors, and everyday folks are scared that runaway inflation and rising interest rates could hurt stock market investments. It must be remembered that the fundamentals of the US economy are sound – there is no questioning that. According to Olsson Capital trading guru, Edward Bronstein:

 

‘We have to appreciate the bigger picture here. The Fed has been pushing to raise interest rates ever since the US economy turned the corner. By December 2015, we started to see incremental increases to the federal funds rate in 25-basis point intervals. Come Wednesday, March 21, 2018, we are likely to see yet another rate hike if stock markets stabilize and employment numbers continue to shine and inflation keeps rising.

 

According to the CME Group FedWatch tool – a great barometer of sentiment for interest rate movements, there is a 71.9% likelihood of a rate hike of 25-basis points in the region of 1.50% – 1.75% in March. Unfortunately, stock markets don’t like rate hikes, especially when they are part of a series of ongoing rate hikes. When the monetary authorities decide to raise interest rates, the value of stocks declines. The thinking is that consumers have less personal disposable income, companies are paying more in interest, and naturally this is going to lead to lower demand for company products and services, and ultimately to lower prices.

 

So, to be safe, investors take their money out of stocks and put it into safe-haven assets like gold, gold ETFs, treasuries, and interest-bearing accounts. They are also going short on derivatives trading options like CFDs and spread betting. Is the stock market going to continue its massive selloff? Probably not. But for now the safe money is on a market correction before the value-investors jump back into the markets to pick up bargain deals on top stocks.

 

While the year to date gains have been erased from major bourses around the world, we should take pause and see what US inflation figures will be before determining whether Fed action is warranted. Meanwhile, German, US and UK bonds have reacted with high volatility to current economic conditions. Oil is down, gold is down, copper is down, and the USD is down. The current trajectory of financial markets is attributed to bearish sentiment.

 

 

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Why The Bitcoin Market Is Hitting All-Time Highs

The Bitcoin market has never been stronger and despite pressures from a number of countries like Russia and the US to strictly regulate and refuse to recognize the cryptocurrency, Bitcoin’s value has soared. In fact, the Bitcoin price soared to a record high of $1,800 earlier this month, although some reports are suggesting that it is beginning to slip slightly. People are beginning to worry about the blockchain disrupting trade finance, but with the rise in value we could see Bitcoin becoming a more stable digital currency. With Bitcoin prices having increased by around 81% since the start of 2017 the market is showing some serious strength. Here, we’re taking a look at why the Bitcoin market is reaching such an extensive high.

Comments From The Minneapolis Federal Reserve President

One of the main factors behind the sudden surge in price on Tuesday 9th May was the comments made from the President of the Minneapolis Federal Reserve, Neel Kashkari, about the blockchain technology as a whole. He stated that the technology is more interesting and has more potential than Bitcoin itself. His comments are beginning to be a pinnacle in the industry and is marking yet another influential policy maker who is warming up to the technology. After his comments, the Bitcoin actually rose by 6%.

Availability Of Information

The internet is a huge source of information on a number of topics, but very slowly a number of major news sources and social media channels are beginning to focus on the Bitcoin currency. This has led to a growing interest in the digital currency, as people are able to understand more about how the Bitcoin can benefit them. This is not only through general information, but also with informative sites like Bitcoin Casino Pro who provide in-depth reviews on Bitcoin casinos – which are one of the main things that people spend their Bitcoins on due to their anonymity and fast transaction speeds. The more people understand the value of the Bitcoin and what they are used for, the more people will turn to invest in the digital currency, further boosting its market value.

China’s Currency Devaluation In 2015

Back in November 2015, there was a surge in the value of the Bitcoin which was influenced largely due to China’s currency devaluation. The devaluation took place in order to help mitigate any inevitable capital outflows and stabilize the economy. While China generally ban the Bitcoin currency, all it would take was a number of Chinese citizens to invest in the Bitcoin, even by just a small fraction for the crypto currency to bubble into another all-time high. Speculation of this was quickly confirmed when reports suggested that Bitcoin price was influenced mainly by Chinese exchanges back in 2015 and this could have had an impact in the rise in the Bitcoin value that we have seen throughout 2017 too.

However, China has also begun to clamp down on the Bitcoin, and looking to ban or at the very least strictly regulate the currency – both for trading and the exchanges themselves. In fact, China’s Central Bank has even warned investors against looking to the currency. While at first glance this may seem like a negative suggestion, the scrutiny that China is putting on the crypto currency (which is similar to Russia’s current stance) could lead to stricter regulations, further helping to steady the market. A more stable Bitcoin market means a potential gateway for investments which will ultimately boost the value of the Bitcoin.

Legalisation Of Bitcoin In Japan

A major influential factor was the recent decision by the Japanese government to legalize the cryptocurrency, and recognize it as a payment method. This led to more Bitcoins being purchased with yen which has led to a major support network for the cryptocurrency. Alongside the legalization of the Bitcoin in the country, a number of regulations are set to be implemented in order to provide users with a lot more security when it comes to using the technology. This is generally due to the concerns about illegal activities using the pseudo-anonymous crypto currency such as money laundering.

However, amendments to the Banking Act and the addition of section 3, which is tentatively being referred to as the ‘Virtual Currency Act, it is highly likely to see a number of regulations. For example, Bitcoin is classified as an asset, and so any profits from Bitcoin trading will be subject to capital gains tax in the country, but will no longer be subject to consumption tax, which lies at 8 per cent in Japan. Digital exchanges in the country will also have a number of required regulations, including the minimum capital that they need to hold being 10 million yen.

According to the new law, the exchanges will also need to possess an IT system management program which is sufficient enough to protect against issues such as leakage, or loss and damage to any personal funds which the exchanges may hold. In order to protect the users of the exchanges even more, exchanges must also disclose trading name and address, registration number, transaction content, and all fees and costs to their users, showing just how much more secure the Bitcoin and digital currency exchanges are set to be for their users.

This legalisation alone has led to a surge in interest in the crypto currency, with more people seeing Bitcoin as a reliable and regulated digital currency, causing asset managers to jump into the market.

Internal Developments

With the rise in value of the Bitcoin and the increased investor attention, there have been a number of internal developments that are in the process of being carried out in order to help ensure that the Bitcoin maintains its promises of flawless security and usage. One of the initial developments that could potentially be carried out include a way to scale up the system in order to allow it to handle many more transactions. The implementation of the Segregated Witness (SegWit) on the Bitcoin clone currency LiteCoin is an initial step towards this development, meaning we could see much more improvement in the future. If this can be successfully deployed, we are likely to see a huge increase in the value of the Bitcoin in the near future. While there are a number of pros and cons of the Bitcoin, these internal developments could prove a vital step towards market stabilisation.

Winklevoss Proposal

Back in March, The US Securities and Exchange Commission rejected a proposal from the Winklevoss twins, who were looking at a Bitcoin exchange traded fund. Nevertheless, the SEC are considering reviewing this rejection, which could see a further interest from investors in the near future as more developments begin to come to light with the crypto currency. With figures like the Winklevoss twins looking to push Bitcoin into the mainstream, we may see that the rise in value of the Bitcoin isn’t just a temporary thing, and we may begin to see the generally rocky market begin to stabilize with more regulation.

 

What Is MiFID II and what impact will it have on business

Even though the delay of the Markets in Financial Instruments Direction, MiFID II, will have been a relief to a number of investment firms that had waited for the release of the European Securities and Markets Authority’s regulation, it doesn’t hide the fact that it will come into practice. The impact that MiFID II will have on businesses is constantly changing and it is imperative to keep a finger on the pulse.

The launch of MiFID II in January 2018 is set to have a sweeping effect on asset management firms in particular who are responsible for providing transaction reports. Despite a couple of exceptions, these firms will no longer be able to rely on brokers for transaction reporting.

However, new technologies will be implemented to help businesses to meet their MiFID II reporting needs.

What is MiFID and MiFID II?

The first Markets in Financial Instruments Directive (MiFID) resulted in a major change to cash equity markets. Its best intentions were to remove barriers to make cross-borders trades and exchanges within Europe safer and more transparent. MiFID II regulates firms that provide services to clients, such as collective investment schemes or derivatives, and this also includes trading of location instruments. The legislation has a number of core objectives, including:

  • To improve investor protection
  • Alignment of regulation across certain areas within the EU
  • To increase competition between financial markets
  • To introduce reinforced supervisory powers

So essentially, MiFID II will introduce a set of requirements regarding communication, disclosure and transparency to benefit investors.

                                        What impact will MiFID II have on business?

 

                                 There are three main challenges ahead of MiFID II:

    

To Improve the market

MiFID II improves the competitive environment for financial instrument trading. This is achieved by establishing access in the market for trading platforms to expand. New rules regarding high-frequency trading will also be put into practice. It is likely for this to involve strict requirements for both investment firms and trading venues. Investment firms will also need to be aware of what types of businesses they are and are not in, and those that they are interested in joining.

To Increase Transparency

When MiFID II is introduced, more requirements will need to be filled when reporting commodity derivatives trading to attain transparency. To ensure success, all trading information must be recorded before and after the transaction for a larger number of financial instruments, when compared to MiFID, to provide increased accountability. Certain shares will be required to be travel-use regulated platforms, as opposed to over the counter, making the process more secure and private.

To provide investment protection

MiFID II focuses on improving investor protection to extend the introduction of robust controls, to prevent conflicts of interest. This will aid in encouraging transparency between pre-execution and post-execution, and enables fees payable in respect of investment advice to be banned. The introduction of new requirements and implementing existing ones will strengthen the protection of investors.

How to Really Benefit from Low Interest Rates

 

 

 

 

98% probability of interest rates remaining at their current rate

The current interest rate is 1.00% – 1.25%. The Fed has not indicated any desire to increase the federal funds rate at its next meeting on Wednesday, 1 November 2017. According to the CME Group FedWatch tool, there is a 98% probability of interest rates remaining at their current rate when the FOMC meets within a month. However, the likelihood of a rate hike at the final meeting of the Fed FOMC on Wednesday, 13 December 2017 is currently 76.4%. By contrast, the probability of interest rates remaining at the current level of 1.00% – 1.25% is just 22.1%. The importance of probability estimates vis-à-vis interest rates cannot be understated. Since August 25, 2017 through September 22, 2017, we have seen an increasing probability ranging from 37.8% to 71.4% that the target rate will increase by 25-basis points.

Monetary and Fiscal Policy: Interest Rates

Current forecasts are based on the estimates of leading economists, analysts and stakeholders. If the Fed deems it appropriate to raise the federal funds rate, this will have a dramatic effect on the USD and the US economy. While the impact of a rate hike is typically priced in to the value of the USD well ahead of time, the actual announcement will cause a slight bump in the USD. For example, interest rate hikes are typically indicative of an improving economy. When the inflation rate (CPI figures) begins to rise, this means that the purchasing power of the USD may be declining. To keep the economy in check, the Fed has several tools at its disposal, notably monetary tightening (rate hikes and unwinding the $4.5 trillion balance sheet). Fiscal policy can also be used to tighten economic conditions by raising taxes, and reducing government spending. However, neither of these fiscal measures are likely given the Trump administration’s policy of tax breaks and massive government stimulus. Therefore, it will be up to the Federal Reserve Bank to adjust monetary policy to prevent inflationary pressures and to keep the USD strong.

The Nonlinear Relationship between Interest Rates and Stock Markets

Low interest rates – as they currently are – will last for some time, but there is a trend towards a gradual tightening of interest rates. If the Fed raises rates before the end of 2017, the federal funds rate will rise in the region of 1.25% – 1.50%. Further rate hikes will be forthcoming in 2018. Right now, we are seeing an increase in the number of personal loan applications as individuals take advantage of historically low interest rates in the country. Any increase to the federal funds rate will invariably spill over into other areas of the economy, and make all lines of credit relatively more expensive. This is particularly true of credit cards which are associated with high APRs, business loans, mortgage loans, automobile loans, student loans and the like. Provided it is feasible to finance a line of credit, it is always better to do it when interest rates are low. Typically, the bulk of payments on personal, business and mortgage loans go towards repaying the interest on the loan. In latter years, the principal amount is repaid. The Fed is also cognizant of the rising level of household debt in the US, and how an increase to the federal funds rate might affect that. If the FOMC decides that conditions are rife for a rate hike, this will provide a short-term boost to Wall Street, but ultimately the increased costs of loans will lead to a slight decline in share prices and profitability, but consumers will ultimately bear the burden.