Demand for Currencies Returns as Volatility in Indices Dives

LONDON, March 27, 2013 /PRNewswire/ --

To say that the start of the year for the equity markets has been impressive would be an understatement.  The FTSE 100 at multi-year highs, the FTSE 250 forging ahead to record highs and across the pond the Dow Jones also making it to new record highs.  Who'd have thought that not even five years on from the banking crisis the words "record highs" would be passing our lips, especially given the challenging economic backdrop.

Interestingly, throughout last summer, autumn and into winter the markets gradually grinded higher but it wasn't until the New Year that client behaviour really changed.  It was as if they couldn't handle the breakout to the upside in indices and so migrated back to trade currencies and there's probably good reason for such a change in behaviour.  Clients will more often than not oppose the trend hoping to catch a top or bottom in the market.  In the case of the indices, bar the odd little retracement, they've just kept on going north and a lot of clients have been swimming against the tide with a few fingers being burnt in the process.

FTSE 100

As the end of the first quarter of 2013 approaches, it is time to reflect on what have been a few months of bullishness that have caught even the most optimistic of investors by surprise.  Along the way there have been a number of retracements, some more pronounced than others with one due to the unexpected Italian elections and the other due to the messy bailout of Cyprus.  These sell offs have all been rather short lived and proven to be more of a buying opportunity for the bulls.  However for spread betting clients, whilst a few clients may have been taking outright long positions in individual stocks, when it comes to the overall index, they been largely short all the way.  Their attempts to find a top and subsequent sell off have been in vain so as a result they have been seeking opportunities in other markets.

EUR/USD

FX has been the main beneficiary of the clients' inability to make decent gains from the indices.  Not only has the uncertainty surrounding Italy and Cyprus made the euro more popular amongst clients, but some of the clear trends such as the Yen's depreciation have attracted punters back to currency trading.  It's a significant turnaround in the amount of FX trading done by our client base and may be the start of a wider migration back to currencies although at this moment in time it's hard to see it overtake trading in indices just as it did in the latter part of 2010 and early 2011.  Back then there was a major shift into currencies at the expense of indices due to the relatively low volatility in equity markets compares to other assets classes in particular FX.

It would seem that clients need some more excitement in the indices otherwise this migration back to currencies looks set to continue.  Perhaps the most recent developments in Cyprus might be the catalyst for clients to look again at the FTSE and Dow.

Spread betting and CFD trading carry a high level of risk to your capital and you can lose more than your initial deposit. These trading products may not be suitable for all investors so seek independent advice.

Angus Campbell is Head of Market Analysis at Capital Spreads, a trading name of London Capital Group (LCG).  He graduated from the University of Exeter with BA Hons in Business and Accounting, and began working in the City in 2001. His expertise in all matters to do with the financial markets has led to him making regular appearances on television channels including Bloomberg, CNBC, CNN, BBC and Sky News and he is frequently quoted in major newspaper and online publications.
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