Leverage and negative balance: risks and responsibilities
Joined 05/06/23 09:25
Indices remain bid amid risk-on sentiment Outlook on FTSE 100, DAX 40 and S&P 500 as the Fed is no longer expected to hike rates at its June meeting. Source: Bloomberg Axel Rudolph FSTA | Senior Financial Analyst, London | Publication date: Monday 05 June 2023 FTSE 100 nears last week’s high Towards the end of last week the FTSE 100 bounced off its two-month low at 7,433 as the US agreed to raise its debt ceiling, China was preparing new measures to support its property market and solid US labour data but a higher-than-expected unemployment rate at 3.7% and stabilising wage growth gave the US Federal Reserve (Fed) room for a pause in June. For FTSE 100 bulls to be fully back in control, the high seen a couple of weeks ago at 7,660 would need to be exceeded on a daily chart closing basis this week. Above it lie the 7,679 and 7,706 mid-May lows and meanders the 55-day simple moving average (SMA) at 7,718. Slips should find around the 26 May low at 7,556 or along the 200-day simple moving average (SMA) at 7,718. Source: Bloomberg DAX 40 flirts with late May high at 16,080 The DAX 40 flirts with its late May high at 16,080, having formed a potentially bullish Hammer formation on the weekly candlestick chart amid broad global risk-on sentiment towards the end of last week. A rise and daily chart close above the 16,080 high would open the way for the May all-time record high at 16,333 to be reached. Minor support only comes in around last Wednesday’s high at 15,928, ahead of the breached May-to-June downtrend line at 15,900. Source: Bloomberg S&P 500 trades near Friday’s nine-month high On Friday, the S&P 500 rallied to a nine-month high at 4,290, close to its August 2022 peak at 4,325, both of which will remain in focus as long as risk-on sentiment prevails. With more and more market participants expecting the Fed not to raise rates at the June meeting and helped by a new Chinese stimulus package for its struggling property market, stock markets continue to look short-term bid. Potential retracements should find good support between the mid- to late May highs at 4,234 to 4,214. Source: Bloomberg
Australia's six-quarter economic growth may slow in Q1 2023, prompting speculation of RBA rate hike pause. Markets watch RBA guidance, household spending, net exports, and AUD/USD trends. Source: Bloomberg Forex Economic growth GDP AUD/USD Export Australia Tony Sycamore | Market Analyst, Australia | Publication date: Monday 05 June 2023 On Wednesday at 11:30 am, the Australian Q1 2023 GDP is poised for a decline. In the December quarter (Q4) of 2022, Australia's economic growth rose by 0.5% QoQ or 2.7% YoY, slowing down from 5.9% YoY in the September quarter (Q3). Net trade (due to increased exports and fall in imports) and consumption primarily drove the GDP growth in the December quarter. Expectations for Q1 2023 For Q1 2023, GDP is expected to rise by 0.3% QoQ or 2.5% YoY. Although this would mark a sixth consecutive quarter of economic expansion, it would also denote the slowest pace since the 2% fall in the September quarter of 2021. The expectations range significantly, from -0.2% to +0.5%. As articulated in the Statement of Monetary Policy in May, the RBA anticipates slower growth as it endeavours to control inflation and balance the labour market via higher interest rates. A dive into the details Household spending, driven by robust services consumption including hotels, cafes, restaurants, and transport services, is projected to contribute positively to the growth. The household saving ratio, which dropped from 7.1% to 4.5% in Q4, is forecasted to decline further as household spending exceeds growth in disposable income, thereby prompting consumers to utilise their savings to offset the cost of living and mortgage pressures. Net exports, which surged by 1.1% in Q4, are anticipated to detract -0.5% percentage points from growth in Q1 2023 due to softer commodity prices and weaker volumes. In Q4, Australia's Terms of Trade rose 0.6% as growth in export prices outpaced import prices. Since then, Australia’s Terms of Trade have turned lower, which suggests a flat outcome is likely in Q1. GDP growth rate YoY Source: TradingEconomics Impact on markets The release of Q1 2023 GDP just a day after the RBA's June Board meeting means that markets are likely to prioritise understanding the implications of the RBA's forward-looking guidance rather than a retrospective GDP print. That said, a GDP of 0.5% QoQ or higher would amplify expectations of further RBA rate hikes, supporting the AUD/USD while posing risks to the ASX 200. Conversely, a GDP of 0.1% QoQ or less would fuel speculation that the RBA has concluded its rate hiking cycle and is ready for an extended pause. Forecast for the AUD/USD The AUD/USD concluded last week higher at .6607 (1.34%), bolstered by stronger commodity prices and upside surprises in the monthly CPI indicator and wage increase at the Fair Work Commissions Review. This suggests the RBA may implement another rate hike, if not in June, then possibly in July. In technical terms, the AUD/USD's close back above .6565 (range lows) currently mitigates the downside risks that followed the sell-off in late May. On the upside, resistance from the 200-day moving average is seen at .6700c, ahead of a solid resistance barrier from range highs at .6800/20c. On the downside, a break of support at .6565 and then of the May 31st .6458 low would put the support at .6350 on the market's radar. AUD/USD daily chart Source: TradingView TradingView: the figures stated are as of June 5, 2023. Past performance is not a reliable indicator of future performance. This report does not contain and is not to be taken as containing any financial product advice or financial product recommendation.
Following a pivotal week for US equities marked by Congressional moves and robust employment data, market focus shifts to central bank meetings and impending data releases. Source: Bloomberg Indices Shares Dow Jones Industrial Average S&P 500 Nasdaq United States Tony Sycamore | Market Analyst, Australia | Publication date: Monday 05 June 2023 US equity indices roared into overdrive as last week drew to a close, turbocharged by the passage of the Fiscal Responsibility Act in Congress, an outperforming non-farm payrolls report, and the anticipated stimulus measures in China. Confirming the resilience of the US economy, non-Farm payrolls rose by 339k in May vs 195k expected. Providing a "Goldilocks" element, the unemployment rate rose to 3.7% from 3.4%, its highest level since October, while Average hourly earnings ticked down to 4.3% YoY from 4.4%. The jobs report did little to change the pricing for the June FOMC meeting, which closed at around 7bp or 30%. However, the July meeting is now 50% priced for a rate hike into the 5.25-5.50% range. This week, the market will focus on two central bank meetings (The RBA and BoC) for possible clues as to whether the FOMC will hike rates or pause its rate-hiking cycle in June. Also of interest will be the US May ISM services report (Tuesday, June 06 at 12.00 am AEST) which, along with next week's inflation report, will be the last major data release before the June FOMC meeting on June 15. ISM: expectations and implications In April, the ISM services increased to 51.9 from 51.2 in March, highlighting the divergence between the soggy manufacturing and resilient services sectors. Behind the solid number was an increase in new orders (56.1 vs 52.2) and new export orders (60.9 vs 43.7). In May, the market is looking for the ISM services to increase to 52.4 for a fifth consecutive month of growth in the services sector. S&P 500 technical analysis Following its explosive rally on Friday, the S&P500 has followed the road map nicely to be eying the August 4327.50 high - from last week's update here. "Presuming the S&P 500 can hold above range highs 4210/4185 (closing basis), allow for the S&P 500 to rally initially towards the August 4327.50 high". Should the S&P 500 move above 4327.50, the next significant resistance level is not until 4500/50. On the downside, strong support is viewed near old highs of 4210/00. Aware that a break and daily close below support at 4185/4175ish would indicate that last week's break higher has failed. S&P 500 daily chart Source: TradingView Nasdaq technical analysis As we noted last week, during the dot com bubble of the late '90s and many others since, when animal spirits take hold, rallies can extend further than expected.\, such was the case last week with a new 52-week high. We expect AI mania to remain a driver of the Nasdaq in the months ahead, with the technology still too early in its lifecycle to disappoint relative to expectations. Pullbacks in AI-related tech stocks and the Nasdaq will likely be met by buyers looking to position for the next leg higher towards the 15,268 high of March 2022. Nasdaq daily chart Source: TradingView Dow Jones technical analysis After its strong rally on Friday, the Dow Jones has broken (again) above downtrend resistance from the bull market 36,952 high. However, before getting carried away there is still much wood to chop. The Dow Jones needs to break above the May 34,257 high, the 34,342 year-to-date high and the December 34,712 high to claim to set up a test of the 35,492 high from April 2022 before the all-time 36,952 high. On the downside, the Dow Jones continues to find good support coming from the 200-day moving average, currently at 32,762. Dow Jones daily chart Source: TradingView TradingView: the figures stated are as of June 5, 2023. Past performance is not a reliable indicator of future performance. This report does not contain and is not to be taken as containing any financial product advice or financial product recommendation.
I'd like to better understand what can happen in an extreme case scenario relying on the use of leverage, e.g. with CFDs.
In theory and with proper money/risk management, this should not happen, but if a leveraged position gives rise to a significant loss:
- IG will perform a call margin if the margin level is just above a given threshold
- If the margin is not sufficient, IG will close open positions to free up margin. What are the rules behind, are the last opened positions closed?
- If the margin is not sufficient and the account balance becomes negative, what happens? Different situations might lead to such a rare situation (unlikely especially in the case of a conservative risk and money management from the trader/user): a bad trade/money management, a lack of liquidity/counter party preventing the client to close a loosing position (similarly, the spread is expected to be high), an exceptional market event (black swan, e.g. flash crash, unexpected strong change of monetary policy,...), a price gap at market opening, etc... for each situation, what are the responsibilities between IG and the client regarding the risks and negative balance? Could there be a debt to be paid by the client to IG, given that the latter is also responsible for risk management and to provide sufficient liquidity? Is IG supposed/responsible to do everything that is needed to avoid such situations to occur? Could a client see his/her negative balance be set to zero by IG and afterwards continue his/her operations with new funds?
Finally, are these scenarios and responsibilities described in the contract between IG and clients?
Looking forward better understanding these aspects;
Thanks and regards,
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