All Ords Report 18 July 2017

Increasingly, Australians are being led to the slaughter like lambs, when it comes to leveraged financial markets.

I hear daily from people, with little or no training, saying they want to day trade or are trying to trade Foreign Exchange or FX for short. For those uninitiated, this is a highly leveraged market for trading currencies.

Warnings on the Government website ‘Money Smart’ say ‘even the most skilled and experienced traders have difficulty predicting movements in currencies’. It also states that ‘margin FX trading is one of the riskiest investments you can make.’

So it’s madness that people with miss-information, inadequate training, skills and often little or no experience in trading slower markets believe that they can make it rich from trading currencies.

Would it surprise you to know that Australia's largest FX brokers can exceed the entire cash equities volume of the ASX in a day, so there’s big money to be made in this market.

Often a broker either runs your training or they’re compensating the trainer when you trade. So if you think you’ve signed up to receive independent education, think again. Remember, a broker’s expertise is broking, not education.

FX is an ‘over the counter’ (OTC) product, where there’s less transparency and regulation than centralised exchanges, such as the Australian Securities Exchange (ASX). Hence the ASIC warnings on FX.

In ‘over the counter’ products, you take on additional risk as you are trading against a market maker who can and will move prices and take you out of trades. If they know how you’ve been trained, they know how you make decisions. Now, I’ll let you decide whether that’s good or bad for you.

My advice for anyone wanting to trade leveraged markets such as FX, is to first learn how to trade and manage your risk properly in slower moving markets until you have proven that you can trade successfully.

Otherwise, you’re likely to end up with the experience that most have in this market; which is a lot of stress as you spend time and money trying to trade and you’ll end up transferring your money to someone else, who already has the knowledge, skill and experience.

What I know from chatting to people, who are attempting to trade FX, is that they are for the majority, unwittingly, lambs to the slaughter.

What do we expect in the market?

In recent weeks, control of the Australian share market has continued to flip between the buyers and sellers, with neither side appearing to have conviction about direction. On Friday, the market traded to around 5800 points, which is above the middle of the band it has been trading in, between 5670 and 5862 points since May. The upside is that the range is narrowing, which means that the market is likely to choose a direction very soon.

While it is anticipated that the market will rise from here through the top of the sideways range to continue higher over the coming months, the longer it continues to trade sideways, the more likely it is that the market will trade slightly lower into late July/early August, before the next bullish rise through August/September commences. Either way, I’m bullish on the market over the medium to long term.

In support of higher share prices, the doom and gloom about retail sales data appears to have dissipated as reports now indicate that retail sales are on the rise. However, remember that the data can change almost as quickly as market direction.

The last significant change in the market occurred in 2015 when the Basel rules continued to take effect on the banks and talk that ratings agencies would soon lower Australia’s credit rating. This could lead to higher costs in wholesale funding for banks and potentially restrict lending, which has a flow-on effect to the property market.

The latest research by the National Australia Bank indicates that property prices are likely to soften over the next couple of years, with unit prices tipped to wear the brunt of any falls in value in 2018. We are due for a mid-cycle correction in property, however, it may take a couple of years to unfold. The positive is that such a move is likely to be followed by further strong rises in property prices.

Right now, the Australian share market is not trading in a bear or boom phase, instead it is in between, in the transition period when sentiment will switch quickly from negative to positive.

If you find yourself paying too much attention to the Doomsdayers, you will find that eventually they’ll be right, but in the meantime you’ll have sat on the sidelines for so long that you missed the rise. For this reason, it is wise to have a balanced view.

Global news

Mounting concerns over tensions between G20 nations and North Korea have created uncertainty for global markets, however, to date this has simply increased volatility rather than create a turn in the market. While wars can turn markets temporarily, generally it is the tightening of or the availability of credit that drives major market declines.

Volatility is to be expected at this time, as the US heads into reporting season this month. Consensus indicates that economic conditions in the US and Europe are improving, which is positive for share prices. Next week will set the scene for sentiment about US companies. While the results are likely to be positive overall, my analysis indicates that the US market may fluctuate in August and pull back in October.

In spite of the talks, the Dow Jones traded to a new all-time high this week as US Federal Reserve chair, Janet Yellen, indicated that interest rate rises would be gradual until a neutral policy stance is achieved, which means the rise is likely to occur in line with improving economic conditions.

Dale Gillham is Chief Analyst at Wealth Within