Pig out on the rebound
WHEN six central banks staged a coordinated intervention last week to lower the cost of dollar swap rates, they gave the European markets a breath of life on the hope that this would sow greater liquidity into the interbank market.
The injection of dollar liquidity into the market sent investors trotting out of dollar positions and into risk assets – the Dax jumped almost 5 per cent and a number of Italian financials jumped higher.
But though the move injected some short term “hopium” into the markets, traders should be looking to benefit on the downside when this starts to swill out. “The problem with this sort of intervention is it does clearly give a short-term fillip to markets, but does it actually change the underlying problems, which are still large, namely the European debt problem and the lack of economic growth in the Western world?” says David Jones, chief market strategist for IG Markets. “Clearly it doesn’t so I would be concerned that it is just pushing us up to a slightly higher level to fall from as these problems drag on.”
But if you held a banking equity that has gained from last week’s activity, you can look to benefit by using CFDs, or at least mitigate downside losses when the short term bubble is deflated. But to make it worth your while, you would have to be in profit. According to Ian O’Sullivan, head of sales for SpreadCo, if you were lucky enough to buy some banks 30 per cent below where they are currently trading, then you should think about selling a CFD short against that position if you wanted to lock in your gains without selling your physical holding this side of Christmas. “You can partially, completely or even over-hedge if your short-term view is more bearish than your long-term view and then hold them until you are happy to close the position again.”
If the equity markets start to squeal again, you may lose on the physical but keep your snout in the trough for profits through the CFD.