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How to Trade the Global Economic Slump |
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14th Aug 2020

How to Trade the Global Economic Slump

To a certain degree, uncertainty has always been a part of leveraged trading, in forex and cryptocurrency, or any other market. However, the 2020 COVID-19 pandemic has been a different story altogether. The continuous spread of the virus and the subsequent lockdowns in different parts of the world has put a dent in the global economic output.

In June 2020, the IMF revised its projections for global growth to 4.9% for the year, almost 1.9% below its April forecast. The World Bank, on the other hand, predicted 5.2% global GDP contraction. At the same time, high volatility in the financial markets rattled even the most experienced investors.

While the stock market has been tied to the pandemic-induced global economic uncertainty to a large extent, it has also sometimes behaved in a way detached from the real economy, recovering quite quickly from its March 2020 crash.

Given the extreme volatility and economic disruptions, this is a time of rapidly changing risk profiles in the global markets. Trading strategies will have to adapt accordingly.
Investing in assets that are non-correlated can help spread the risk in the overall portfolio.  Safe-haven assets, such as the US Dollar, Swiss Franc, gold and Bitcoin/USD, have surged in this period of uncertainty. The surging US stock market, low interest rate environment around the world and overall economic gloom, helped the US Dollar climb higher early during the coronavirus outbreak. Subsequently however, the US Dollar appeared to lose its safe-haven status to the Swiss Franc, amidst US-China tensions and gradual recovery in economic activities worldwide.

Gold prices are expected to benefit from the uncertain global economic outlook and a weaker US Dollar. The yellow metal price breached $2,000 an ounce recently and this momentum might continue all the way to $2,500 by the year end. Another safe-haven asset to consider is Bitcoin (BTC), which has had a stellar year in 2020. The largest cryptocurrency is now trading close to $12,000, as of August 11, 2020.
Even safe haven assets can experience volatility during economic releases. One of the most significant market moving events has been the US Non-Farm Payroll (NFP) report, which has been surprising investors since May 2020. For the third consecutive time on August 7, the US jobs data was positive, with the addition of 1.763 million jobs in July, despite the rising COVID-19 figures in the US. As a result, global equity markets rose higher, while bond yields declined. Also important to follow is the news of massive government stimulus packages worldwide.

In July 2020, EU leaders drew up plans for a $850 billion stimulus package to revive their economies. The discussions around another US stimulus package and US-China tensions have been driving the US Dollar strength in recent weeks. There are tensions that rising stimulus packages will lead to higher inflation and erode currency values. Such concerns increase the appeal of non-inflationary assets like Bitcoin/USD and gold.

Economic and geo-political news updates will be crucial for forex and cryptocurrency market participants. For instance, Brexit developments, along with market risk sentiment, will drive the Great British Pound (GBP) and the Euro. China’s rising inflation figures and low producer price index will impact the movement of the commodities-based Aussie Dollar.
Stock market volatility has been unnerving, and on many occasions, far removed from the real economic indicators. About two-thirds of the S&P 500 companies have released their second quarter earnings reports. While some companies have struggled to keep investors happy, many have done well.

Consumers are now seeking comfort and familiarity in large brands, particularly online retail, technology, pharmaceuticals, food, consumer discretionary products and eCommerce. Some of the factors that have driven global stocks include news around the development of a COVID-19 vaccine, stimulus packages and oil market fluctuations. Energy and real-estate stocks have ranked lower in recent EPS releases.
Another way for forex and cryptocurrency traders to take advantage of both rising and falling markets is by trading derivatives like Contracts for Difference (CFDs). CFDs allow traders to assume positions in both rising and declining markets, making this a more flexible trading route than any other forms of trading. They are also designed to mimic the underlying market momentum closely. 

Lastly, in an unpredictable market like this, the importance of risk management tools and practising strategies before committing to a position are paramount.