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Trading Risk On & Safe Haven Assets in Stressed Markets

Trading Risk On & Safe Haven Assets in Stressed Markets

Ben Lobel, Martin Essex, MSTA,

Talking points on this podcast:

This time on Trading Global Markets Decoded, our host Martin Essex is joined by Shain Vernier, a US market analyst at Fxleaders.com. Shain has spent more than seven years in the markets as a professional futures, options and forex trader, with stretches at several proprietary trading firms. At this critical time, we cover how to approach risk on and safe haven assets in stressed markets. You can listen to this podcast by clicking on the YouTube link above or by using one of the alternative platforms listed below.

For more ways of listening to the DailyFX podcast, click on one of the additional channels below.

Trading risk on assets in times of turbulence

First up, we discuss the status of stocks and risk-on assets like AUD in such precarious times. How do you trade these instruments when there’s a market panic? “I think job number one is to be prepared,” Shain says. “You have to address as many scenarios as you can during the pre-market hours, expect the unexpected and understand when you’re wrong.

“If you go long a specific group of midcap stocks and they immediately go against you, sometimes it’s better to get out of the market and reevaluate before getting back in.” Also, if you are going to trade stocks, keep a close eye on the major stock indices, he advises. “It seems like with ETFs and mutual funds these days, the indices almost drag the stocks along for the ride, not the other way around. So it’s important to keep a close eye on the indices and have a firm grasp of risk.”

Trading safe haven assets

What about safe havens? Were the likes of US Treasuries, German bunds, gold, and Swiss Francs created equal for those looking for defensive plays? “They’re not equal at all in my view,” Shain says. “Each of them is sort of a stopgap measure and a hedge to a certain degree, but if the coronavirus has taught us anything it’s that each of these instruments has a mind of its own.”

Take gold as an example. In the first three weeks of March amid incredible volatility, we’ve seen gold futures regularly tank on the same day US equities are tanking. The Swiss Franc however has performed much better; up about 2% over the same period, a time when the coronavirus panic hit a crescendo in the US, as Shain sees it. “So as we started taking measures like locking down cities and restricting travel, it appears traders have turned to the Swiss Franc and even the JPY. These are different than gold’s performance, they’re each unique.”

What about USD – why does it sometimes react like a safe haven but other times not? “In times of panic USD has traditionally been the dog with the least fleas,” Shain says. “International banks hoard USD and rightly so, but it’s also been a victim of policy.”

Indeed, we’ve seen some incredibly bold moves from the Federal Reserve in the wake of the outbreak; with significant rate cuts, a massive stimulus to prop up the bond markets, and capital injections not just to banks but directly to businesses.

“We see devaluation from the Fed in an attempt to buy our way out of trouble. Will it work in the wake of the coronavirus? The jury’s still out on that one.”

For more ways of listening to the DailyFX podcast, click on one of the additional channels below.

DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.

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