Forex Trading

It has been over six months since the financial markets last suffered a seizure that was born of panic selling or a collapse in liquidity; but does this mean the waters are once again safe for risk taking? Considering the timid recovery in equity markets and high yielding currencies through the past few months, it would seem so.

• Traders Are Taking Greater Risk Despite Deteriorating Fundamentals
• The Financial Sector Makes Progress, But Crisis Not Over Yet
• Is The Market Finding Unwarranted Strength In The G20’s Promises?

It has been over six months since the financial markets last suffered a seizure that was born of panic selling or a collapse in liquidity; but does this mean the waters are once again safe for risk taking? Considering the timid recovery in equity markets and high yielding currencies through the past few months, it would seem so. Indeed, in the absence of immediate risk, foregone returns become too much for traders to bear. Looking at the broader gauges for investor sentiment, dormant threats haven’t held back the clear desire to reinvest in the speculative market. A recover in equities has been paced by the benchmark Dow’s 25 percent advance from its early March lows. The index is now pushing two month highs. Elsewhere, junk bond spreads are the lowest they have been since November, the CRB Commodity Index is attempting to break three months highs and credit default risk – the crux of market fears through the crisis – has making a steady recover to levels not seen this anytime this year. For the currency market, the carry strategy seems to have finally found a balance between risk reward that has allowed for speculative headway. Though yield differentials are pushing near-historical lows (and are expected to tighten even further), the extended period of calm has ellicted strength from the more prominent carry pairs – perhaps spurred by the hope of early entry on capital gains through the exchange rate. Despite all this however, caution will remain an indelible element of broader market sentiment for as long as economic recessions bear down on growth and the circulation of capital through the markets is curbed by the potential for another seismic event.

Gauging the balance of risk and reward that would draw investors back into the market is difficult; but given enough time, stable markets will stoke any traders appetite for return. This is the best way to sum up the steady recovery we have been seeing in so many different risk-loving assets. It isn’t that the potential for returns has been amplified or fundamental risk has largely disappeared; but rather, relative calm has opened the door to diversification away from Treasuries, money markets and other relatively low-risk instruments (that are themselves over-extended). On the other hand, considering the health of the credit markets and the outlook for global activity; it is clear that the natural course for investment is for a steady decline in a natural bear market. Recession is still a common label throughout the global market space; and forecasts are predicting conditions to worsen before they begin to improve. The more realistic forecast for traders would not be for a recovery to develop in the next few months or quarters; but rather the absence of economic accelerants that can lead to ‘feedback effects’ or tip a recession into a prolonged depression. These are the threats that theG20 objectives are attempting to head off – though confidence derived from their statement will quickly evaporate without clear evidence that major economies are treating the recession as a global one.

Written by John Kicklighter, Currency Strategist
Article Source - Traders Are Taking Greater Risk Despite Deteriorating Fundamentals