5.15.2009

Can Stocks And High-Yielding Currencies Maintain Their Rally Without Fundamental Support?

• Can Stocks And High-Yielding Currencies Maintain Their Rally Without Fundamental Support?
• Doubts Over the Reliability of the Fed’s Stress Test Growing
• How Far Ahead Will Speculators Look in Forecasting a Global Recovery?

The collection of European monetary policy decisions, US non-farm payrolls and the results of the Federal Reserve’s bank Stress Test last week seems to have been a turning point for sentiment in the market. However, the tempered pace of job losses in the world’s largest economy and in-line capital shortfalls from 10 of the largest banks was more effective at curbing the ongoing recovery in optimism than supporting it. Looking at those asset classes with an indelible link to sentiment and risk, it was clear that investors from all levels of the market realize that capital gains and yield can only be supported by a genuine economic recovery – which is still months away at the earliest. The deflation in optimism for stocks has been modest so far, as the benchmark Dow has pulled back less than four percent from the four month highs set just last week. The same can be said for sentiment in the currency market. This past week, the Carry Trade Index managed to top six-month highs before being turned off its steady advance. So, while the market has taken a step back, we have to consider that the bias over the past two months is still bullish on risk. However, should the shift in underlying market conditions continue alongside the fledgling trend in asset prices, we may see a true collapse in bull convictions and the revival of a long-term bear market. We are still a long ways off from this scenario though. The DailyFX Volatility Gauge has ticked above 14 percent just after exploring a seven-month low. Along similar lines, risk reversals and interest rate expectations from the most risk prone pairs have edge off their steady trends of improvement to raise the potential for a pause rather than a full-blown retracement.

From a fundamental perspective, it is ironic that risk appetite was rising into thedense round of event risk last week; and after the data crossed the wires with a positive bias, the advance would fall apart. Putting this incident into perspective though, this reaction played out exactly as would have been expected. Over the past two months, we have seen investors lower their guard against the threat of an unexpected market shock and begin to reinvest their capital into risky assets. However, throughout this period of burgeoning optimism, the outlook for economic activity and returns were in fact deteriorating. Growth forecasts from policy officials and central bankers are laden in caution even though they conservatively project a ‘slow’ or ‘gradual’ recovery through the end of this year and into the beginning of 2010. Meanwhile, hard data is still painting the picture of a severe recession. Advanced readings on first quarter GDP figures are looking at significant, negative revisions while timely indicators like employment maintain their painful trajectory. Now that sentiment has broken trend, investors will be more wary with their confidence. A potential concern going forward is the accuracy of the Fed’s Stress Test. There is speculation that losses were understated and forecasts overstated - a questionable combo.

Written by John Kicklighter, Currency Strategist
Article Source - Can Stocks And High-Yielding Currencies Maintain Their Rally Without Fundamental Support?
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What is Forex?

If you would go out on a dinner with your friends or family and you mentioned that you were trading on the Forex market most of them wouldn’t know what you were talking about. The worst thing is that most of the Forex traders that join the Forex market don’t know what they are doing. Understanding what Forex is, is the first good step to your success at Forex trading.


The foreign exchange market (Currency, Forex, or FX) is where currency trading takes place. It is where banks and other official institutions facilitate the buying and selling of foreign currencies. Forex transactions typically involve one party purchasing a quantity of one currency in exchange for paying a quantity of another. The foreign exchange market that we see today started evolving during the 1970s when world over countries gradually switched to floating exchange rate from their erstwhile exchange rate regime, which remained fixed as per the Bretton Woods system till 1971.

Today, the Forex market is one of the largest and most liquid financial markets in the world, and includes trading between large banks, central banks, currency speculators, corporations, governments, and other institutions. The average daily volume in the global foreign exchange and related markets is continuously growing. Traditional daily turnover was reported to be over US$3.2 trillion in April 2007 by the Bank for International Settlements. Since then, the market has continued to grow. According to Euromoney's annual Forex Poll, volumes grew a further 41% between 2007 and 2008.

Forex Turnover

Forex Turnover
Main foreign exchange market turnover, 1988 - 2007, measured in billions of USD.
The purpose of Forex market is to facilitate trade and investment. The need for a foreign exchange market arises because of the presence of multifarious international currencies such as US Dollar, Pound Sterling, Yen, etc., and the need for trading in such currencies. Since you aren’t buying anything physical this kind of trading can be confusing. When buying a currency think of it as buying a part in that particular country’s economy because the currency rate reflects the economical situation of the country when compared to others.

Currencies

Currencies
List of most popular currencies on the Forex market

Forex used to be a closed market because only the “big boys” because you needed between 10 and 50 million $ to open an account. But today, with the development of internet, online Forex brokers have the possibility to offer their services to “little” traders. All you need to start is a computer, fast internet connection and information which you can find on this page also.

This enormous market is like the dangerous sea where you can meet lots of sharks and dangerous waters but at the same time it is the only one where two weeks of trading can hypothetically bring you $1,000,000 out of $1,000 of initial investment.

This is certainly hypothetically because a lot of newbie traders deal with their trades as gambling, that surely bring them to having nothing in the end. You should always keep the phrase "be careful!" in your mind. This market would give you its profit possibilities only if you learn the basic things hard and make lots of demo trading.

The statistics is that as much as 95% of traders come to losing their money at Forex, 5% have profit and less than 1% of traders make large fortune at Forex. You shouldn't produce, sell or advertise anything trading at Forex. Your assets are your knowledge, experience and a small amount of cash.

This market is a platform for banks, transnational corporations and individual traders to change the currencies they possess into other ones. This is the spot Forex market. At this market you can trade with up to 1:400 leverage which means that you'll get $400 on your account for each dollar invested. So, you can trade with the $400,000 sum having invested $1,000 onto your account.

Forex is unique among other world markets because in any time of day and night, somewhere in the world, a financial centre is open for business, banks and corporations exchange currency all the time, with a little lower frequency during the weekend.

Why to trade on Forex?

1. There is no commission fee for trading at Forex.
2. There is no intermediary, you can trade directly at Forex.
3. Forex is open 24-hours a day.
4. Nobody can influence the market for a longer period.
5. High liquidity.
6. Free demo accounts, analysis and charts.
7. Small accounts that allow everyone to try out his luck.

Hope this has answered a lot of questions you were asking yourself about Forex and that you can now start trading. Also make sure that you check out other articles on this blog which can help you earn your fortune.

Good luck to everyone!