Risk Appetite Weighed by Forecasts for Recession, Looming Financial Risks

• Risk Appetite Weighed by Forecasts for Recession, Looming Financial Risks
• Financial Leaders Defer the Government’s Withdrawal From the Market at G8 Meeting
• US Banks Suffer Downgrades, European Officials Refuse Stress Test

The market finally saw its steady rise in optimism knocked off track this past week. After such a heady buildup in sentiment, it took the collective influence of dreary growth projections, growing financial troubles and the G8’s refusal to cater to investors’ sentiment-fueled rally to win a temporary break in risk appetite. However, the general bias has not changed. Risk appetite retains the positive bias that has encouraged speculative funds back into the market for nearly four months now. The current period of indecision instead offers an opportunity for fundamentals to truly catch up to price action. Looking across the more popular measures of risk appetite, we have seen the Dow Jones Industrial Average drop below the floor of the 8,600-8,850 range that had equities sidetracked for nearly two weeks. More attuned to the growth forecasts derived from positive sentiment, commodities put in for their biggest correction since late April. Even the more sensitive credit market gauges deteriorated despite the government’s steadfast liquidity and guarantees. Credit default swap premiums have risen more than 17 percent in the past week. How has this shift in attitude presented itself in currencies? The Carry Trade Index has violated its stable rising trend and marked a double top with the peak set at the beginning of this month. With risk reversals and yield forecasts turning lower, the scales of risk and reward seem to be once again shifting.

While they have taken a back seat to sentiment in the past few months, fundamentals have always been there for market participants scrutiny. And, a critical look at the growth forecasts and burgeoning financial troubles at eye level certainly do not support a rabid redistribution of capital into risk assets. This past week, the headline event was the two day G8 summit in Lecce, Italy. Rhetoric from the Finance Ministers was generally mixed; but the official statement maintained a cautious tone. Growth was deemed the top priority; and considerations for the government’s exit strategy was deferred to a later date. Record budget deficits no doubt present a significant long-term problem for individual economies; but they also support an economic recovery in the near-term. This is an important point considering the IMF forecasts the global economy to see its first contraction (1.3 percent) since the Great Depression and there are numerous financial concerns that could quickly escalate into crises. An ongoing risk to the world’s financial markets is the health of US banks. Just this past week, Standard & Poor’s downgraded 22 American banks – seven of which were TARP recipients. And, despite the lingering risks with liquidity and future earnings, nine of the 19 banks that were put through the stress test paid back a total of $68 billion of their government loans. The trouble isn’t isolated to the US though. European officials refuse to perform a stress test on their own banks even though the ECB has forecasted another $283 billion writedowns this year (the IMF projects $904 billion).

Written by John Kicklighter, Currency Strategist
Article Source - Risk Appetite Weighed by Forecasts for Recession, Looming Financial Risks
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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.


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!