Caught in a vice between a post-covid economy which has caused demand to explode, and a war economy that is torturing the supply of commodities, increased fears of a recession are mounting. But as always in such situations, the potential trading opportunities continue to remain intact. Below is an overview of the general market trends, and how to take advantage of them.
It was 2021… so long ago…confident about their economic future despite the Covid-19-related slowdown, numerous citizens became consumers again and caused demand to explode. Problem: they demanded more than what the market was able to produce, and above all, more than what the industry was able to deliver. You name it: the so-called “supply crisis” was on its way, with no relief in sight.
No flexible supply
Consequence: we may have to get used to an economy of lasting shortages alongside inflation in certain sectors. In the air, European airlines are failing to keep up with the floodgates of travellers. Ticket prices have increased sharply from pre-Covid-19. Traveling by sea, the situation is similar. Boats line up in congested and overwhelmed ports. Shipping costs have also increased considerably since the end of Covid-19, despite the relative drop observed in 2022:
Lingering drop in Stock prices?
The supply chain crisis is not neutral insofar as the Stock market is concerned. According to a UK report, local stocks have been affected over the last few years by global supply chain issues and material shortages, among other things. What are the most affected sectors? The Retail Industry and the Motor Trade Industry, with a drop in prices for the latter:
High Tech, Low Point
It is interesting to note that the golden sector of High Tech, the one that believed it was untouchable during the Covid-19 crisis, was not spared by the fall in prices. Indeed, a shrinking economy also means less financing for technology companies. Additionally, some experts believe they are overvalued when access to money was still easy and “free” until last year. Thus, the paradox: even if the results in Q1 (2022) for the High-Tech Industry were globally satisfying, they were still insufficient to cover for the bearish tsunami (Nasdaq, S&P 500, etc).
War and commodities: from tears to fears
The post-covid economy shook the earth for the first time. A second eye-opening shock took investors by surprise: the war in Ukraine. The main ramifications for the markets were subjected to raw materials and commodities, since the conflict is waging between two leading producers of gas, oil and wheat. Europe is now trying to do in a year what hasn’t been done in a decade: diversify its supplies. However, fears of shortages for the winter of 2023 only amplify the concerns of severe inflation and recession because of excessive energy costs.
Bye-Bye, free money
Within an inflationary environment, Central Banks like the FED try to reduce inflation by raising interest rates. 0%, 1%, or more… The lower the rates, the easier and cheaper it is to borrow money. Conversely, the higher the interest rates, the more expensive it becomes for everyone to borrow. The markets can react strongly to these rate variations. The long period in which money was “free” has just ended, probably for a long time.
The Up and Downs between the Dollar Euro?
The Dollar hasn’t lost its status as a safe haven in times of recession. In other words, the desire to increase the share of Dollars in one’s portfolio is crucial, for some investors. But this automatically makes the purchase of raw materials more expensive for some States: “Petrol and most commodities like metals or timber are usually traded in US dollars (with some exceptions). So, when the dollar gets stronger, these items cost more in local currency” write some Senior Lecturers.
And it is here that the United States’ main rivals (China and Russia) are trying to change the situation in the long term: “there are signs the Petrodollar system is cracking. Saudi Arabia is making noise about selling oil to China in yuan and is squarely siding with Russia over OPEC oil supplies”, writes the Columnist Franck Giustra, for whom today’s geopolitics will have an impact on the finance of tomorrow.
In contrast, “the Euro, the Japanese Yen and the British Pound, whose central banks have either not hiked rates or failed to keep up with the Fed’s aggressive policy tightening, have weakened by double-digit percentages this year”, Hari Kishan from Reuters added.
But not everyone is unhappy with that situation…
Potential trading opportunities
For some investors, this bearish context is precisely, an ideal opportunity to diversify their portfolio. Diversification can take place from one index to another, from one instrument to another, and from one market to another. The bond market, for example, has recently experienced a resurgence of interest. This type of investment is considered “safer” over the long term, although its returns decline in proportion to its popularity.
Diversification can also take place from one strategy to another. Don’t want to buy a stock for fear the price will drop? With multi-asset platforms like Alvexo, you can trade CFDs, i.e. derivatives, without having to buy the underlying asset – the stock itself. Trading opportunities can thus exist in two directions, both when markets go up, or down, even if this aspect is less known to the general public.
In addition, investors can also pay attention to companies that, structurally, take advantage of this type of situation. This was for example, the case of the now famous ZOOM. When everyone was ordered to stay at home, the software’s solution perfectly suited the conditions. The Zoom stock exploded in 2020.
An identical situation for the ASLM asset. The Dutch manufacturer of lithography systems for the microprocessor is in a strong position in a market marked by high shortages of chips and other electronic components. Thus, with meaningful outcomes already:
Not all businesses are affected identically by shortages and price increases. In 2021, carriers from the maritime sector ZIM or supply chain giant like UPS increased their profits. It is therefore up to the trader to identify these companies that remain worthwhile, even in a recessionary economy.
In conclusion, in troubled times, trading with a reliable regulated broker is a must. Good risk management can start with turning to a multi-asset broker like Alvexo, for diversification strategies. Alvexo, coupled with its innovation, devoted community of experts, and a multitude of trading tools (signals, eBooks, economic calendar), is a leading platform to be reckoned with, in today’s unique volatile markets.
Article by Alvexo
CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 76.22 % of retail investor accounts lose money when trading CFDs with this provider. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.
The above content is considered to be market commentary information and shall not be perceived as independent investment research or investment advice. The opinions expressed in this article are the author’s own and do not necessarily reflect the view of Alvexo on the matter.