Q. Dear Josh, this week chancellor Alistair Darling gives his budget. Is there likely to be much market reaction?
A. The market always has the ability to move both during and at the end of a budget speech, depending on what is said. The share prices of tobacco firms, for example, have moved in the past when the chancellor of the exchequer announced duty rises on cigarettes. Last week, property firms in Japan advanced briefly after the Japanese government announced in their budget speech that it will raise the transaction tax on luxury homes. This helped to calm fears that there would be a more aggressive move.
Having said this, one of the key themes for the government right now is the amount of spending cuts they will make and where these cuts will take place.
Unfortunately for spread betters, with an election pending it is likely that Alistair Darling will spend a lot of his time on Wednesday talking about the government’s success in bringing the country out of recession, rather than actually providing details about where the Treasury plans to make budget cuts and how it will reign in the spiralling deficit.
Q. Dear Josh, I trade mainly shares. What are the advantages of trading the foreign exchange (FX) markets?
A. Trading FX can be very different to regular shares trading. First and foremost, FX markets are open 24 hours a day, from Sunday evening to Friday night, while equity markets are not. The longer opening hours gives you greater trading flexibility because you can get in to or out of a position whenever you want, regardless of the time of day. Some traders prefer FX to regular shares simply because there are a limited number of pairs to choose from. This means they can then focus on certain pairs and not get distracted by thousands of different shares.
The majority of FX traders tend to stick to the so called “majors” which are euro/dollar, dollar/yen, sterling-US dollar, US dollar-Canadian dollar and euro-yen. You can also gain greater leverage with FX pairs, with margins starting from 1 per cent while most equity margins in spread betting typically range from 5 per cent to 30 per cent. Of course, however, the lower the margin, and therefore higher the leverage, the greater the potential for both your profits and losses to be magnified and so there is an added risk factor here.
One particular factor to recognise when trading FX is that prices can be affected by multiple aspects such as macro economic data, fundamental data, social unrest, political uncertainty and many more unpredictable factors. This can make forex trading difficult to analyse as there are so many different things that can influence price movements.
Q. Dear Josh, last Friday was quadruple witching day. What does this mean for spread betters?
A. Quadruple witching day is when a combination of equity index futures, equity index options, equity options and equity futures contracts all expire on the same day. This happens on the third Friday of each quarterly month, ie March, June, September and December. On this day, indices can do “spooky” things that do not necessarily tie in with the trading sentiment of the day. Last Friday, for example, the FTSE 100 spiked higher by 24 points in a just a few seconds when there was no obvious macro or fundamental reason behind this move.