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The 4 Am Trades

In July of 2007, the US investment bank Bear Stearns announced that two of its funds had imploded. In any other timeline, this would have been a localised event. Not in that summer. In the events that followed till much of the next year, the world saw one of its worst crisis since the great depression of 1930s. Such was the effect of this collapse that within the next one-one and half years, nations as far as Singapore and Europe went into recession.

               In winters of 2019, a new virus showed up in the Wuhan province of China. Within months, this new highly contagious coronavirus brought about national level lockdowns in many countries and pushed most of them into deep recession.

               What do these events have in common? What do they teach us about the world in general and the financial markets in particular?

               The answer might seem straightforward in this internet age. But its effects are simply not that easy to fathom. Globalization. We have successfully globalized the world economy. In doing so however we didn’t just globalize our profits, we also globalized our crises. We have created a world that is a living example of the butterfly effect in action. The collapse of a few funds trigger a chain of events that crush every financial system in its path. A contagious virus practically ends the world as we see and believe it. A nation leaving a trade bloc pushes another to a recession which in turn triggers a slowdown in the world. The script is pretty much the same in all these cases. So how can the Indian trader find a way to go beyond the average even with an event that promises to end careers for a lot of market participants? How can the Indian trader find an umbrella to handle a rainy day in the markets?

Let’s take a look at some cost effective solutions to this problem.

  1. Western financial markets: Once the Indian markets close, a new day in the western world is about to begin. Their markets have just opened up for trading. Indices of these markets decide the mood of our markets the following day. If the European and American market indices are trading positive then you could expect the same flow to continue in the India markets.  

Indices to Track Overnight: SGX NIFTY(Nifty on Singapore exchange), S&P500 (Broad-based US index), DOW JONES (Industry heavy US equity benchmark), NASDAQ (tech heavy US benchmark), DAX(German Stock Index), FTSE100 ( UK stock index)

  1. Eastern Financial markets: While tracking the markets west of your time zone, it is equally important to track the markets east of your timeline. These markets open before your markets and often their money flows can affect our markets.

Indices to Track Early Morning: HANG SENG (Hong-Kong benchmark), SGX (Singapore Benchmark), SGX NIFTY (Nifty on Singapore Exchange), NIKKEI (Tokyo stock exchange benchmark)

  1. GEOPOLITICAL EVENTS: News or to be precise, the interpretation of news is the single most important driver in the markets after the flow of money itself. Three important aspects with this respect are of particular importance:
  1. Finding the right kind of news: Reliable sources are of importance here
  2. Understanding what news has been priced into the stock/asset price
  3. Being the first in the market: Try keeping a track of markets around off-hours. Take the example of Brexit. Even the Londoners didn’t know that Britain had voted out of the EU in the early IST hours. This leads to a potential mispricing of the stock because of less number of market participants. A trader entering the markets much earlier than the rest of the world would find it easy to make money on such days. More examples of such events are the trade embargo on Iran, Political instability in Arab countries, US election results, etc.
  1. CENTRAL BANK INTEREST RATES: Just like RBI, other countries too, have a central bank which regulates the flow of money in these countries and indirectly in other countries. If interest rates are hiked or reduced by them then that changes mood of foreign investors in our markets. A high interest rate in the stable markets like the US and Europe lead to investors pulling out their money from emerging market economies and placing them in safer, stable US and European markets.
  2. CRUDE OIL PRICES: Crude oil is a major source of energy in the world. Changes in crude oil prices because of production cuts and geopolitical reasons influences economies and thereby asset prices in these economies. The 2016 crude oil crash is a classic example. When oil reached sub-30$ levels, it affected the inflation expectations of various economies thereby leading to a repricing of assets.
  3. Currency Levels: Currency moves generally are associated with economic stability and import-export balance of payment aspects of the economy. Thus tracking currency pairs becomes extremely important especially if the moves are pretty big in nature. Emerging currencies and developed market currencies often act as indicators for greed and fear of investors in the markets.

The importance of correlations between different markets is severely understated to many investors. This could lead to an extremely flawed pricing of assets. To conclude, the story of a market wizard, Michael Marcus who in spite of living in the US timeline would get up every day at 4 am in the morning only to check the news comes to my mind. One fine day, he woke up to the news of Saddam Hussein invading Kuwait. Hearing this, he bought all the gold he could find in multiple exchanges. Because people were still not awake at that time, Michael effectively bought every ounce of gold on multiple exchanges. When the markets opened, all the gold he owned now was valued in multiples of the buying price. The hard work of waking up every day at 4 am finally had paid off. That was the price of staying ahead of the market! That was the 4am trade that changed Michael’s life!!

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