Trading in CFDs is a popular alternative for many traders, particularly because of the high leverage they offer and the freedom of trading without owning an underlying asset. When trading CFDs, it is important to understand the various aspects that may influence the performance of instruments such as currency pairs, stocks or commodities. The latest event to sway performance is the speech by Janet Yellen, Chair of the US Federal Reserve. There were different effects before and after the speech given on Friday, August 26. The speech was at the Jackson Hall Symposium, a yearly meeting of central bankers. The speculation of whether there will be a rate hike is what drove the varying performances in different markets.
By the close of day Thursday, European markets registered sharp losses. The STOXX 600 had all sectors posting losses with an overall fall of 0.84%. Healthcare, miners and auto stocks are some that were in the red as investors eagerly waited for the Yellen speech. There was also a 0.28% fall in the FTSE 100 in addition to other European markets like DAX that slipped 0.88% and CAC40 that closed 0.65% down. For crude futures, the prices had gains and losses fluctuations but rose with Brent at $49.47 and US Crude at $47.04 in anticipation of a weakening dollar after Yellen’s speech. European market stocks did, however, post mild gains ahead of the speech.
When Janet Yellen gave her speech at the Symposium, she hinted at a US rate hike by saying that the case is strengthened. Although cautious with her comments, investors got the message and that had its effect on the markets. Shortly after the speech, Brent crude was up 50 cents, meaning it went past $50 a barrel, but it then fell to $49.90. On the following day, the FTSE100 gained 0.3%. The pound posted some gains and best performances against the dollar since its decline after the Brexit vote at $32.80.
The Impact of Higher Interest Rates
It is useful for traders to understand how an increase in the rate of the dollar affects the market because it impacts CFDs trading. What happens is that when the Federal Reserve raises interest rates while other central banks maintain current rates or lower them, then the US presents a better return on savings than other nations. Due to the flow of international capital from other regions, the dollar is bound to appreciate. A strong dollar will have an undeniable effect on a majority of markets because it will influence asset prices. Of course, some markets are more susceptible than others when it comes to high interest rates. For example, a rise in rates will affect gold negatively because precious metals don’t perform the same as bank accounts. The bond market is one that will experience a lot of challenges from the anticipated rate rise.
CFDs provide a viable alternative for long and short-term traders with options such as currency, treasury, commodity and stock. Trading on CFD instruments involves betting on the rise and fall of different assets without actually owning them. The contract for difference is between a broker such as CMC Markets and a trader where profits and losses rely on the movement of an underlying asset. A trader only has to put in a fraction of their money on an underlying asset but is entitled to 100% of the potential gains and losses.
Even though a CFD trader does not buy an asset directly, the performance of an asset on the market will impact gains and losses; hence, the significance of the US interest rates. A rate rise in the US also has the potential to deflate emerging market currencies, again useful information when trading.