Tips for traders, 26 May 2020
The Dow Jones Industrial Average (DJIA), S&P 500 (SPX) and Nasdaq Composite are moving in sync. There’s one key difference between the DJIA and Nasdaq: the DJIA is still far below its peak, whereas the Nasdaq is very close to its highs before the crisis. This is mainly because the Nasdaq consists of technology stocks which have flourished during this pandemic as more people are ordering online, buying food, medicine, and more virtual services like conferences, meetings, webinars, etc.
Even though the American economy has gradually reopened since last month, unemployment is still very high. It’s too early to expect much of a recovery. Many people around the world will be trying to save more during the current circumstances given high economic uncertainty. Fear has decreased significantly with the VIX entering its pre-outbreak range at 10-24:
More and more central banks might continue to cut their interest rates and even set negative rates. Last week the Bank of England sold bonds with negative interest, a historic decision. The US has never done so, but the futures market suggests that rates for American bonds will turn negative. Negative rates make it hard for economies to recover.
That’s why the chairman of the Fed has been trying to avoid them. The US is printing more money to fuel its economy instead. In one interview Dr Powell said that the Fed will flood the market with money until the economy runs again.
Meanwhile, the price of gold seems to have stabilized in its current range between $1700 and $1750/troy ounce. This is mainly due to “wait and see” mode: there might be another burst of the bubble before scaling more to gold. There is no significant sign for investors and traders of “flight to safety” now, so gold could stagnate for a while.
Risks should be avoided where possible in the current circumstances. During ranging, there is often a tendency for sudden movements, so ‘wait and see’ can be appropriate to avoid unpleasant surprises. At the same time, if one sees a price heading in one direction, it’s better not to ‘dip both feet into the water’.
Further money printing suggests that a currency will weaken, but at the same time this does not really apply to the dollar. Most transactions in forex markets still involve the dollar. Pairs with the dollar and another currency of which a central bank is printing more can probably be expected to show gains for the dollar.