Trading Opportunities Amidst Market Volatility

Falling share prices, collapsing cryptocurrencies, and the increasing fear of a recession – driving force of the market downturn? Inflation.

Trading Opportunities Amidst Soaring Inflation

When the global economy went into a standstill amid Covid-19 lockdown in 2020, the US Federal Reserve and other major central banks intervened to support the economy by extensive quantitative easing (QE) and by keeping interest rates near zero. The purpose of this is to increase the money supply to the economy and to lower borrowing costs to encourage spending which would stimulate the economy. With travel suspended and people confined at their homes with their stimulus pay-out, demand for goods soared and there was also a significant rise in retail investors participating in the financial market which pushed stocks and cryptocurrencies to all-time-highs. Inflation started to creep in as the global supply chain fails to keep up with the soaring demand. No thanks to the Russia-Ukraine war and persistent Covid-19 lockdown in parts of China, the global supply chain issue escalated which saw the US hitting the highest inflation in 4 decades at 8.6% in May.

In an inflationary environment, the asset classes that tend to outperform typically includes real assets such as Gold, real estate and other commodities which increases in price as more dollars are chasing a limited supply. Once the reality of decreased purchasing power kicks in, demand for cash also increases as consumers start to tighten their purse strings and hold cash.

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Next: Capital Flow During Rising Recessionary Fears

Capital Flows During Rising Recessionary Fears

To tame the soaring inflation, the US Federal Reserve finally kicked off its monetary policy tightening in March, May and June 2022 with interest rate hikes of 25bps, 50bps and 75bps respectively. Huge increase in interest rates in a short timespan could induce a “hard landing” where the economy rapidly shifts from expansion to contraction because of heightened cost of borrowing as the government attempts to bring down inflation with rate hikes. The fear of a recession is driving risk-off sentiment, which aided the flow of capital away from risk assets like stocks, into safe haven assets like USD denominated bonds or cash.

Following the patterns of capital flow, risk assets such as stocks and cryptocurrencies underperform, giving rise to opportunities for short sellers to capitalise in this market. A capital efficient way to participate would be through the use of derivatives which tracks the underlying price movement yet can be traded on margin in both directions, requiring only a fraction of the notional value to initiate a position.

Next: Re-evaluation of Sentiments in Bear Market

Re-evaluation of Sentiments in Bear Market

Against the backdrop of sky-high inflation, hawkish Federal Reserve and recessionary fears, the stock market turned into a bear market in 2022 with the benchmark S&P 500 index dipping around 20% since start of the year. At the same time, the tech-heavy Nasdaq 100 Index also declined as much as 30%. During the 2020-2021 bull run, the sheer volume of capital injected into the stock market saw valuation rising beyond justification into bubble territory. Despite the steep decline across the risk assets, a correction can be healthy as it flushes out excess in the market to establish a sound foundation before further long-term growth. Moreover, investors do not need to be too worried about the bear market as the market has bounced back from every single bear market in history.

To the contrary, bear markets are welcomed by savvy investors and speculators. Savvy investors recognise the opportunities to pick up more quality investments at a deep discount. While speculators understand volatility gives rise to potential short-term speculative plays through going long or short in the market.

Next: How to Hedge Against Inflation

Hedge Your Portfolio Against Inflation

Unlike buying stocks where one can only profit from rising markets, Forex and CFD trading gives you the flexibility to go long and short – bringing endless trading opportunities in the movement of currencies, stocks, indices, commodities, and more.

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Trade in both bull and bear markets at absolutely zero commission on Phillip MT5. Open an account today!

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