The Active Trader Insights from your global trading partner
January 2014
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The Active Trader January 2014
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A letter from the CEO
2013, a rewarding year
Welcome to the first issue of The Active Trader for 2014. In this issue we’ll be taking a look back at some of the highlights of 2013 and we’ll reveal some exciting new developments for 2014.
2013 was a very successful year for CMC Markets and we ended the year with 16 UK-based awards to add to our trophy cabinet. These awards recognised everything from our trading platform and features through to our mobile apps and overall service.
2013 was a particularly successful year for us here at CMC Markets. Our Next Generation platform went from strength to strength throughout the year including the release of a more streamlined look and feel. We also launched it into five of our European regions in the second half of the year. I’m very proud of the achievements of the entire global team; in the UK our hard work was rewarded with 16 industry awards. I was particularly proud to accept the Financial Services Provider of the Year trophy at the Shares awards in November. Heading into 2014 we’ve kept the momentum going with a number of exciting additions to our platform and service. We’re proud of our history as pioneers and innovators in the spread betting and CFD industry, and are very excited to announce our brand-new product Contra Trading. Contra Trading is our new margin-free way to spread bet or trade CFDs. You can learn more about this 0% margin account on pages 4 to 7. On top of the introduction of Contra Trading we’ve been busy adding other enhancements to our platform including Execution Alerts and 1-Click Trading. These are now live on your Next Generation platform and 1-Click Trading allows you to place trades almost instantly (learn how to use this feature on page 8).
Peter Cruddas Chief Executive Officer CMC Markets Plc
We’ve put a huge amount of work into our Next Generation platform over the past 18 months, so we were thrilled that nine out of the sixteen awards we received in 2013 recognised the quality of our platform and custom-built apps. We genuinely feel that our platform is now one of the best in the industry and we see these awards as confirmation of that from the wider trading community.
We’re proud to have picked up the following awards last year:
One of the main highlights of the year for us was receiving the 2013 Financial Services Provider of the Year award from Shares magazine, which is fantastic recognition of the service we provide overall. We’d like to thank you for your support and your votes – this kind of recognition is a great reward for everyone at CMC Markets who has worked so hard on all areas of our business, especially to deliver our industry-leading platform.
• Best CFD Provider Shares Awards 2013
• Best Forex Spread Betting Company UK Forex Awards 2013 • Best Online Charts MoneyAM Awards 2013 • Best Online Trading Platform MoneyAM Awards 2013
• Best Online Trading Platform Shares Awards 2013 • Financial Services Provider of the Year Shares Awards 2013 • Best Spread Betting App Investors Chronicle & Financial Times Investment Awards 2013
We received nine awards from the recent Investment Trends 2013 UK Leveraged Trading Report. These results are based on highest user satisfaction. • Highest Overall Client Satisfaction According to CFD traders • Best Mobile and Tablet App According to spread betters and FX traders • Best Trading Platform Features According to spread betters, CFD and FX traders • Best Value for Money According to CFD traders • Best Education Materials According to CFD traders • Best Research Tools According to CFD traders
Some of the other articles in this issue include insightful pieces from our Market Analysts in Sydney, London and Toronto, an update on improvements to our client service including details of our cash rebates and an infographic summarising some of our 2013 statistics. I hope you enjoy this issue and wish you every success for the year ahead.
Peter Cruddas
Spread betting, CFDs and FX are leveraged products and carry a high level of risk to your capital as prices may move rapidly against you. It is possible to lose more than your initial investment and you may be required to make further payments. These products may not be suitable for all clients therefore ensure you understand the risks and seek independent advice.
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CMC Markets PLC
Fe e br w ua ry
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Introducing Contra Trading The MARGIN-FREE way to trade the financial markets By Peter Cruddas This February we will be launching our new Contra Trading account. Contra Trading is the exciting new way to intraday trade the financial markets, margin-free. In essence it means that if you open a trade and close the trade on the same day, you can contra settle both trades against each other and pay/receive only the difference between the two . Your margin-free Contra Trading account will operate like your normal account with us (spread bet or CFD) but all trades have to be closed out and contra settled on the same day. At 5pm Eastern Standard Time (10pm London time) each business day, our platform will automatically close out all trades. You cannot carry contra trade positions over night. Contra account funds won’t be used as margin for your trades, it will only be used to offset any losses. Profits can be withdrawn in the normal way. Contra trading is not new in the financial markets, it is common place in the physical share markets. For example, if you buy physical shares the full settlement of the shares is normally three days after you have bought them (T+3). To settle this physical share transaction, you would have to pay for the full value of the shares through your bank. However, if you have a contra account with your stockbroker and you sell the shares the day you bought them, you can offset your buy trade against your sell trade and the broker pays you the profit or you pay the broker any losses. Contra trading also occurs frequently in the interbank foreign exchange markets, between major banks. It is a pointless and costly exercise for major banks to settle every single trade between each other individually. Banks match up their buy and sell trades with each other and settle the currency differences. Both of the above are examples of contra CMC Markets PLC
trading and settlement. We are now offering a Contra Trading account to our CFD and spread bet clients. (For AU can say in line with the way we offer this service to our physical stock broking clients.).
No margin required to place trades Major global shares, indices, FX pairs and commodities will be available to trade. You can trade up to five different products at any one time.
What are the benefits of Contra Trading?
Contra Trading is most appealing for those people who like to trade intraday as all contra trades will be closed out at 5pm EST (10pm UK time). You will be able to close your positions throughout the day,
You will be able to trade on ZERO margin on our most popular products including major global shares, indices, FX pairs and commodities, allowing you to gain greater exposure from your trading capital. In addition, you will still have all the other great benefits of trading with CMC Markets including: • The same competitive spreads and commissions as our standard CFD and spread betting account • Award-winning* platform features, service and charting • Award-winning** custom-built mobile and tablet apps • Cash rebates for high volume traders Due to the nature of a margin-free trading account, extra care is needed when selecting your trade size to ensure you understand the total exposure of your capital and the potential losses should the price move against you. As with our standard accounts, Contra Trading is a leveraged product and carries a high level of risk to your capital. It is possible to lose more than your initial investment and you may be required to make further payments. This product may not be suitable for all clients therefore ensure you understand the risks.
What is the difference between Contra Trading and a standard CFD or spread betting account? Your Contra Trading account will operate like our standard account, with the addition of the following Contra Trade features:
but as they cannot be held overnight, we will automatically close out any positions still open at 5pm EST. Any deficit on your contra account will be due immediately. As there is no margin to pay, all contra trades will be closed when your account value reaches the absolute close out level of £500 (Aus$1,000 for Australian clients) The same simple payment process as our standard accounts apply.
The reason we have these margin-free Contra Trading account terms is to mitigate some of the risk during the day that comes with allowing clients to trade without any margin requirement at all One of the main reasons it is normal to deposit position margins with your broker is to cover any losses that might occur as a result of likely market movements. Generally
the largest market movements happen between when markets close and open as there is less liquidity, this is sometimes referred to as gap risk. During the day when the markets are open, there is more liquidity and therefore less risk of a market gap, which is why we require all margin-free contra trades to be closed by 5PM EST. These restrictions only apply to our Contra Trading accounts. You can trade normally
through a standard CFD or spread bet account. I hope you will agree that the possibilities presented by margin-free Contra Trading make for an exciting new proposition for intraday traders. Please read our special Ask the expert feature on the next page, to learn more
Why does a Contra Trading account have some restrictions? The following terms are part of margin-free Contra Trading: All positions must be closed by 5pm EST • close of market (generally 10pm London time); Any open positions at close of major • markets will be closed out automatically by CMC Markets. As no margin is required to trade on a • Contra Trading account, we will close all open positions when the value of your account reaches £500 (Aus$1,000 for Australian clients). This is called the Absolute Close Out level. You can trade up to 5 products at any one • time. You can trade most of our popular and • liquid products in shares, indices, FX and commodities via your Contra Trading account. Position limits apply for each product and can be found in the product overview within the Contra account of the Next Generation platform.
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Contra Trading Your questions answered What is Contra Trading?
What is the minimum account value?
This February we are launching our new Contra Trading account, the margin-free way to spread bet and trade CFDs intraday.
In order to open a position the account value must be at least £500, as such we would recommend depositing at least £2,000.
What do I need to do to open a Contra Trading account?
If your account value drops below £500, the platform will automatically close out all of your positions.
Contra Trading will be available in February 2014. You will be sent an email to let you know that Contra Trading is available. You will then need to apply for and fund your new Contra Account, in the same way you did with your existing account with us.
Will the position limits be the same for each product?
I used to trade with CMC Markets but I don’t anymore. Can I still get a Contra Trading account? Yes you can, as long as you have previously had an account for our Next Generation platform. You will need to follow the process outlined above.
What happens if I don’t close out all trades by close of business every day?
All Contra Trading accounts have position limits for each product; these may differ slightly to the position limits available on a standard account. You can view the position limit details in each product overview in the platform.
How is my Contra Trading account settled? As soon as a Contra Trade is closed any Unrealised Profit or Loss immediately becomes Realised Profit or Loss and a corresponding change is made to the cash in your Contra Trading account.
All Contra Trades must be closed out by 5pm Eastern Standard Time (EST. This is generally equivalent to 10pm London time.). If you have not closed all of your Contra Trades before this time our platform will automatically close all trades at the last available level 1 spread for the applicable product plus the Contra Trading close spread. The Contra Trading close spread is currently equal to the last available level 1 spread for the applicable product.
If after your Contra Trades are closed out a negative cash value remains, the full amount is due and payable immediately.
What if I want to carry over my Contra account positions?
Will the costs be the same as my standard account with you?
Contra account positions cannot be carried over night. If you would like to hold a position overnight, this will need to be done via a standard margin account.
Yes, the same competitive spreads and commissions will apply to our Contra Account.
Are Holding Costs and Corporate Actions applicable? No, as positions cannot be held overnight, holding costs and corporate actions are not applicable.
CMC Markets PLC
Will I still be able to earn cash rebates on a Contra Account? Yes, full cash rebates will apply if you qualify based on the usual volume requirements.
Will I be able to access it from my mobile or tablet? Yes, you will be able to access the Contra Trading account from your mobile or tablet as usual via our award winning mobile apps.
Shares Examples of Contra Trading products 73 Australian inc:
167 US inc:
88 UK inc:
Newcrest Mining, BHP Billiton and Rio Tinto
Apple, Facebook and Twitter
Barclays, Lloyds and RBS
15 Finland
20 Norway
8 The Netherlands
30 France
29 Spain
6 Switzerland
42 Germany
11 Sweden
15 Italy
FX
Indices
Examples of Contra Trading products
€
$
Examples of Contra Trading products
AUD/CAD
EUR/CHF
GBP/EUR
AUSSIE200
GERMAN30
AUD/CHF
EUR/GBP
GBP/JPY
JAPAN225
EUSTOX
AUD/JPY
EUR/JPY
GBP/USD
NDAQ100
FRENCH40
AUD/NZD
EUR/USD
USD/CAD
SPX500
SPANISH35
AUD/USD
GBP/AUD
USD/CHF
US30
FRENCH40
EUR/AUD
GBP/CAD
USD/JPY
UK100
SPANISH35
Will the order types available be the same? Contra Trading execution is the same as a standard CMC Markets account. All of the standard entry and risk management orders are available such as market orders, stop entry, limit orders, stop loss, trailing stop loss and take profit orders.
Are there any limitations to how many products I can trade?
Commodities Examples of Contra Trading products USCRUDE UKCRUDE GOLD SILVER
You will be able to trade up to five different products at one time.
Can I try Contra Trading via a demo account? No, Contra Trading will only be available on Live accounts.
Which products are available to trade on a Contra Trading account? There will be over 500 Contra Trading products including major shares, indices, FX and commodities. They will be visible in the product library of the Contra Trading account on the Next Generation platform.
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Welcome to 1-Click Trading This new feature lets you place orders almost instantly In keeping with our promise to never stop improving our platform we’ve started the year by adding a 1-Click Trading feature, among other enhancements.
There are three 1-Click modes to choose from: single-click, doubleclick and a locked mode, so you can easily turn 1-Click Trading off when you are just monitoring the market.
When it comes to trading volatile markets, being able to quickly react to a market opportunity can be important. We’re therefore delighted to announce the introduction of 1-Click Trading into the Next Generation web platform. When activated, 1-Click Trading allows you to place certain types of orders immediately, with a single or doubleclick, directly from any live streaming buy or sell price, for faster order submission.
For those times when you want to set up a trade more precisely, alter boundary levels, view the price depth ladder or have greater control of your risk management, you can still access the full order ticket quickly through the product drop-down menus available throughout the platform. Alternatively, you can temporarily lock 1-Click Trading via the new quick-link icons in the top navigation toolbar. When it’s locked, the live streaming price buttons act as quick-links to the full order ticket.
Activate 1-Click Trading through this icon in the main navigation toolbar. Once you have carefully read and accepted the Terms of Use, decide if you want to place 1-Click market orders via ‘All Price Buttons’ or just via ‘Quote Panels’. Once you have activated 1-Click Trading, you can choose between three modes via the main toolbar. Now you can trade with 1-Click on any live price quoted within the platform.
Execution Alerts In addition to 1-Click Trading, we also added the Execution Alerts feature to our platform. If you have pending orders waiting to be executed, including limit, stop entry, stop loss and take profit orders, the platform will now notify you immediately via an in-platform popup and optional alert sound, if one is executed.
Orders that are executed while you’re logged out of your trading account will also be highlighted via an alert pop-up when you return to the web platform.
You can also be informed of these types of executions while you are no longer logged into your account. You are already able to have price and economic calendar alerts sent to you when you’re not logged into the platform, by email or push notifications from our mobile app. As of January 2014 the Next Generation platform now gives you the option to receive Execution Alerts in the same way. You will only receive an alert for the first trade that is executed after you log out of the platform, not for every execution that occurs while you are logged out. You can enable or disable any of these features within ‘Order Settings’.
1-Click trades automatically inherit your personalised order settings, including remembering previous ticket quantity, forward settlement choices, custom stop loss order trigger preferences and any boundary levels.
Enter units or stake manually or use the convenient built-in drop-down lists. If you have ‘Save Ticket Quantity’ enabled in order settings, the 1-Click ticket will remember your last trade size for that product automatically.
You can decide separately if your default stop loss order and take profit order settings are enabled (on by default) or disabled when using 1-Click Trading.
The 1-Click ticket will display the live price from the price ladder corresponding to the number of units or stake entered. When you click (or double-click, where applicable) the buy or sell price, the order will automatically be submitted. When the trade has been executed, a trade confirmation will appear in the top right of the platform and then fade automatically after a few seconds.
Please note that 1-Click Trading also applies to closing open trades or pending orders within the account module. So you can close a trade with one click by clicking the relevant red ‘x’ icon.
CMC Markets does not recommend the use of 1-Click Trading for inexperienced clients. Please note this feature is not available on mobile or tablet devices.
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CMC Markets global: A look back at 2013
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Building a new service culture
Earn cash rebates as you trade
Towards the end of 2012 we thoroughly reviewed our client service strategy. Part of this initiative led to the creation of a new Sales Trading desk. Matt Macklin, Head of UK and European Distribution, explains how the overall client service initiative has progressed over the course of 2013.
As part of our ongoing commitment to competitive pricing, we now pay cash rebates to high volume traders on shares, indices, commodities and FX.
Taking a fresh look at our service When I joined in 2012, one of the areas I was keen to improve was the overall quality of service for all of our clients. To do this, we stepped back as a team and looked at our service from a client’s perspective. An important part of this process was to carefully consider the feedback we had received from clients. It was clear that our clients were looking for more than just a cutting-edge trading platform, they wanted the platform to be supported by excellent client service as well as competitive pricing. Throughout 2013 we have worked on delivering this all-round approach and we’re confident it has improved the way we help our clients achieve their trading goals.
All of our clients are eligible to receive rebates, as long as they meet our monthly notional value requirements for an asset class. If you meet these requirements for one asset class, you will automatically qualify for rebates on the others. The tables below show the monthly trading volumes required to qualify, the different tiers and the corresponding rebates available. The portion of the notional value that falls within each tier is subject to the rebate applicable for that tier.
Shares Minimum monthly notional value required to earn rebates
3M
* *
Minimum monthly notional value required to earn rebates
80M
* *
to-day queries and trader development for our wider client base. Our in-house specialist trains new and existing team members in the many different functions of our business, so that they are equipped with the knowledge on our products and platform to provide the very best service to our clients.
“We now have one of the highest levels of client satisfaction in the industry.” point of contact, who can help them with trade execution and account queries, or who they can call up to discuss general market conditions. Equally important, we have invested heavily in our Client Management team, led by Chris South. This team assists with day-
CMC Markets PLC
Monthly notional value of share trades (£)
Rebate provided as a percentage of CMC Markets spread
Level 1
0M – 6M*
10%
Level 2
6M – 10M*
20%
Level 3
10M* and above
30%
Rebate Tiers
Monthly notional value of index trades (£)
Rebate provided per million notional value (GBP)
Level 1
0M – 100M*
£2
Level 2
100M – 200M*
£5
Level 3
200M* and above
£7
Rebate Tiers
Monthly notional value of commodity trades (£)
Rebate provided per million notional value (GBP)
Level 1
0M – 20M*
£3
Level 2
20M – 30M*
£5
Level 3
30M* and above
£7
Rebate Tiers
Monthly notional value of FX trades (£)
Rebate provided per million notional value (GBP)
Level 1
0M – 20M*
£5
Level 2
20M – 30M*
£7
Level 3
30M* and above
£10
Indices
How our client service proposition has improved Starting the Sales Trading team this time last year involved bringing in a number of experts from within the industry. During 2013, Matt Basi stepped up to lead the team supported by Senior Sales Traders Jamie, Alex, Toby and Nick. This team has gone from strength to strength, developing and maintaining good relationships with some of our most active traders. Now our Sales Trading clients benefit from a single
Rebate Tiers
Results from the recent UK Investment Trends survey show that the changes we have made over the past year to our clientfacing teams are working. We now have one of the highest levels of client satisfaction in the industry, which is a significant improvement from last year, so we are definitely achieving what we set out to do.
Clients continue to be at the forefront of everything we do, with much of our platform enhancements being a direct result of client feedback.
Commodities Minimum monthly notional value required to earn rebates
10M
*
Other benefits now available to clients To reward high volume traders, we now offer competitive cash rebates* on shares, indices, commodities and FX. Clients can withdraw their rebates or use them to increase their trading account balance. The combination of our competitive and transparent pricing, improved client service and award-winning platform, mean that we are going into 2014 with our best foot forward.
*Conditions apply. Please see our website for further details.
*
FX Minimum monthly notional value required to earn rebates
50M
* *
*M denotes million (GBP) Conditions apply. Please see our website for further details.
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Lloyds outperforms sector in 2013
Central banks & easy money
After the good performance of banks seen in 2012, against a backdrop of negative headlines about Libor scandals, mis-selling and money laundering, the performance of banks in 2013 was somewhat underwhelming, with only Lloyds Banking Group showing any sort of decent performance.
Unprecedented levels of central bank stimulus have been a key driver of markets since 2008. Massive injections of funds into the global monetary system, combined with low interest rates, are an attempt to support asset prices, demand and confidence, giving economies the chance to recover from the shocks of the global financial crisis. Following moves by the US Federal Reserve to start winding in its support as the US economy rebounds, the interplay of growth and stimulus withdrawal may be the defining factors of market action over 2014.
With the sector starting the year at around the 4,500 level, we saw patchy performance as the UK banks sought to rebuild their balance sheets in line with increased capital requirements, with only Lloyds showing decent gains, while Royal Bank of Scotland disappointed after a positive start to the year. The key question as we head into 2014 is whether or not we will see a continued recovery in the UK banking sector given its importance to the UK economy. Despite a recovery in Europe and the UK, the underperformance is all the more surprising, which suggests that investors still remain quite cautious about the sector. Uncertainty about how the European Banking Union will look if politicians in Europe come to an agreement, increased regulatory burdens and the European Central Bank’s Asset Quality Review (AQR), are all factors that could influence bank share prices in 2014. Can we
Barclays
believe ECB President Mario Draghi’s pledge that he will let banks fail if the AQR shows up glaring capital holes, or is it just talk? Previous stress tests in Europe have failed the credibility test at every turn, so 2014 could be important for the banking sector in Europe, particularly if the EU is serious about tackling its banking problem. While some EU politicians say their banks are already well capitalised, you’d be forgiven for remaining sceptical, particularly when you look at the ratio of nonperforming loans in countries like Italy, Spain and Ireland. For this number to come down, Europe needs to have growth and falling unemployment, both of which appear to be pretty elusive at the moment. Lloyds Banking Group was the standout performer last year with share price gains in excess of 50%. Lloyds was boosted by a return to profitability and government plans to significantly pare down its stake in the bank. They have also been reducing the size of their non-core operations, announcing last year the sale of its Australian operations to Westpac for £900m, and its Scottish Widows business to Aberdeen Asset Management in November for £660m. Certainly, of the two state owned banks, it would appear that investors prefer the “Black Horse” over Royal Bank of Scotland.
Performance: 7.44%
Michael Hewson Senior Market Analyst, London office
The performance of RBS was pretty decent until October, but unfortunately the turmoil following the departure of the CEO Stephen Hester, the uncertainty surrounding the good bank, bad bank question, and the competing demands of its major shareholder in the form of the UK government, point to a bank without a clear strategy. If these problems weren’t enough, there is also the prospect of more compensation provision for the misselling of PPI, as well as additional provision for interest rate hedging products, which were mis-sold to small businesses. The bank is also under pressure to off-load its US operation, Citizens, which it should complete by 2016. It’s true that the UK banking sector appears to be in much better shape than it was a year ago, and while the improvement in the UK economy is undoubtedly a factor in that, the government’s “help to buy” initiative also helped to boost property prices, a sector that both banks are heavily exposed to. As for the rest of the sector, it’s been a much more average performance, with HSBC and Standard Chartered shares disappointing thanks to the recent slowdown in emerging markets. Standard Chartered shares had a shocker, down nearly 20% in 2013, over concerns about its exposure to the emerging markets turmoil caused by the recent taper tantrum. Over the last three months, performance has been just as disappointing, with only Lloyds in positive territory at +8%, while RBS is down 7% and Barclays is 1% higher, HSBC flat and Standard Chartered -7%.
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Central bank stimulus takes effect in two main ways. Low interest rates and high levels of liquidity have internal effects, increasing confidence in a nation’s prospects and credit markets, encouraging individuals and businesses to borrow, and thereby supporting asset prices (primarily housing and shares) and economic activity. The external drivers are more controversial. Increasing the supply of any goods tends to lower the price, and the same is true for currencies. Additionally, lower interest rates discourage international investors while driving domestic investors to seek better returns elsewhere. The net effect is to drive a currency down, allowing that economy to become more internationally competitive
and, effectively, to import economic demand. With so many central banks either explicitly or implicitly lowering their respective currencies, one might say we are in a world of “competitive devaluation”. Determining the overall size of global stimulus and its effects on economies is not straightforward. Interest rates in different countries vary significantly. There is clear evidence (source: St Louis Federal Reserve website) that this never-before-seen level of liquidity has significantly slowed the velocity of money – the speed at which currencies circulate in the broad economy in exchange for goods and services. Nevertheless, the size of central bank assets gives some clues as to the size of this monetary expansion (see table 1). To put this table into perspective, the total value of all share markets globally is just over the equivalent of USD 60 trillion (as at December 2013)*. It’s also important to remember that nations differ in their situations and approaches. The PBoC is not injecting funds into the domestic economy, it is accumulating foreign reserves while holding down the value of the Yuan. The BoJ is acting in concert with easier fiscal policy, and the US Fed is working against a fiscal tightening.
Central bank balance sheets - Assets
Michael McCarthy Chief Market Strategist, Sydney office
Implications for traders The ECB and BoE are already winding back their programs. The US is slowing the rate of stimulus, while the BoJ is full steam ahead. How will this impact markets over 2014? Firstly, the size of the US stimulus and the recent turning point could suggest a stronger USD over 2014. This is not only important for currencies, it may also impact commodity markets. Gold may remain under severe pressure, and could find new multi-year lows. The implications for share markets are less clear. This is unlikely to be the simple “risk on, risk off” world of 2011 and 2012. Investors may interpret withdrawal events in two contrasting ways. Draining liquidity could drag share prices down, or it may encourage confidence in emerging economic growth, and spur higher stock prices. It’s highly possible both will dominate at different times over 2014. Ultimately, increasing growth may see share markets finish 2014 at higher levels, but the path will not be straight, and higher volatility based on sentiment swings may be factored into trading plans.
Dec 2007 trillion
Peak date Peak level
Dec 2013 trillion
USD equiv trillion
US Federal Reserve
USD 0.9
Dec 2013
4.0
4.0
4.0
European Central Bank
EUR 1.3
Jun 2012
3.1
2.3
3.1
People’s Bank of China
CNY 16.9
Dec 2013
31.4
31.4
5.2
Bank of Japan
JPY 116
Dec 2013
225
225
2.2
The build-up of liquidity took many years, and the unwind could take longer. The
Bank of England
GBP 0.11
Nov 2012
0.42
0.4
0.7
Total
15.2
trade-off between lower central bank support and strengthening economies could be an important trading theme for years to come.
Table 1 Equivalent values are calculated at December 2013 exchange rates. Source: Bloomberg / CMC Markets
*Source: Bloomberg
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Outlook for technology shares
Index markets in 2013 and 2014
While a rising tide lifted most boats in 2013, there were a number of companies and sectors that performed spectacularly well. Some of the biggest outperformers were found in the technology sector and, with the NASDAQ Composite hitting 4,000 in December, many started to wonder if we are heading for a repeat of the 1999-2002 technology bubble and (the more worrisome part) the subsequent crash.
The bull market in developed economy stocks ranks as one of the defining features of the 2013 investment landscape. The extent of these gains poses an obvious question for 2014. Can these markets continue on their merry way, or have bulls already fired most of their ammunition?
There are a number of differences between now and 1999, but there are still big risks facing the sector in 2014. Valuations could be crunched severely as QE is tapered back and the demand for hot stocks from new money decreases. Extreme volatility in companies like Tesla near the end of the year show that expectations could be another big issue as they rise along with prices. This example also shows that it doesn’t take much to send traders flush with profits heading for the exits. Any hint or news that suggests growth may not be able to meet inflated expectations could spark trouble as traders start looking for reasons to sell over reasons to buy.
Apple and the smartphone sector 2013 saw another big shakeup in the smartphone sector. Challenges from new platforms out of Blackberry and Microsoft/
Apple
Nokia failed to catch fire and both groups spent the second half in turmoil. Microsoft ended up buying out Nokia. Blackberry put itself up for sale and when that failed, sacked management and brought in a turnaround expert. Blackberry finished the year taking another big loss and launching new initiatives in emerging markets. In 2014 the share’s performance will likely depend on new management’s ability to at least stabilise the situation. At this point, it appears to have the potential to compete successfully in niche markets, even if the mass market remains closed to them. It remains unknown if new management is dressing it up for another auction or if they’re in it for the long haul. It’s hard to believe but 2013 was a turnaround year for Apple. After rising to king of the hill by late 2012, Apple struggled for nearly a year. Recently, the shares have started to climb up out of a double bottom after the company’s new iPhone 5s and iPad Air met with so much critical and consumer success that they were able to more than offset the disappointing iPhone 5c. At the end of the year Apple finally closed a deal with China Mobile, giving it access to that company’s 700 million+ subscriber base and opening up a major potential growth opportunity for 2014. Google’s performance
Performance: 20.43%
Colin Cieszynskiiost Senior Market Analyst, Toronto office
in 2014 may depend on how well it is able to hold off the challenge of a resurgent Apple.
Internet search and social media 2013 was a fantastic year for search and social media companies, with all five of the companies mentioned below posting gains of over 50%.
Even so, it can help to have a broad idea of overall market values. This doesn’t have to involve holding rigid ideas about markets being too cheap or too expensive, but it can provide index traders with a sense of where the balance of risk lies on future market moves.
The S&P 500 for example had one of the largest valuation expansions in 2013. The 24% gain has put it back at the top of the PE range that applied in 2004-2007 (see table 2). So even if you assume that bond yields are only down at 3% because of the Fed, PE values are still only at the high end of the range that applied at a time when bond yields were at more “normal” levels of 4%+. It’s also possible that analyst earnings forecasts at the end of 2013 will prove to be a bit conservative, meaning forward PE values are not quite as high as they look.
The rally could continue in 2014, but the risks are higher
The components of growth in 2013 Yahoo! matched Google’s performance in the first half before pulling ahead in the second, propelled partly by speculation on what the value of its position in Alibaba may be worth as that company prepares for an IPO in 2014. LinkedIn dominated in the first half than stalled in the second, while Facebook was sluggish through the first half of the year then caught fire in July and never really looked back. Facebook’s performance in 2014 will likely depend on its ability to continue growing mobile advertising revenue. Another stumble like the one it had out of the gate in 2012 could be costly. Facebook may also be influenced more by general market flows in 2014, having been added to the S&P 500 just before the end of 2013. Twitter struggled briefly after its IPO but then soared in December. Expectations are starting to run really high. The reaction to its first earnings report, likely near the end of January, may indicate if the shares will be able to maintain their hot performance or not. You can see Colin’s full technology sector preview in his 2014 Market outlook.
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From the outset, let me say I am an advocate of maintaining a trader’s flexibility on these questions. We don’t know what events are before us so it pays to keep an open mind, reacting to events and charts as they unfold.
a central bank inspired bubble. History will be the judge of this question but analysis of historical PE values suggests that while valuations are getting high for some markets, they are probably not yet into bubble territory.
Price earnings (P/E) valuations, while far from perfect, can provide useful insight in terms of both historical comparisons and current market dynamics. Are markets rising because of an expected increase in earnings or just because investors are prepared to pay more for those earnings (valuation expansion)? In 2013 it was a combination of both, but for most indices, valuation expansion was the major driving force. See table 1.
Is this a bubble? The extent of valuation expansion in stock markets over the past two years has led to much discussion about whether we are in
Developed economy stocks might well continue their bull market in 2014. However, if this is driven mainly by valuation expansion and not earnings growth, we may start to enter “bubble” territory in some markets and the potential for large corrections will escalate. News that the Fed has begun to taper its asset purchases heralds the beginning of a monetary tightening cycle. US stocks have risen following the first rate hike in seven of the eight tightening cycles since 1980. The average increase has been 7.9% over the following six months*. At this stage of the cycle, economic growth rates are normally improving but monetary policy is still accommodating. So the taper period is
The analysis in the table below is based on forward price earnings multiples.
Ric Spoonert Chief Market Analyst, Sydney office
certainly an environment in which earnings growth, rather than valuation expansion could support further market gains. Against this background, what might the 2013 rally mean for 2014? • Current full valuations and the potential for bond yields to rise means that from here on in, gains in indices may be based more on earnings growth than valuation expansion. If this is correct, overall gains may not be as large as they were last year. • At current PE valuations, indices may be becoming more vulnerable to a correction. Anything that increases the risk outlook could now see a deep correction as risk premium is built back into the market. More like 2011 when the deepest correction in the S&P 500 was 21.6% than 2013, when it was 8.9% When we look back at the end of 2014 we may see index charts in the developed economies with flatter uptrends and/or deeper corrections than we saw in 2013. That could be an environment that creates plenty of opportunity for index traders with a flexible outlook who are prepared to trade the markets in both directions.
Index
% Gain 2013
Due to expected earnings growth
Due to valuation expansion
S&P 500
30%
6%
24%
DAX
25%
5%
20%
Nikkei 225
57%
34%
23%
Forward PE
S&P/ASX 200
15%
4%
11%
10 year bond yield
S&P 500
Table 1 (Source: Bloomberg)
*Source: Thompson Reuters; AMP Capital Markets
End 2013
March 2004December 2007 range
15.1
13.5-15.0
3%
4-5.25%
Table 2 CMC Markets PLC
The Active Trader January 2014
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Trader Development Our variety of regular events and webinars help you get the most out of our Next Generation platform and your trading. These events and webinars have been specifically designed around the feedback we have received from clients on what they would find most beneficial. Below are some of the events you may be interested in attending. You can find more information about these events, as well as register for them, on our website at cmcmarkets.co.uk/education.
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