Keeping Up with What Affects Financial Spread Betting

Part of Financial Spread Betting For Dummies Cheat Sheet (UK Edition)

No matter what products you’re trading in your financial spread betting adventure, you always need to know about anything which might affect the way prices move.

The following roundup highlights some of the key market and economic factors that traders look at when considering whether to buy or sell commodities and interest rate products:

  • Energy stocks: Nothing moves energy prices more quickly than geopolitical tensions. The market immediately assumes that supplies are going to be limited, so prices rise.

    Several regular reports impact the market when they’re released, particularly the US Department of Energy inventory report. This report outlines the status of US supplies: if supplies are lower than expected, this tends to have an upward impact on prices.

    Seasonality broadly impacts on prices too, particularly the northern hemisphere winter. If the weather is colder than expected, demand for heating oil rises, pushing prices higher. OPEC decisions also impact oil prices. The general rule is that when OPEC reduces supplies, prices go higher; and when OPEC increases supplies, prices go lower.

  • Grains: Much of the wider price impacts on grain prices come from the stocks that are available at the end of the growing season. The lower the stocks, the higher the price. The US Department of Agriculture releases crop reports regularly to help with estimates. Not surprisingly, the weather impacts on prices too, with less-conducive growing conditions increasing prices due to short supplies.

  • Industrial metals: In general terms, the higher the overall level (and expected future levels) of global economic activity, the more industrial metals will be in demand. When you consider that industrial metals have such a wide range of applications, you may wonder how countries can achieve economic growth without them.

  • Livestock: Some of the same factors that affect the grain market impact on the livestock market. A colder season can see cattle gaining less weight, which makes them less valuable to farmers. In addition, a bad growing season for corn and soy beans may see prices for feed climb, and if cattle prices aren’t high, farmers may prefer to sell their cattle cheaply rather than pay for expensive food – which can negatively impact cattle prices.

  • Precious metals: Demand for precious metals can come from the industrial side of the market, the retail side of the market and from investors looking to store value. Some of the key holders of gold looking to store value are the central banks around the world. Central banks choosing to buy or sell gold can have a large impact on supply and demand. The state of inflation globally can also have significant impacts on gold prices as other participants in the market try to hedge against weakening currencies.

  • Treasuries: Inflation is one of the major factors that impacts on the yields paid by treasuries. In most treasuries the interest payment is a fixed amount, say £4 per £100 bond: the yield is simply the return expressed as a percentage (in this case, 4/100 ×100 = 4 per cent). This relationship means that as the price increases, the yield decreases, and vice versa. This is referred to as an inverse correlation.

    If you hold a treasury that pays 4 per cent per annum and inflation is running at 3 per cent per annum, you’re making a real return (the return you receive minus the rate of inflation) of 1 per cent. If inflation rises to 4 per cent, your real return is 0 per cent. As inflation and, equally importantly, inflationary expectations increase, so too do treasury yields to compensate for the negative impact of inflation.