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How to Trade the Impact of Politics on Global Financial Markets

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HOW TO TRADE GEOPOLITICAL RISKS – TALKING POINTS

  • The global economy is showing increasing weakness and fragility
  • Eroding economic fortitude exposes markets to geopolitical risks
  • Examples of political threats in Asia, Latin America and Europe

See our free guide to learn how to use economic news in your trading strategy!

ANALYZING GEOPOLITICAL RISKS

As 2019 continues to unfold, political risks are growing increasingly relevant to watch as their capacity for inducing market-wide volatility is significantly expanding. Globally, liberal-oriented ideologies – that is, those favoring free trade and integrated capital markets – are being undermined by nationalist and populist movements. The result – though not always – is violent volatility stemming from uncertainty.

Against the backdrop of a slowing global economy and central banks pausing or reversing their rate-hike cycles, the introduction of additional uncertainty will likely create even more volatility. What makes political risk so dangerous and elusive is the limited ability investors have for pricing it in. Traders may therefore find themselves hot under the collar as the global political landscape continues to unpredictably shift.

Generally speaking, markets do not really care about political categorizations but are more concerned with the economic policies embedded in the agenda of whoever holds the reigns of the sovereign. Policies that stimulate economic growth typically acts as a magnet for investors looking to park capital where it will garner the highest yield.

These include the implementation of fiscal stimulus plans, fortifying property rights, allowing for goods and capital to flow freely and dissolving growth-sapping regulations. If these policies create adequate inflationary pressure, it could prompt the central bank to raise interest rates as a response and lead to a stronger exchange rate for the country concerned.

Conversely, if you have a government whose underlying ideological predilections go against the gradient of globalization, this may cause capital flight. Regimes that seek to rip out the threads that have sown economic and political integration usually create a moat of uncertainty that investors do not want to traverse. Themes of ultra-nationalism, protectionism and populism have frequently shown to have market-disrupting effects.

If a state undergoes an ideological realignment,traders will assess the situation to see if it radically alters their risk-reward set up. If so, investors may then reallocate their capital and re-formulate their trading strategies that tilt the balance of risk to reward in their favor. However, in doing so, volatility will likely follow as the reformulated trading strategy is reflected in the market-wide redistribution of capital across various assets.

EUROPE: EUROSCEPTIC POPULISM IN ITALY

In Italy, the 2018 election roiled regional markets and eventually rippled almost throughout the entire financial system. The ascendancy of the anti-establishment right-wing Lega Nord and ideologically-ambivalent 5 Star Movement was founded on a campaign of populism with a built-in rejection of the status quo. The uncertainty accompanying this new regime was then promptly priced in and resulted in significantly volatility.

The risk premium for holding Italy’s assets rose and was reflected in an over one-hundred percent spike in Italian 10-year bond yields due to investors demanding a higher return for tolerating what they perceived to be a higher level of risk. This was also reflected in the dramatic widening of the spread on credit default swaps on Italian sovereign debt due to increased fears that Italy could be the next epicenter of another EU debt crisis.

EURUSD, EURCHF Plummeted as Mediterranean Sovereign Bond Yields Spiked Amid Fears of Another Eurozone Debt Crisis

Chart Showing EURUSD, EURCHF

The US Dollar, Japanese Yen and Swiss Franc all gained at the expense of the Euro as investors re-directed their capital to anti-risk assets. The Euro’s suffering is being prolonged by the dispute between Rome and Brussels over the former’s budgetary ambitions. The government’s fiscal exceptionalism is a feature of their anti-establishment nature that in turn introduced greater uncertainty and was then reflected in a weaker Euro.

LATIN AMERICA: NATIONALIST-POPULISM IN BRAZIL

While President Jair Bolsonaro is generally characterized as a fire-brand nationalist with populist underpinnings, the market reaction to his ascendency was met with open arms by investors. His appointment of Paulo Guedes – a University of Chicago-trained economist with a penchant for privatization and regulatory restructuring – boosted sentiment and investor’s confidence on Brazilian assets.

Ibovespa – Daily Chart

Chart Showing Ibovespa

Since June 2018, the benchmark Ibovespa equity index has risen over 46 percent compared with only a little over 9 percent in the S&P 500 over the same time period. During the election in October, the Ibovespa rose over 12 percent in one month as polls revealed that Bolsonaro was going to triumph over his left-wing counterpart Fernando Haddad.

Ibovespa Spiked Almost Five Percent After October 7 Vote and Polls Showed Bolsonaro in the Lead

Chart Showing Brazilian Stocks

Since Bolsonaro’s ascension to the Presidency, the oscillations in equity markets and rate of capital inflow frequently move in tandem with the level of progress on his market-disrupting pension reforms. Investors are anticipating these structural adjustment will be strong enough to pull Brazil’s economy away from the precipice of a recession and toward a strong growth trajectory, unburdened by unsustainable public spending.

ASIA: HINDU NATIONALISM IN INDIA

The re-election of Prime Minister Narendra Modi was broadly welcome by markets, though lingering concerns were raised about the effect of Hindu nationalism on regional stability. However, Modi also has a reputation of being a business-friendly politician. His election lured investors into diverting a significant amount of capital into Indian assets following his ascendancy to the presidency.

However, the optimistic outlook from investors could be undermined if risk appetite sours amid rising tensions in the region. In the first breathes of 2019, India-Pakistan relations drastically escalated amid a skirmish over the disputed Kashmir region. Ever since the 1947 partition, the hostility between the two nuclear powers has always remained a regional risk.

India Nifty 50 Benchmark Equity Index, S&P 500 Futures and AUDJPY Fall Amid Political Volatility

Chart Showing AUDJPY, Nikkei 225, S&P 500

Nationalist campaigns and governments are embedded with political risk because the very nature of such a regime relies on displaying strength and frequently equates compromise with capitulation. In times of political volatility and economic fragility, the financial impact of a diplomatic breakdown is amplified by the fact that a resolution to a dispute will likely be prolonged due to the inherently stubborn nature of nationalist regimes.

US President Donald Trump and Modi employ a similar brand of strong rhetoric both on the campaign trail and within their respective administrations. In a rather ironic way, their ideological similarity may in fact be a force that causes a rift in diplomatic relations. Tensions between the two have escalated recently with markets worrying that Washington may start another trade war in Asia – only this time it will be with India.

WHY POLITICAL RISKS MATTER FOR TRADING

Countless studies have shown that a significant decline in living standards from war or a severe recession increases the propensity for voters to occupy radical positions on the political spectrum. As such, people are more likely to deviate from market-friendly policies – such as capital integration and trade liberalization – and instead focus on measures that turn away from globalization and are deleteriously inward-facing.

The modern globalized economy is interconnected both politically and economically and therefore any systemic shock has a high probability of echoing out into the world. During times of significant political volatility amid inter-continental ideological changes, it is crucial to monitor these developments because within them are opportunities to set up short, medium and long-term trading strategies.

FX TRADING RESOURCES

— Written by Dimitri Zabelin, Jr Currency Analyst for DailyFX.com

To contact Dimitri, use the comments section below or @ZabelinDimitrion Twitter



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Gold Price Rally Primed For a Fed Boost, Silver Price Struggling

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Gold (XAU) Price, Silver (XAG) Price Analysis and Chart

  • Global risk sentiment remains, interest rates look set to go lower.
  • FOMC minutes on Wednesday, Fed chair Powell speaks at Jackson Hole on Friday

Q3 2019 Gold Forecast and Top Trading Opportunities

Gold Remains Underpinned and Ready to Move Higher

Gold remains bid and underpinned around current levels and is looking for the next bullish impulse to send it through its recent multi-year high. Risk sentiment, one of gold’s main drivers, remains with US-China trade talks still not confirmed, while in Hong Kong, mass protests continue, and these may well be a hot topic of discussion between the US and China. On Wednesday the latest FOMC minutes, while on Friday, Federal Reserve Chairman Jerome Powell will speak at the Jackson Hole Symposium and he may well give further insights into the central bank’s thinking around the next round of US interest rate cuts. Any hint of that the Fed wants to get ahead of the curve and cut rates aggressively will push gold higher.

The daily gold chart suggest further short-term consolidation as the market unwinds its recent heavily overbought bias. There are a few recent lows between $1,487/oz. and $1,503/oz. that will support gold in the case of any sell-off, while to the upside, $1,520/oz. before $1,528/oz. and $1.535/oz. If this latter level is broken and closed above, then $1,540/oz. is the next upside target.

Gold Price Daily Chart (January – August 19, 2019)

Gold Price Rally Primed For a Fed Boost, Silver Price Struggling

IG Client Sentiment data show that 62.3% of retail traders are net-long of gold, a bearish contrarian indicator. However, recent daily and weekly positional changes give us a stronger bearish contrarian trading bias.

How to Trade Gold: Top Gold Trading Strategies and Tips

Silver Price Struggling Around Multi-Month Highs

Silver is stuck in a short-term downtrend after hitting $17,51/oz. last week when the commodity space rallied. Since then, silver has made a series of lower high and lower lows and if price breaks below $17,00/oz. then the August 8 and 12 double low at $16.80/oz. will be tested. Below here, the 61.8% Fibonacci retracement at $16, 57/oz. should provide strong support. Silver has moved out of overbought territory and will likely remain in lock-step with the price of gold.

The gold/silver ratio remains stable around 88.60.

Silver Daily Price Chart (August 2018 – August 19, 2019)

Gold Price Rally Primed For a Fed Boost, Silver Price Struggling

How to Trade Silver: Top Trading Strategies

Traders may be interested in two of our trading guides – Traits of Successful Traders and Top Trading Lessons – while technical analysts are likely to be interested in our latest Elliott Wave Guide.

What is your view on Gold and Silver – bullish or bearish?? You can let us know via the form at the end of this piece or you can contact the author at nicholas.cawley@ig.comor via Twitter @nickcawley1.



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Gold, Crude Oil Prices Eyeing FOMC and ECB Minutes, Jackson Hole

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Gold, Crude Oil Prices Eyeing FOMC and ECB Minutes, Jackson Hole

Crude oil, gold price performance chart created using TradingView

GOLD & CRUDE OIL TALKING POINTS:

  • Gold price technical positioning hints at pullback brewing ahead
  • Crude oil prices idling near $55/bbl as risk trends await catalyst
  • FOMC and ECB meeting minutes, Jackson Hole in the spotlight

A risk-on mood broadly prevailed across global financial markets Friday. Cycle-sensitive crude oil prices edged higher alongside stocks. Treasury bond yields also rose as capital moved away from haven assets, undermining the appeal of non-interest-bearing alternatives and weighing on gold. The anti-risk US Dollar and Japanese Yen likewise declined.

From here, a slow start to an otherwise action-packed week might see key assets idling as traders withhold conviction before forthcoming event risk. Minutes from July’s FOMC and ECB meetings as well as the Fed’s Economic Policy Symposium due to kick off Thursday in Jackson Hole, Wyoming will probably take top billing. Political turmoil in Italy also warrants attention.

With slowing global growth top-of-mind for investors, scope for incoming monetary stimulus expansion is a critical consideration. The ECB is widely expected to ease next month, but its preferred delivery strategy is unclear. As for the Fed, the markets are priced for 75bps in additional rate cuts before year-end. Such robust hopes may be disappointed by a more reserved central bank, souring risk appetite anew.

Get our free guide to help build confidence in your gold and crude oil trading strategy!

GOLD TECHNICAL ANALYSIS

Gold prices are treading water below the monthly swing high at 1535.03. Negative RSI divergence warns of ebbing upside momentum, hinting that a pullback might be in the cards. A break below initial support at 1480.00 exposes the 1437.70-52.95 zone. Alternatively, a push above resistance aims for a weekly chart inflection level at 1563.00.

Gold, Crude Oil Prices Eyeing FOMC and ECB Minutes, Jackson Hole

Gold price chart created using TradingView

CRUDE OIL TECHNICAL ANALYSIS

Crude oil prices continue to mark time near the 54.72-56.09 congestion area. Resistance defining the near-term bearish bias is now at 58.48, with a daily close above that targeting the 60.04-84 zone next. Critical support is clustered around the $50/bbl figure. Breaking below that sets the stage for a descent to challenge three-year lows just above the $42/bbl mark.

Gold, Crude Oil Prices Eyeing FOMC and ECB Minutes, Jackson Hole

Crude oil price chart created using TradingView

COMMODITY TRADING RESOURCES

— Written by Ilya Spivak, Currency Strategist for DailyFX.com

To contact Ilya, use the comments section below or @IlyaSpivak on Twitter



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US Dollar May Rise vs Nordic FX From Trade Wars, FOMC Minutes

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NORDIC FX, NOK, SEK WEEKLY OUTLOOK

  • US Dollar may rise vs Nordic FX amid trade wars, FOMC minutes, Italian politics
  • Critical data out of the Eurozone and US may exacerbate growing recession fears
  • Commentary from officials at Jackson Hole symposium could induce risk aversion

See our free guide to learn how to use economic news in your trading strategy!

The US Dollar may extend gains vs Nordic FX if growth concerns continue to pressure cycle-sensitive currencies and redirect capital to anti-risk assets. US-China trade tensions appear to be escalating against the backdrop of growing political uncertainty in Italy. Recessionary fears may be exacerbated this week from the release of the FOMC meeting minutes and commentary from officials at the Jackson Hole symposium.

Financial Markets Brace for Deteriorating US-China Trade Relations

Early into Monday’s Asia-Pacific trading hours, US President Donald Trump held a press conference and said he was not ready to make a trade deal with China and that Huawei posed a threat to national security. Furthermore, he also said reaching a trade agreement with Beijing may be more difficult if the violence amid the protests in Hong Kong continues. Greater friction will likely continue to erode market sentiment.

FOMC Meeting Minutes: Will the Transcript Simply Re-Emphasize the Market’s Worse Fear?

As outlined in my weekly US Dollar forecast, the Greenback may rise at the expense of equity markets when the FOMC meeting minutes are released. The prospect of cheaper credit has remained a key factor buoying investor sentiment as the fundamental outlook continues to dim. What the minutes will likely show is just a more detailed message from the last meeting by Fed Chairman Powell: The Fed is not as dovish as you think.

Jackson Hole Symposium May Pressure Nordic FX if it Exacerbates Global Growth Fears

Fears about the prospect of a recession gained momentum last week after a number of recessionary signals began to sound the alarm. Commentary from officials at the symposium may exacerbate global growth fears and could pressure export-oriented currencies like the Swedish Krona and Norwegian Krone. However, amid the uncertainty and search for liquidity, the US Dollar may catch a haven bid.

G7 Summit Will be Closely Eyed by Investors Amid Rising Geopolitical Tensions

Traders will be closely monitoring the G7 Summit this week in Biarritz, France from August 22-24. Given the current state of rising geopolitical tensions around the world, looking for key developments at this conference will be crucial. Some key topics will include Facebook’s Libra cryptocurrency, US-China/EU trade and discussing the replacement of IMF chief after Christine Lagarde transitions to her post as ECB president.

ECB Minutes May Spook European Markets Despite Prospect of Stimulus

The publication of the European Central Bank’s meeting minutes is expected to carry dovish undertones after central bank president Mario Draghi said monetary authorities are entertaining QE and rate cuts. However, optimism about the prospect of cheap credit may be overwhelmed by gloomy undertones if the overall message of the transcript is prevailing conditions are so severe that they require stimulative policy measures.

A Chilling Outlook for European Growth

Chart Showing German PMIs

Italian Political Uncertainty May Sap Confidence, Weigh on Nordic FX

Political volatility out of Italy will likely sap confidence in European markets and pressure the sentiment-linked Krone and Krona. The Riksbank has repeatedly cited political risk out of the EU as a key source of uncertainty. Deputy Prime Minister Matteo Salvini will attempt to consolidate power and break away from his coalition in order to end cabinet infighting and push forward his market-disrupting fiscal agenda.

Critical Data out of EU, US May Induce Risk Aversion

Traders will also be watching the release of key US and EU economic data. The more notable ones include Eurozone inflation, flash PMIs and consumer confidence, US manufacturing PMIs and new home sales reports. A poor reading from these indicators will likely only strengthen the case for central banks to adopt accommodative monetary policy measures and will likely send a chilling message to Nordic FX markets.

SWEDISH KRONA, NORWEGIAN KRONE TRADING RESOURCES

— Written by Dimitri Zabelin, Jr Currency Analyst for DailyFX.com

To contact Dimitri, use the comments section below or @ZabelinDimitrion Twitter



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