Ben Robson – The week of 23rd-27th March 2020- Daily distortions!

I have never been the greatest fan of high-frequency traders. They often state that they provide liquidity and stability to markets.

That may well be true in non-volatile markets when HFTs are clambering to be top of book and are fishing for non-HFT orders. In volatile markets where there may be fewer non-HFT bids and offers, HFTs are so quick and adept at pulling their own orders that a large stop-loss order can quickly cause a cascading effect and rapidly lead to severe market distortion.

I understand that HFTs account for over half the volume on US equity markets. Their orders are prevalent on FX and commodity markets too. The 10%+ swings we are seeing on equity markets do not surprise me. In fact, if anything I’m surprised the moves haven’t been larger. There was less volatility as the week drew to a close. Perhaps the non-HFT traders had been cleaned out and didn’t give the piranhas too much to frenzy feed on. Perhaps people are standing back a little to see where markets stabilize before going back in.

Last week saw concerted intervention from central banks and governments to provide contingency measures for now and the immediate future for the many businesses and individuals affected by the Covid-19 virus. With parts of Europe and the US on shutdown, we are probably in for a prolonged period of market disruption. The trick will be to identify really solid companies that will survive and thrive as markets ultimately return to normality.

My view is that markets have not yet bottomed out. Just over 11 years ago in March 2009, the S&P touched an intra-day low of around 666. At 2,304 (Friday’s close) we are 245% above that level. With all the fiscal and monetary easing that’s gone on over the last 11 years, stocks have been on a tear. Unfortunately, there will be a recession now, and certain central banks have gone all-in with their aid. In my mind, there will be weeks, perhaps months of pain for certain industries. Dividends will suffer and several cashflow vulnerable companies may well go to the wall.

Perhaps there’s another asset class we can trade. And yes, of course, there is. Foreign exchange! Several themes have played out in this latest equity market crisis that have mirrored moves in previous equity market collapses. The current state of affairs in the oil market leads to additional currency trading opportunities. And finally, the rush into US dollars has pushed many currencies to be massively oversold and perhaps ripe for a correction. I see opportunity everywhere in currency markets. Currencies are a perfect diversification of assets and should be included in any portfolio!

This week, economic data will be largely irrelevant. UK CPI (exp 1.7% Y/Y Feb), A Bank of England MPC meeting (interest rates to remain at 0.1%), US GDP (exp 2.1% Q/Q Q4), US PCE (exp 1.7% Y/Y Feb). None of these releases will affect markets.

I shall be watching oil and CADJPY in tandem, AUDNZD which is trading near parity and GBPUSD (which took a big hit last week) for any signs of a rebound!

Good Luck and Good Trading! Ben Robson

Ben Robson is the CEO of Spectrex Commodities and author of Currency Kings- How Billionaire Traders Made Their Fortune Trading Forex And How You Can Too.

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