Picking Alpha has asked Dan Gramza to share his opinion on the returning market volatility and share his ideas on how to navigate it successfully.
Is it true that USA government plays a major role in US market volatility?
D.G.: Yes, either directly or indirectly the USA government can play a role in US and global market volatility through its current and potential policies and actions. It could be the market’s reaction to potential tariffs, tax code changes, immigration policies and relationships with other countries that can have market consequences.
A part of the government which is not politically controlled is the US Federal Reserve and the direct and indirect actions, statements and policies of the Federal Reserve Federal Reserve can be a part of an increase or decrease global market volatility.
Oftentimes, it is the markets anticipation of what a government policy may create an impact on the market even though the policy has not been put into place but creates uncertainty and market volatility.
Recent and current examples of indirect and direct government actions that becomes part of the US market volatility: The North and South Korea situation, U.S. trade delegation to China for trade talks, NAFTA negotiations, Middle Eastern challenges, Iran situation to be determined, general uneasiness in Washington, release of the FOMC statement and the Treasury’s refunding announcement.
How this volatility has been affecting currencies and commodities?
D.G.: The easiest way to think of the impact on currencies is to think about whether the volatility would make the US dollar more attractive as an investment or less attractive as an investment. If the volatility makes the US dollar attractive then capital flows would increase demand for the US dollar. For example, as the US dollar increases in demand the price level of the euro US dollar currency rate would decrease. If the US dollar is increasing it typically would have a negative impact on US commodities such as grains and agricultural products because the cost of these goods would be increasing for foreign buyers and would become less attractive to buy. Typically, an increasing US dollar could decrease crude oil prices. This may occur because oil-producing countries will be paid in US dollars and if the US dollar is stronger they will get more of the local currency when it is exchanged and decreasing crude oil prices would be offset by a stronger US Dollar.
Which US markets will trigger immediate volatility in other parts of the world? Where and in which markets?
D.G.: With stock indices, currencies and interest-rate markets, volatility is globally absorbed instantly.
What financial instruments are in the most advantageous position for such volatility?
D.G.: US stock indices, currencies and interest-rate markets can provide opportunities as volatility increases and decreases. Typically, with increasing volatility directional price movement can occur and traders will seek out opportunities to follow the direction of that price action. With decreasing volatility, a flat sideways market condition can occur and oftentimes provides opportunity to sell option premium.
What can you say about USA and EU bonds at the moment and for the upcoming month?
D.G.: I am bearish on the prices for USA and EU bonds near term and through the end of the year. My expectation is that as the US Fed and the ECB increase interest rates downward pressure on the yield curve prices would be expected.
Dan Gramza is President of Gramza Capital Management Inc. and DMG Advisors, LLC. He provides daily market updates from around the globe on subjects ranging from the Nasdaq and currencies to crude oil and grains at dangramza.com.
Gramza is a widely traveled consultant and market educator. He has presented trading courses in over 35 exchanges, 450 countries, four regulators and 35 countries.
He has published works in Australia, Europe, Japan, and the United States. He has appeared in the media on CNN‘s “Moneyline” program, Reuters TV, Bloomberg TV, ROB TV in Canada, WCIU-TV in Chicago and as a market analyst for the CME. Additionally, he has given expert testimony in Federal court.
Previously, Gramza was a member of the Chicago Rice and Cotton Exchange, which was merged into the former MidAmerica Commodity Exchange. Also, he was an adjunct faculty member of the Illinois Institute of Technology master’s program in Financial Markets and Trading.