Top trading trends you should know
‘Greedflation’, interest rates, inflation… it’s a bear market all around. As we head into the last half of 2022, many traders and investors are looking ahead with uncertainty.
The reason for poor market sentiment? It can all be traced back to the volatility caused by Russia’s war in Ukraine. When two of the world’s biggest oil and wheat suppliers are at war it’s bound to cause havoc for all sectors.
The price of oil spiked to record levels earlier in February and this sent ripples throughout all sectors as companies raised prices.
Today, we look at market trends and share valuable advice for all traders.
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3 major trends traders should keep their eye on
1 Inflation
This year will be forever marked by rising costs of goods and services. Sadly, its consumers are bearing the brunt of escalating prices. Companies are also being accused of ‘greedflation’; arbitrarily raising prices to take advantage of consumers. This is evidenced by the fact that many companies are reporting record profits. The US CPI shows high inflation leading to low consumer spending. When consumers aren’t buying, the economy isn’t growing.
2 Interest rates
The COVID-19 pandemic saw many governments and central banks inject billions of dollars as a form of economic stimulus into their respective markets and countries. Despite keeping businesses afloat and consumers spending, this, unfortunately, couldn’t last. The result? Too much currency flooding the market, devaluing the currency, and raising inflation. To curb this, institutions such as the US Federal Reserve and the European Central Bank have raised interest rates throughout 2022. This unfortunately makes borrowing money and loans prohibitively expensive.
3 Energy sector
The energy sector has been rocked by volatility in 2022. Oil companies are reporting record profits; ARAMCO briefly became the world’s most valuable company at $2.3-trillion due to its profit windfall. Oil prices have dropped from record highs seen earlier in the year. Natural gas however has seen extreme volatility as the major pipeline from Russia to Europe is under threat. Prices for natural gas have soared to record levels and could increase even further during the Northern Hemisphere winter.
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Top trading questions answered
Fred Razak, CMTrading’s Senior Trading Specialist, shares his trading trends for the rest of 2022:
Forex
Q: What’s happening in Forex? And where do you think the market will be headed?
Razak said: “So in terms of the markets of the forex symbols, pretty much the major pairs have gained back some of their losses. From what we saw about a month ago versus the US dollar, they have all made a comeback. Whether or not they’ll stay at these levels remains uncertain.
“I think everything is tied to the EU markets as we head into the last half of the year. I think we’ll have much more clarity as to which way the markets are headed when we reach September or October. I think we’re going to just be trading in a tight range for now. I think everything will be a prelude to the markets coming up in September and October. We’ll then know for certain whether we can accept bearish or bullish sentiment for the remainder of the year.”
Inflation
Q: Why is Inflation continuing to soar? Won’t that decrease the demand for goods?
Razak said: “When we’re looking at inflation, we need to consider the cost of goods sold. In 2022, we can see that the cost of goods sold has drastically increased. It’s not just the CPI (Core Price Index), even the manufacturing index has gone up. Why? Well, predominantly because of what happened with the price of oil. Once prices go up because of oil, that’s it. There’s no retracement in there. All sectors increase their prices, there’s no retracement from that because there is a new standard that they hold in terms of their ability to sustain the markets at a certain level.
“So inflation is mostly directed to oil but also by the devaluation of the US dollar. During the pandemic, there was a big stimulus in the market, there was a lot of flooding of money into the markets, thereby devaluing the purchasing power of the money that’s in circulation. This puts a damper on things and puts a lot of pressure on inflation.
“Usually in an inflationary market traders gravitate towards gold. However, gold has not been the standard. Real estate ironically has been standard now as to the ‘inflation haven’ environment to put yourself in.”
Q: If we increase interest rates won’t that harm investor sentiment?
Razak said: “So interest rates are going up but what does that mean? Well, that means borrowing money is going to be less. What happens in the inflationary market is there’s too much money in circulation. So central governments and banks will try and reduce the available money in the markets to make borrowing more appealing. They do this through rate/interest hikes.
“I believe it was the 2008 credit crunch; I remember friends of mine that were in the metal business. They had a really hard time getting their hands on money and borrowing money to sustain their businesses because it became so difficult.
“It’s a means by which the central banks control inflation. However, the damage is done, and lower prices are not coming back. So, until things are balanced it usually takes five years. Unfortunately, it’s a very long process. Until there’s some sort of expansion.
“I don’t think we’re going to be in a state of expansion for at least five years and it’s going to take much longer than that but that’s usually the cycle that we’re going through. This is the beginning of perhaps a very long recessionary cycle but that’s yet to be determined. So, I can’t think for more than five years, down the line.
Energy Sector
Q: Why has the price of natural gas exploded? How can traders invest in the energy sector?
Razak said: Well, the biggest factor hasn’t been on natural gas but rather on gasoline (petrol). So, in the energy sector, gasoline has been the major component of everybody’s focus because of what’s happening between Russia and Ukraine. I mean that is still in the backdrop of everything.
“Natural gas has gone up just tremendously because of the war. It’s one of the easiest resources for heating fuel, and that was the intended purpose of Russia providing Europe with gas. And if that doesn’t materialize, then that’s going to be a serious problem for Europeans. They may not have heat this coming winter, so this is something that’s really on everybody’s mind.
“The outcome between Russia and Europe has nothing to do with Ukraine per se. Ukraine is just the battleground, the doorway, uniting Russia and Europe. This mainly goes back to even World War Two between Russia and Germany. Germany is the biggest country in the European Union both demographically and economically. So, they are the biggest proponent of the gas trade. So, there’s a little bit of getting back from World War Two in a certain sense, where Russia didn’t have the reparations that it probably would have wanted to get, and especially some old sources. Sadly, some old wounds don’t heal so quickly.
Company earnings
Q: Why have many FAANG socks failed to meet their targets?
Razak said: “With regards to the FAANG stocks, some of them didn’t meet their revenue earnings targets but met their earnings in terms of proper sales targets, which is a better metric of a company’s health. It wasn’t as bad awe expected. That was why we got this nice little bounce in the market from on the NASDAQ from 11,600 to about we’re standing right now at above 12,000, so during the first week of August 2022.
It went from 11,600 to about 13,000, which is a decent bounce for the NASDAQ. Overall, it wasn’t as bad as everybody anticipated and that’s why you kind of got a little bit of a lift in the market. Whether or not sustainable for the next quarter is still questionable.
“We are going into a recessionary climate, and you see that companies starting to act a little bit differently towards their employees. They’re raining in employees from home to come work at the offices. Ending work from home and more restrictions on expenditure for companies. You’ll see certain companies actually tighten their belt a bit as they say.
Q: Is it a good time to buy when these stocks are low?
“Well, that’s the million-dollar question. Is it a good time to buy stocks? You know even in bear markets you do have spikes and rallies that are short-lived. They do exist in a bear market and that’s what we’re in.
“It’s hard to say where we bottomed out in terms of if there will be any further selling off. I think investors will have a better picture in September and October. Other markets will react then, and I think that will give us a lot more insight as to which way the markets are you going forward for the remainder of the year.”
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