In order to assess whether it is a good time to increase exposure to riskier assets such as equities, institutional traders often use correlation tools and inter-market analysis.
Depending on the macro environment (uncertainties, market drivers, monetary narratives), traders periodically assess their exposure between offensive and defensive values (Risk-on vs Risk-off).
One of the easiest way to assess investors' trading stance and appetite for risk is to look at what is happening on other asset classes such as Bonds and currencies.
For instance, on this example you can find the US 10 year yield (bond) on the right, the US Dollar index in the middle (currency) and the S&P500 (stocks) on the right.
It is easy to notice the mechanism in place here : When the currency becomes weaker while the cash goes back into bonds (bear in mind that when bond yields drop means bond markets goes up), it usually sparks a bullish trend in the stock markets.
This is exactly what we are seeing here. Bond yields have started to drop on the 1st of May, alongside the Dollar index, which sparked a sharp rebound on the S&P500 at the same time.
Of course, sometime these three asset classes aren't correlated that much, which means there is no clear trading signal and that uncertainty lingers in the markets.
But when a drop occurs in both bond yields and the currency of a specific economic zone, this is seen as the best setup to buy stocks for traders.
This is explained by the fact that when the currency drops, large exporting groups are able to sell more internationally, boosting their exports.
Meanwhile, a drop in bond yields means investors are willing to put more cash into the market.
If you're willing to know whether it is a good time to increase your exposure to equity markets, maybe you should pay attention to what's happening in those key other assets.
Pierre Veyret, Technical Analyst at ActivTrades.
The information provided does not constitute investment research. The material has no been prepared in accordance with the legal requirements designed to promote the independence of investment research and such is to be considered to be a marketing communication.
All information has been prepared by ActivTrades ("AT"). The information does not contain a record of AT's prices, or an offer of or solicitation for a transaction in any financial instrument. No representation or warranty is given as to the accuracy or completeness of this information.
Any material provided does not have regard to the specific investment objective and financial situation of any person who may receive it. Past performance is not reliable indicator of future performance. AT provides an execution-only service. Consequently, any person acing on the information provided does so at their own risk.
Depending on the macro environment (uncertainties, market drivers, monetary narratives), traders periodically assess their exposure between offensive and defensive values (Risk-on vs Risk-off).
One of the easiest way to assess investors' trading stance and appetite for risk is to look at what is happening on other asset classes such as Bonds and currencies.
For instance, on this example you can find the US 10 year yield (bond) on the right, the US Dollar index in the middle (currency) and the S&P500 (stocks) on the right.
It is easy to notice the mechanism in place here : When the currency becomes weaker while the cash goes back into bonds (bear in mind that when bond yields drop means bond markets goes up), it usually sparks a bullish trend in the stock markets.
This is exactly what we are seeing here. Bond yields have started to drop on the 1st of May, alongside the Dollar index, which sparked a sharp rebound on the S&P500 at the same time.
Of course, sometime these three asset classes aren't correlated that much, which means there is no clear trading signal and that uncertainty lingers in the markets.
But when a drop occurs in both bond yields and the currency of a specific economic zone, this is seen as the best setup to buy stocks for traders.
This is explained by the fact that when the currency drops, large exporting groups are able to sell more internationally, boosting their exports.
Meanwhile, a drop in bond yields means investors are willing to put more cash into the market.
If you're willing to know whether it is a good time to increase your exposure to equity markets, maybe you should pay attention to what's happening in those key other assets.
Pierre Veyret, Technical Analyst at ActivTrades.
The information provided does not constitute investment research. The material has no been prepared in accordance with the legal requirements designed to promote the independence of investment research and such is to be considered to be a marketing communication.
All information has been prepared by ActivTrades ("AT"). The information does not contain a record of AT's prices, or an offer of or solicitation for a transaction in any financial instrument. No representation or warranty is given as to the accuracy or completeness of this information.
Any material provided does not have regard to the specific investment objective and financial situation of any person who may receive it. Past performance is not reliable indicator of future performance. AT provides an execution-only service. Consequently, any person acing on the information provided does so at their own risk.