Spread bet

The news headlines are currently crammed with tales of war and disaster. The ongoing unrest in the Middle East coupled with the earthquake and tsunami in Japan, have created choppy conditions in financial markets. Some traders may feel the time is not right to spread bet when such unpredictable macroeconomic forces have been unleashed on the world, but the canny trader has the option right now of balancing a higher degree of risk with the reward of more profit.

Those investors interested specifically in commodities trading can spread bet a range of commodities markets in the current crisis, but the one that has focused attention the most has been the oil market. The fighting in Libya in recent weeks and the prospect of potential instability in Saudi Arabia and other major oil producing nations in the Middle East has driven up the price of crude oil, particularly Brent crude futures.

The Brent crude futures contract represents the price of oil that is primarily imported into European ports, and it is Europe that is the biggest consumer of Libyan oil and also a large consumer of energy products from the Middle East. This explains the big discrepancy between the Brent futures contract and the West Texas Intermediate (WTI) oil contract which is traded on the NYMEX exchange in the US. The American market relies primarily on other sources for its oil like Canada, Texas and the Gulf of Mexico, and this is encapsulated in the WTI futures contract.

Oil had been relatively range-bound (trading between two price levels), never really threatening to break beyond $90 a barrel between September 2009 and August 2010. Since August last year, however, it has been off to the races as the global economy has recovered. It has been difficult to argue against a spread bet on the long side of oil. The unrest in the Middle East was not a major factor in the oil price until problems began in Libya and Bahrain. The latter is potentially even more concerning, as it holds out the prospect of street-level unrest in Saudi Arabia, the world’s second largest supplier of crude oil after Russia.

The Japanese earthquake and tsunami had a dramatic effect on the Nikkei 225 index, the benchmark Japanese stock market index which is the best daily representation of Japanese equities. It plunged over 2,300 points as traders took stock of the disaster. For those who spread bet the Nikkei, the fall will have come as a big shock, as spread bet trades are based on the number of points a price shifts. The fall in the Nikkei was a dramatic move of historic proportions.

However, since then, the index has been climbing higher as economic fundamentals underpinning global economic growth have taken hold. Concerns obviously still surround the potential impact of a meltdown at the Fukushima Daiichi reactor and if the situation deteriorates there, the market will react accordingly.

Interestingly, when it comes to trading forex (foreign exchange), the Japanese yen has been appreciating against the US dollar and other commonly traded international currencies since the disaster. It dropped to a low of 76.25 yen to the US dollar but has since been reinforced by intervention from the Japanese central bank and the G7 economies, which have voiced their support for Japan’s efforts to keep the yen more expensive.

The yen’s rise has to be seen against the backdrop of the bigger global currencies picture. Those who spread bet on the yen on a regular basis will know that the currency has been rallying since the collapse of Lehman Brothers, the ill-fated US investment bank, in 2008. This was because investors trading forex were borrowing against the yen to buy other assets, a process known as the carry trade. All this ended in 2008 as interest rates in other countries were cut dramatically in 2009, including in the US, UK and Europe.

The question remains whether the tide has turned, and if the yen is now set to appreciate. Many who trade forex on a regular basis believe now is the time to start selling the yen. Government support for a currency does not instantly ensure its fortunes. Governments have been caught on the wrong side of a falling currency before. But it seems as if risk appetite is coming back into the market globally, and one sign of this could be a trend towards a cheapening yen.

Markets are currently being driven by the 24 hour television and newswire output. Traders at their desks in big banks around the world are making frequent knee-jerk reactions to news as it breaks. For the trader at home, keeping an eye on his spread bet positions, it may not be possible to spend all day glued to the television. It is now possible to spread bet on the move, however, using a mobile device to keep up to speed with hourly news developments and react accordingly. Or you can simply take a spread bet position – for example, long oil – and protect yourself with a stop loss that will close your trade if the market turns suddenly against you. This at least will mean you minimise any spread bet losses you take as a result of market turbulence.