Risk slowly returning

Suffice to day it was not an easy day in markets yesterday given the tragic events unfolding in Brussels. Whilst the human cost is enduring, the impact on financial markets tends to be transitory. Yesterday we saw a modest flight to safety in markets, with core bond yields falling, peripheral yields generally steady to higher. Gold was higher, although we’ve seen that move more than unwound in overnight trading. In FX, sterling was the currency that was losing out. There were two reasons for this. The first was the suspicion that events in Brussels could enhance the ‘leave’ campaign in the upcoming EU referendum in June, on the belief (rightly or wrongly) that this would leader to stronger border controls and increased security. The second reason is that fact that sterling has been trading more strongly inversely to risk. In other words, as assets that increase in value when investors become more risk averse, sterling weakens and that relationship has become more strongly inverse this year.

For today, as we head into the Easter weekend, we are likely to see activity and volatility decline into the long weekend, with some markets (London, NY) closed on Friday. We have a few speeches from officials, but none are major and likely to impact markets. The themes to watch are the continued weakness of sterling, together with the stalling in the recent recovery in emerging market currencies. The Aussie also continues to defy gravity, up nearly 7% over the course of the month so far. Equities are also at key levels, especially in the US where the S&P is struggling to push higher, having erased the losses of the year to date. Most European indices are struggling to make up the same gap and are likely to remain cautious in the wake of yesterday’s events.

Did you know?

If overwhelmed by pessimism and falling prices, the FX market is defined as “bearish”, while if characterised by optimism and rising prices, it is called “bullish”. These two terms derive from the way in which bears and bulls attack their opponents, with the former swiping its paws downwards and the latter thrusting its horns upwards.

Word of the day
"Pip" - The smallest increment in which a currency pair can move. It is usually the fourth decimal place of the quote currency in a pair. In the case of the Japanese yen (JPY), it is the second decimal place of the quote currency.
Pro Tip

Higher leverage --> Less funds required as margin / Lower leverage --> More funds required as margin

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