UK stocks do not trade in isolation.
Before the London opening bell (8am UK time), traders are frantically trying to price-in the impact of moves across related markets that occurred after the London close (4.30pm UK time) the day prior.
The Regency Risk Barometer is designed to help traders cut through the noise and clearly observe the important relationship between the four primary markets – stocks, bond, commodities and currencies.
This not only makes the bigger picture become much clearer, but it can also lead to smarter trades.
S&P 500 Index – The old adage ‘when the US sneezes, the world catches a cold’ holds firm when it comes to trading stocks. The S&P 500 is the world’s flagship equity market and its movement is the best reflection of the global appetite for equities. Particular attention should be given to the S&P’s closing price in relation to its session high and low. Should the S&P close near highs for the day, it usually sets a bullish tone for early European trading.
Hang Seng Index – With the FTSE 100 index being heavily weighted towards mining stocks, and China being the world’s largest consumer of commodities, it’s very important to look at how Asian equities have traded. The Hang Seng Index is Hong Kong’s 50 largest stocks by market cap and trades from 1.30am – 8.10am UK time. It is regarded as a more reliable gauge of Chinese demand than the domestic Shanghai Composite Index.
Gold – As Warren Buffett once said, “gold is a way of going long on fear”. The shiny yellow metal is the world’s oldest ‘safe haven’, and when investors fear the worst, they tend to swap their stocks for gold. Gold is priced in US dollars, which is also a safe haven, so the relationship between gold and stocks is far from predictable. However, a sharp jump in the price of gold is usually indicative of storm clouds gathering.
AUD/JPY – This forex pair may seem like a rather left field selection, but for those in the know, AUD/JPY is one of the cleanest barometers of risk there is. With Australia being a commodity producing economy, AUD tends to strengthen when stocks rally. The Japanese yen on the other hand, is a safe haven which tends to strengthen when stock markets fall. AUD/JPY moves predominantly during Asian market hours and hence it is well worth noting how it has performed prior to the London opening bell.
U.S. 10yr Yield – The bond market is much larger than the stock market. In the U.S. alone, bond markets make up almost $40 trillion in value, compared to less than $20 trillion for the domestic stock market. In the short-term, when investors become more fearful they seek safety in US government bonds – pushing up bond prices which pushes down bond yields.