Q. Dear Josh, can you tell me how the markets reacted to the emergency Budget presented by George Osborne last week?
A. The banks and the retailers all performed strongly in reaction to the budget while the pound also received a boost. We saw banking stocks such as RBS, Lloyds Banking Group and Barclays rally on the back of the bank levy charge not being as severe as had previously been speculated.
The retailers also got a boost from the delay to the VAT hike until next January. Of course, a VAT hike could play a role in reducing consumer appetite as people see their disposable incomes fall.
But the fact that there is a six-month period until it comes into effect gives consumers time to digest the increase. Retailers could also see an upsurge in buying activity as shoppers try and make the most of the lower VAT rate before the hike takes place on 4 January 2011.
Sterling rallied last week, climbing to its best levels against the euro and the dollar since the middle of May. This was because the new coalition government is tackling the deficit head-on, which is giving investors increased confidence. Initial comments from ratings agency Fitch also helped to remove some of the fears of an impending UK rating cut and gave sterling an additional boost.
Q. Dear Josh, several stocks are proving to be quite volatile currently, and BP in particular. What methods can I use to manage my risk in these market conditions?
A. You are certainly right that BP’s shares are incredibly volatile at the moment given that the Gulf Oil spill continues to have a terrible effect on the company and its share price. BP closed down 6.35 per cent Friday at 304.6p. While unlimited losses are possible with spread betting, there are thankfully various risk management tools on offer, which should help you prevent volatile markets from escalating your potential losses.
One essential risk management tool is a guaranteed stop loss. If you are worried about volatile markets and the effect that they have on your account balance, then you should consider placing a guaranteed stop loss on your position. This will mean that your position will be closed out at the level of your stop loss regardless of any market gapping, which can be a regular feature of volatile markets. Normal stop losses will only close out your position at the first market price hit after the gap.
However, do be aware that you will have to pay a small fee for this extra insurance. One alternative you could consider is using options because when you buy options your maximum downside is already limited. But be aware that your downside is not limited if you chose to sell an option.