Opportunities in Volatile Markets

Glboal financial markets have been displaying particularly large and volatile swings over recent days.

Here we take a look at some of the main themes causing these relatively violent fluctutations, including the euro debt crisis and the UK's hung parliament, and examine how the markets have reacted to the rapidly changing events so far.

What's causing the current volatility?

A number of economic factors combined last week to cause widespread panic among traders. This in turn resulted in significant falls across major global indices, with the most significant issue arguably remaining the eurozone debt crisis. This itself was sparked by Greece's spiralling descent into debt and the accompanying credit rating downgrade to 'junk' status. Magnifying the issue is the fear of contagion in other debt-laden eurozone nations like Portugal and Spain.

The political uncertainty that came in the wake of Britain's hung parliament was felt acutely across the markets last week, with the FTSE losing close to 8% for the week.

As if these issues weren't enough to contend with, a further dent to markets was provided on Thursday by an alleged 'fat finger' error – later denied – by a Wall Street dealer. The large trade caused the Dow to plummet almost 1000 points – or 9.2% – before rebounding to a rather more modest, though still large, 3.2% slide on the day.

How have the markets reacted?

After spiralling inexorably downward global markets rebounded emphatically on Monday after the European Union (EU) and International Monetary Fund agreed a €750 billion deal to plug the threat of the Greek crisis spreading. The FTSE rebounded 5.2%, recovering more than half of its losses over the previous week.

However, despite the fact that we now have a coalition government, there remains some uncertainty over exactly which economic policies may be implemented. For instance, the £6 billion Tory deficit reduction pledge, widely considered to be a positive move for sterling, will be harder to meet in a coalition than it would have been in a one-party majority situation.

After taking a pummelling as the Greek issues reached tipping point last week, the banking sector was one clear beneficiary of the EU/IMF rescue deal. Indeed Barclays, Lloyds Banking Group and Royal Bank of Scotland Group occupied the top three spots on Monday's leader board, with the former adding as much as 16.2% to 329.6p.

Predictably, both sterling and the euro have been affected by the ongoing uncertainties. Sterling fell to a one-year low against the dollar of $1.45 on Friday morning, 7 May, before easing higher later in the day and closing the week at $1.48. Some fund managers believe that it is a clear buying opportunity on the dollar, with its relative safe-haven status – one analyst believes it could fall as low as $1.40. In contrast it is thought more likely that sterling will hold its value versus the euro, in the face of the debt-mountain faced by Greece, and therefore the EU as a whole.

Manage your risk

It is important to remember that in periods of high market volatility, while is it possible to make significant profits, it is also possible that you will incur larger losses than during less volatile times. With IG Markets you can take steps to put a limit on the amount of money you are willing to risk while ensuring that potential profit is uncapped. Find out how we can help you to manage your risk.

Take a view

Whatever your position on the next market move, with IG Markets you can choose from a host of different markets, including:

• Binary and Options volatility Trading – If you feel that a market is set to be particularly volatile, you can take a position by trading on the volatility itself, as opposed to choosing on one direction. Find out more about trading on volatility.
• Stock Indices – Deal around-the-clock and take advantage of our tight spreads; just 2 point on FTSE 100.
• Sectors – choose from more than 35 FTSE-based sectors, including the ever-topical banking and mining sectors.
• Forex – take a short-term or longer term view on currency movements from over 60 pairs, including EUR/USD from just 1 pip.
• Shares – Pick from 7000 individual global shares with permanently low spreads and margin rates from just 5%.

Find out more about our huge range of markets or browse from our portfolio of free
online seminars. Alternatively apply online to open an account in minutes.

The above comments do not constitute investment advice and IG Markets accepts no responsibility for any use that may be made of them.

Updated: 12/05/10