Correlated Markets

When spread betters discuss their daily market activity, the majority tends to focus on one of the major asset classes:  stocks, commodities, or forex.  There are some advantages to this approach, as it will allow spread betters to really become an expert in a given area.  It will also become much easier to spot opportunities when they occur because you will have a much better sense of when a certain asset has become overly cheap or expensive.

 

But one thing that gets missed when spread betters focus on one asset class alone is the fact that each of these asset classes are deeply connected.  Having a better sense of the ways these asset classes are connected can make it much easier to identify emerging trends before they happen.

 

Dollar-Denominated Assets

 

One of the best ways of understanding the interconnected nature of the global asset markets is to watch activity in the US Dollar.  The US Dollar is the world’s reserve currency and most of the commonly traded commodities assets are priced in Dollars.  This means that the overall trend in the greenback can have a major influence on assets like gold and oil. For example, if the Dollar is seen in a strong upward rally, spread betters will start to expect to see downside pressure in gold and oil.  Commodities that are priced in Dollars will have an inversely correlated relationship to the Dollar. 

 

So it is reasonable to expect positive or negative for the Dollar to have the reverse impact on commodities.  Can this correlation be enough to create new price trends on its own?  Not usually.  But if we think back to the financial crisis years following the market crash in 2008 it is possible to find an example where this occurred.  Is the inverse correlation enough to influence more minor fluctuations in commodities prices?  Absolutely.  So it is almost always a good idea to have some sense of where the Dollar is headed before making taking on any significant positions in commodities trades.

 

Commodities Influence on Stocks

 

Of course, the Dollar is not the only asset spread better should be watching.  Commodities themselves can have significant influence on stock values, as the prices for raw materials can have a significant impact on the ability for specific companies to generate strong earnings revenue.  One of the best examples can be seen in oil prices, and this this is such a widely used energy product, changes here can influence more than simple oil company stocks.  

 

Let’s say that oil prices are rising strongly.  What influence would this have on oil stocks?  What influence would likely be seen in the stock market as a whole?  For oil stocks, a scenario like this would be bullish.  Oil companies are in the business of selling oil, and higher prices mean that those companies will be able to charge more for their inventories.  For stocks as a whole, the influence would be bearish.  This is because most company will have higher energy costs, and regular consumers will have less expendable income to buy large items.  This would be most relevant for spread betters that focus on the major stock benchmarks (for example, the FTSE 100, the S&P 500, or the German DAX). 

 

Conclusion -- Don’t Neglect An Asset Class Just Because You Aren’t Trading It

 

The main point to remember here is that no asset class exists in a vacuum.  Rising or falling asset prices in one area will have at least some influence on the others, so it is important to understand how these assets interact with one another.  Is the correlation positive or negative?  Is your asset priced in Dollars?  Will rising energy prices influence a certain stock in a positive or negative way?  These are critical questions that should be answered when defining your exit and entry levels in a spread betting trade.