by Dave Evans of binary.com
Markets Hold After Ukraine Tragedy
Markets were sold off heavily on Thursday following the tragic destruction of the Malaysia airlines flight over Eastern Ukraine. It was an airline from a country with no connection to the conflict, largely carrying delegates from the Netherlands to a conference on AIDS in Perth.
Both sides of the Ukraine conflict are now struggling to inflict or deflect blame while Russia and the US maintain relative silence as they wait for more information to emerge. The first black box is already on its way to Moscow, while Ukraine releases recordings of separatist commanders discussing the downing of the plane. Just as with the Lockerbie bombing, we sadly may never know the full truth about what happened with the flight.
Sadly, the crash is not the only source of tension for global markets, as Israel announces a ground offensive in Gaza and Portugal’s Banco Espirito Santo continues to put pressure on European equities.
Early on Friday morning markets rebounded quickly though with the main FOREX risk on/ risk off barometer, the AUD/ JPY, erasing all of the previous day’s losses. Fears that the plane crash could lead to an escalation of the Ukrainian crisis may come to pass, but for now it seems all parties are stepping back from the brink.
In the medium term, we make look back on the Thursday sell off as being a product of economic slowdown fears rather than the plane crash and associated tensions.
Elsewhere, this week we have seen a number of economic items in below expectations. On Monday, European industrial production dropped by more than expected, Tuesday saw German ZEW economic sentiment fall for the sixth straight month and US retail sales slip below estimates for the third straight month. There was some positive UK data on Thursday, but this was followed by poor US industrial production figures amid warnings of the US housing market overheating.
It is said that bull markets climb a wall of worry, but this is a market that has been propped up in part by accommodative central banks who are now about to dim the lights on the party (with the exception of the ECB).
As such, Friday’s relief rally could be a good time to build short positions rather than follow the market long.
A good way to play this is a LOWER trade predicting that the S&P 500 closes below 1,950 in 21 days time for a potential return of 196%. Or put another way, betting that the S&P 500 will be below 1,950 at the close on August 8th could return a profit of £19.62 from a £10 stake.
After an extended period of inactivity, the precious metals of gold and silver experienced a rare bout of volatility. The screenshot below shows gold with an indicator that measures the gap between gold and its parabolic SAR. A large gap beneath the parabola can hint at a short term reversal and vice versa.
The implication here is that gold is only marginally oversold – if at all. The large sell off and ensuing recovery have merely brought gold back to the trading range it has been stuck within since the start of the month.
While the Ukraine crash will no doubt have further to run, it may pay to bet on gold retreating back into its shell in the short term instead of assuming we are in breakout territory. There is also the advantage of volatility improving the odds of bets assuming the opposite.
Or put another way, betting that gold will be between $1,325 and $1,310 in 7 days time on the 25th of July could return £21.37 from a £10 stake.
Disclaimer: This financial market report is intended for educational and information purposes only. It should not be construed as investment or financial advice and you should not rely on any of its content to make or refrain from making any investment decisions. Binary.com accepts no liability whatsoever for any losses incurred by users in their trading. Fixed odds trading may incur losses as well as gains.