Financial markets have been experiencing particularly large fluctuations of late.
We take a look at the factors that have been causing these savage swings, with particular focus on global stock indices and forex, and discuss the ways in which the fragile markets may move next.
What's causing the current volatility?
A number of economic factors combined last week to cause widespread panic among traders. This in turn resulted in the hefty falls seen across major global indices and in forex markets, with the most significant issue arguably remaining the eurozone debt crisis. This itself was sparked by Greece's spiralling descent into debt and the accompanying credit rating downgrade to 'junk' status. Exacerbating matters, there is a tangible fear of the contagion threat to other vulnerable eurozone nations like Portugal and Spain.
The political uncertainty that came in the wake of Britain's hung parliament was felt acutely across the markets last week, with the FTSE shedding all the gains it had made this year.
As if these issues weren't enough to contend with, a further dent to markets was provided on Thursday by an alleged 'fat finger' error by a Wall Street dealer. This unintentionally large trade caused the Dow to plummet almost 1000 points – a whopping 9.2% – before rebounding to a less catastrophic 3.2% slide on the day.
How have the markets reacted?
After spiralling inexorably downward – the FTSE 100 plummeted almost 8% in the first week of May – global markets rebounded emphatically on Monday 10 May after the European Union (EU) and International Monetary Fund agreed a €750 billion deal to plug the growing concern of the Greek crisis spreading. The FTSE rebounded 5.2%, recovering more than half of its losses over the previous week. However, despite the fact that we now have a coalition government, there remains some uncertainty over exactly which economic policies may be implemented. For instance, the £6 billion Tory deficit reduction pledge, widely considered to be a positive move for sterling, will be harder to meet in a coalition than it would have been in a one-party majority situation.
After taking a pummelling as the Greek issues reached tipping point last week, the banking sector was one clear beneficiary of the EU/IMF rescue deal. Indeed Barclays, Lloyds Banking Group and Royal Bank of Scotland Group occupied the top three spots on Monday's leader board, with the former adding as much as 16.2% to 329.6p.
Predictably, both sterling and the euro have been affected by the ongoing uncertainties. Sterling dropped to a one-year low against the dollar of $1.45 on Friday morning, 7 May, before easing marginally higher later in the day and closing the week at $1.48. Some fund managers believe that it is a clear buying opportunity on the dollar, with its relative safe-haven status compared to the pound – one analyst believes it could fall as low as $1.40. In contrast it is thought more likely that sterling will hold its value versus the euro, in the face of the debt-mountain faced by Greece, and therefore the EU as a whole.
Manage your risk
It is important to remember that in periods of high market volatility, while is it possible to make significant profits, it is also possible that you will incur larger losses than during less volatile times. With IG Index you can take steps to put a limit on the amount of money you are willing to risk while ensuring that potential profit is uncapped. Find out how we can help you to manage your risk.
Take a position
Whatever your view on the next move, with IG Index you can choose from a host of different markets, including:
- Binary and Options volatility bets – If you feel that a market, for example the FTSE 100, is set to be particularly volatile, you can take a position by betting on the volatility itself, as opposed to choosing on one direction. Find out more about betting on volatility.
- Stock Indices – Deal around-the-clock and take advantage of our tight spreads; just 1 point on Daily FTSE and 2 points on Daily Wall Street.
- Sectors – choose from more than 35 FTSE-based sectors, including the ever-topical banking and mining sectors.
- Forex – take a short-term or longer term view on currency movements from over 60 pairs, including EUR/USD from just 1 pip.
- Shares – Pick from 7000 individual global shares with permanently low spreads and deposits from just 5%.
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The above comments do not constitute investment advice and IG Index accepts no responsibility for any use that may be made of them.
Updated: 12/05/10