.
By Oren Laurent
President, Banc De Binary
Currency markets have experienced a high degree of volatility lately, and this is likely to be mirrored by much of the same in equities markets. Analysts are concerned that a lot of the uncertainty is being seen in the forex trading arena, and the bond markets and that this may well lead to high volatility in the equities markets.
Government debt remains a source of deep concern, especially across the Eurozone, Russia and the U.S. in recent days the greenback has lost ground against the Boston of currencies including the Euro which has gained almost 9%. Here was last trading at a 12 year low figure of $1.0457 around March 2015. This was a result of several factors in the US such as weak economic data and uncertainty vis-a-vis the U.S. interest-rate hike.
Bond Markets Under the Spotlight
But what we have been witnessing lately is heavy selling in bond markets which has resulted in higher yields. For example, the 10 year U.S. Treasury yield hit a five-month high figure in the second week of May. Likewise, in Germany the 10-year Bund rose from a low of 0.05% in April by 59 basis points. There are several reasons why these yields may be rising, including rising oil prices and a general feeling that low bond yields are causing in the markets.
One of the reasons why traders have been making a lot of money in recent years is momentum. Since everyone has been buying German Bunds the general thinking is that this is the right thing to do. Market sentiment has reinforced this bullish approach. Allied with that is the launch of a bond buying programme by the ECB. Valued at $1.13 trillion, this broad scale initiative is designed to stimulate economic growth across the Eurozone.
Equities Markets White Hot?
Perhaps what was supposed to happen and what actually happened with respect to QE and how it impacts on yields took many investors by surprise. Quantitative easing is supposed to apply downward pressure on bond yields, but the German Bund yields have risen in recent weeks. The equities markets are rallying right now, but if downward pressure is exerted on 10-year Treasuries and/or 30-year Treasuries we may see a reversal with regards to stocks. It should be pointed out that in 2015 alone, Japanese stocks and European stocks have recorded gains in excess of 10%. This leads many analysts to believe that the equities markets are surging ahead too quickly.
High Volatility Buoys Traders
It may well come to pass that a reassessment of the stock markets take place midway through the year. In the event of such a reversal, all that liquidity in the markets will quickly dry up. One cannot ignore that such things can happen, especially since they did occur in the bond market, and the currency market. For now, oil stocks are the flavour of the day and currency traders are enjoying a lot more activity in the trading arena – thanks to higher volatility.
