3 Key Events Set To Shape The Markets This Fall

Events Set To Shape The Markets

News moving the markets in 2019 has revolved around a handful of central themes including dovish central bank policy across the globe, the ongoing trade war between the U.S. and China, Brexit and a rising number of indicators pointing to a global economic slowdown. In this article we’ll look at three major events ahead and how their outcomes could impact the market.

FOMC Meeting September 17-18

In July of 2019 the Federal Reserve lowered interest rates for the first time since the financial crisis of 2008. The rate cut was viewed as an insurance against inflation and economic uncertainty caused by President Donald Trump’s trade war. 

The market now eagerly awaits the outcome of next week’s Fed meeting taking place on September 17th and 18th. Speaking in Zurich last Friday, Fed Chair Jerome Powell said that the U.S. central bank will continue to act “as appropriate” to sustain the economic expansion. His comments underpinned expectations that another rate cut will be announced. The CME Fedwatch tool currently forecasts an 86.5% chance of a quarter-point rate cut.

Nevertheless, opinion within the Fed is mixed. Boston Fed President Eric Rosengren is in favor of holding rates steady. In a recent speech he pointed to healthy U.S. consumption and employment and the limited space to reduce rates. Meanwhile, others such as St. Louis Fed President James Bullard have called for a half-point rate cut. Bullard has cited a need to get ahead of market expectations and insure against fallout from the trade war.

On Wednesday, President Trump on tweeted his view that the central bank should lower interest rates to zero or even below, calling Fed officials “boneheads”. Powell had affirmed the Fed’s independent stance earlier, stating; “Political factors play absolutely no role in our process, and my colleagues and I would not tolerate any attempt to include them in our decision-making or our discussions.”

Currently, the market expects a quarter-point cut next week, one more reduction before the end of this year and another in early 2020. Rates being kept on hold at the September meeting will likely pressure stocks, while a greater than expected half-point rate cut could trigger a rally in stocks, pressure the dollar and boost gold prices.

US/China Trade Talks Early October

The trade war between the U.S. and China which began in January of 2018 has resulted in the economic superpowers imposing tariffs on billions of dollars worth of one another’s goods. Fears stemming from the ongoing conflict is limiting business appetite for investment and threatening global economic growth.

A paper published by the Federal Reserve in early September suggested that uncertainty driven by the trade war could result in hundreds of billions of dollars in lost U.S. output and as much as $850 billion lost globally through early 2020.

China’s economic growth fell to its lowest level in 27 years in the second quarter, reflecting the toll of the trade war on the world’s second largest economy. Meanwhile, U.S. manufacturing activity contracted for the first time in three years in August, with new orders and hiring falling amid trade tensions.

On Monday, Treasury Secretary Steven Mnuchin told Fox Business that the U.S. and China have a “conceptual” agreement on enforcement concerns and affirmed that progress has been made. However, he also warned that President Trump will keep imposing tariffs if a deal cannot be reached.

Markets cheered the news that the U.S. and China agreed to meet next month in Washington to discuss trade. While expectations for a major breakthrough at the talks are relatively low, investors are relieved to see negotiations resuming. The announcement came after after both countries imposed new tariffs on each other’s goods at the start of September. Many analysts are skeptical over a deal being reached before the 2020 U.S. presidential elections and global equity markets will continue to be pressured if trade tensions rise. The U.S. dollar has benefited as a safe-haven during the trade war while emerging market currencies have depreciated sharply.

Brexit Deadline October 31st

Brexit, the scheduled withdrawal of the United Kingdom from the European Union, is due to take place in just seven weeks. The U.K. parliament is currently in recess after being suspended for five weeks by Prime Minister Boris Johnson. The controversial move was ruled unlawful by Scotland’s highest civil court on Wednesday.

The potential outcomes of Brexit remain wide open, ranging from a disorderly ‘no deal’ Brexit to a second referendum that could result in the United Kingdom remaining in the European Union. On September 4th, Members of Parliament voted to pass a law that would force Johnson to request a three-month delay to Brexit to January 31, 2020 if a deal with the EU has not been reached.

An orderly Brexit could take place on October 31st if Johnson is able to secure a deal with the EU that wins the approval of a majority of MPs. A ‘no deal’ Brexit is also still possible, if Johnson wins an upcoming election.

The prospect of a ‘no deal’ Brexit has driven the pound sharply lower and the Bank of England has warned that such a scenario could leave sterling at record lows against other currencies.

The Bottom Line

With the S&P 500 edging towards record highs on Friday, market sentiment is currently lifted by optimism over improving trade relations and yesterday’s announcement of aggressive stimulus from the European Central Bank (ECB). The market now turns its eyes to the Fed meeting next week and the expected quarter-point rate cut.

The Transition to Best-Case Scenario Trading in Forex

Behind every new venture, there’s a story. Of course, there are always two sides: the real business model and the motivational legend. The first involves executive “sacred knowledge.” The second serves as a motivational legend for everyone else.  In this article, I’d like to take a deeper look at the two sides that exist in any Forex story: the trader and the brokerage. More specifically, within the confines of Forex, how can a trader find profit and success? 

I’d say the magic happens, as always, on the borderline. It occurs when you get a vision of both stories making sense synchronously. There’s no contradiction or limitation; comprehension arrives in a kōan-like manner. During my “ten year challenge,” in the trading industry, I’ve seen common misconceptions exploited in the service of sales mojo. Reflecting on my decade of experience, I’d like to explore those myths and legends and reveal how they affect the trader’s ability to succeed.  

A Books, B Books, and Hybrids

When it comes to Forex trading, three systems determine how a client interacts with their broker: A Book, B Book, and the hybrid model. While A Book trades favor the client, B Book, or “dealing desk” trades are more beneficial for the brokerage. In a hybrid model, the clients fall into A Book or B Book based on their profitability.

So what’s the difference and what should you keep an eye on? In A Book trading, used by ECN/STP brokers, intermediaries are used to send client trading orders to liquidity providers or multilateral trading facilities (MTFs). This trading puts the client at the forefront and eliminates the conflict of interest that can exist when brokers trade against their clients. In this scenario, brokers make money by charging commissions on volume orders or increasing the spread. Because the broker makes money on both winning and losing trades, there is no incentive to bet against the client.  

For Forex brokers using B Book, client orders are collected internally and the broker profits when the client fails. Brokers manage risk through internal hedging, spread variations, and by matching opposite orders. Because so many traders lose money in Forex, B Book can be very profitable for brokerages. Unfortunately, the profit comes at a price – the disadvantage (and loss of funds) of the client.  

In a hybrid model, brokerages use software to identify successful and unsuccessful clients by analyzing their orders. By filtering traders based on the deposit amount, leverage, risk, and other elements, brokers can divide their clients into two groups: winners and losers. The winners get A Book treatment, and the losers must settle for B Book. 

As you can imagine, A Book is becoming the popular choice for Forex traders because they aren’t at odds with their broker. Removing the incentive to bet against the client and focus on the trades activity to create profit creates a more amicable environment and helps forge a stronger relationship between the trader and their broker. Additionally, profitable trades actually increase trading volumes and positively impact the broker’s profits, which encourages brokers to help their clients succeed. 

A/B-book vs. ECN Makes a Difference

Let’s start on the tech side.  Whether your brokerage uses an A-book, B-book or ECN to execute trades is irrelevant to your performance. When choosing a brokerage, you want an organization authorized and regulated in a domain where the law is on your side. Why is that important? Because you want the ability and legal means to withdraw your profits without difficulty. 

So what differentiates A/B book from ECN? 

For starters, when you lose money on a B-book trade, it stays with the broker. Losses from A-Book or ECN stay with brokerage’s liquidity provider. Guess what happens when you earn more on B-book than your broker can provide? Well, in the latter case, it’s their own problem as long as you’re covered with a legit local Financial Supervisory Authority.    

Another differentiator? Technically, B-book trades can sometimes execute faster because no market confirmation is needed. Of course, that depends on a fair B-book. It could be argued that the difference between A-book and B-book is illusory. For example, T4 plugins or custom bridges can use hooks to delay when an A-Book trade is communicated to the liquidity provider. It should be noted, however, that the idea of pure A-books and B-books are marketing rudiments of the past. Trades can be delayed automatically or by dealers before ever being communicated to the liquidity provider. 

The illusion of faster trades is significant. If you are seeking an ECN with an advanced HFT algorithm that supposedly beats the market, for example, you might fall for a pitch that doesn’t deliver. Be vigilant when vetting brokerages. Keep in mind that some players try to trick the game with the existence of algorithms on the liquidity provider’s infrastructure. They do this by exploiting infamous arbitrage and ultra-high frequency tactics.  Remember, they’ve been there for ages. Even if you plan executes, keep in mind the compliance department can block your withdrawals for any length of time based on any legal reason.

This is one platform that is better than the others

In an ideal world, we assume brokers use certified technology and can’t distort the market data or mess with your actions. Unfortunately, that’s not always the case. At present, no relevant regulations exist and, in most cases, nothing can be proven. In fact, the only reason the majority of brokerages does not do it is that 99% of traders lose their money themselves, sooner or later, legally. 

Some uninformed brokers on the market do distort data or manipulate results. Fortunately, they quickly end up in the Forex Peace Army blacklist and fade away. Well,  they don’t really fade away. They continue to show up periodically. Often with rebranded names, like Phoenix. You can spot them by the platform (usually not changed) and a dodgy registration location, like Vanuatu. If you’re curious, just Google the address of registration. If you see a dozen other companies registered for that same address, you know what type of beast you are dealing with.

Understanding Swaps In Forex Trading

Here’s a question: What is a forex swap? If you are like many forex traders just starting out – or even if you have many years under your belt but very little time to accumulate a lot of knowledge about the forex industry – this might be a tougher question than it appears. 

Don’t worry. We’re here to help!

 At Scandinavian Capital Markets, we are committed to building powerful relationships with our clients. We see ourselves as partners in our customer’s success. That means we value transparency and education. We want our clients to understand the market, have a basic understanding of how interest, earnings, and fees are calculated, and why things happen the way they do. As we travel down the road to success together, we will continue to provide insight and help our clients become forex experts.

 Get to Know Your Swap

 So what is a swap and what do you need to know about them? In general terms, a forex swap is an overnight (or rollover) interest earned or paid when a trader holds positions overnight. Most of the time, a trader is required to take delivery of currency purchased within two days of the transaction date. However, if the trader chooses to roll over that position, they can extend that settlement period by one day. The rollover usually includes simultaneously closing the trader’s existing position at the close rate for that day and the re-entering the new opening rate for the next trading day.

 Why Do Swaps Matter?

 Forex traders are interested in making money on changes in exchange rates. That means currency purchases aren’t literal – the trader wants to play the margins to make a profit when that currency’s value alters. Every forex transaction involves borrowing. A trader borrows currency from one country to buy the currency of another country. This borrowing generates interest, either owed or paid.

 Swaps matter because earning or owning currency becomes a strategic decision. To earn interest, a trader may take a long position in a high-yielding currency compared to the currency they used to make the purchase. In the event the borrowed currency outperforms the purchased currency, the trader will owe interest. To avoid paying interest, it might make sense to close at the end of the business day (5pm Eastern Standard). On the other hand, if a currency is performing well – and the trader anticipates that performance will continue – a swap may be the best way to prolong the trade and increase the profit.

 This piece will also contain the history related to swaps, how did swaps come to be (Central Banks history leading up to swaps being within the forex world).

 How Are Swaps Calculated

 Swap fees are incurred when a position is kept open overnight. The forex swap fee is determined by calculating the difference between the two currencies being traded according to whether the trader’s position is long or short. The interest rates between the two currencies in the swap can be negative or positive depending on if the trader is borrowing or lending.

 Generally speaking, rollover rates are calculated by subtracting the quote currency interest rate from the base currency interest rate and dividing that sum by the amount calculated when multiplying the base.

A rollover rate can also be called a swap fee; The swap rate, on the other hand, the rate at interest at which one currency is exchanged for another. In other words, a swap rate is the difference between a traded currency pair. interest in another currency – that is, a swap rate is the interest rate differential between the currency pair traded. The rollover rate can also be known as the swap fee.

 A way to see how swap rates and rollover rates work in forex, imagine trading between AUD and JPY currencies, and the JPY carries an annualized lending rate of .25% while the AUD borrowing rate is 1.64%, then you would gain 1.39% per year by holding AUD/JPY in a long position. Holding short, on the other hand, would change the lending/borrowing rates, increasing AUD to 2.74% for example, while decreasing JPY to -.15%, resulting in a decrease of annual swap charges by 2.89%

 It’s true that the swap calculation equation can be complicated. Thankfully, there are many online swap calculators that can help you determine what you might owe in fees. Keep in mind that the interest you gain or pay changes across brokers and is heavily influenced by the timing of your trades. That’s why it’s important to work with a brokerage that provides clear information up front. Check with your broker (or any broker you are considering) and look at their swap rates table. In addition, if you are using the MT4 platform, you can right click on the “Market Watch” section and select “Symbols” to see your broker’s swap rates.

 Finally, it’s important to remember that a trade position held open overnight from Wednesday to Thursday, will be charged triple storage because the swap involves pushing back the value date on the underlying futures contract. In other words, when a position is opened on Wednesday, Friday becomes the effective value date. If a position is kept open overnight from Wednesday to Thursday, then the value date is moved forward three days, skipping the weekend and making Monday the effective value date – so the charge is triple to reflect holding for three days rather than one. Storage is tripled because you are being paid or charged interest for three days instead of just one.

 Scandinavian Capital Markets and Swap Trades

 Scandinavian Capital Markets swap rates are calculated each day at 5 pm Eastern Standard Time / 12 pm MT4 platform time (GMT+2). Any trade that has been opened before 5pm and held open past this time will be subject to swap rates. Swap rates are tripled on Wednesday at 4.59 pm to account for weekends. Please note that swap rates vary by pair and are updated frequently as market movement causes swaps to adjust. It is important for traders to familiarize themselves with where to locate the current swap charges for the particular pairs they are trading.