The Chinese slowdown, Britain’s vote to leave the EU and Trump’s election all set off major market volatility in 2016. What lessons can we take from these events going forward?
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Spread bets and CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 71% of retail investor accounts lose money when trading spread bets and CFDs with this provider. You should consider whether you understand how spread bets and CFDs work, and whether you can afford to take the high risk of losing your money.
How do UK traders react to global volatility events?
In the current political landscape, financial markets are constantly confronted with new dramas to give traders cause for concern. And there’s always bound to be more uncertainty round the corner, whether in the form of new leadership, major elections or influential legislation.
In anticipation of renewed volatility, we’ve taken a look at how IG clients traded three major market-moving events from 2016: China’s market slowdown, the UK’s vote for Brexit and the election of Donald Trump as 45th president of the United States. What were the patterns and behaviours present among previous volatility events, and will they have an impact on what’s ahead?
View the volume of trades across all three events, as well as the volume of positions opened per asset class, by clicking on the charts below. You’ll find a more detailed overview of each individual event underneath.
China’s slowdown
It was an uncertain start to 2016, as China’s ‘circuit breaker’ shutdown measure came into effect for the first time.
The UK votes for Brexit
The UK’s unexpected vote to leave the European Union caused widespread unease in the financial markets.
US presidential election
Trump’s election as president upset all expectations – and continued to surprise as it kicked off a significant rally.
China’s ‘circuit breaker’ slowdown
Fears over China’s economic growth ensured 2016 kicked off with uncertainty, as indices around the world slumped and the Chinese regulator was forced to utilise its ‘circuit breaker’ shutdown measure for the first time – before abandoning the measure shortly after.
'Global equity markets are in freefall as yet another Chinese shutdown caused mass panic across European futures markets. For many in the City, there was a feeling that the show was over before it had begun, with the FTSE 100 already down almost 2% by 7am.'1
Joshua Mahony, IG market analyst, London, 7 January 2016
How was it traded?2
While undoubtedly a major market event, the impact of the Chinese slowdown on traders in the UK doesn’t quite match up to that of Brexit and the US election. This is reflected in the number of trades and active traders, which was significantly lower.
China’s market slowdown also wasn’t a scheduled political event, meaning traders wouldn’t have been able to plan their strategies in advance to the same degree. And with no incoming results to follow, overnight trading was markedly lower.
That may partially explain why desktop was the preferred platform, representing 54% of the trades made over this period. With no need to follow markets and results throughout the night, traders were happy to stick to their work PCs and laptops.
Despite being smaller in scale, the Chinese slowdown still brought about some interesting reactions from traders in the UK. For instance, Anglo-Swiss commodity trader and miner, Glencore, was the most-traded share over the 24 hours, suggesting UK traders were wary of the impact it would have on the world’s biggest importer of commodities. As far as share dealing went, however, there may have been other, domestic issues at hand to distract traders, given that Lloyds, Tesco and Barclays – whose interests aren’t likely to be influenced by the Chinese economy – took centre stage.
Findings in full
Platform/trader
- 54% of all trades were executed via desktop, with the highest volume of desktop trades arriving at 8am on 7 January1
- 32% of all trades were via iPhone, compared to 14% via Android
- 63% of UK traders aged in their 30s used a mobile device to trade, whereas 77.63% of UK traders aged in their 60s traded via desktop
- The average age among those trading the Chinese slowdown was 45
Asset class
69% of trades opened during this event were on stock indices, 15% were on forex pairs, and 9% were on commodities.
Key markets
China 300
- Volume increased 35% on the China 300 in the two days after the circuit breaker was removed when compared to the two days before
- On the day after the circuit breaker was removed, sentiment was 58% positive
- In the two days before, it was 51% negative
USD/CNH
- Traders generally avoided the yuan: just 0.5% of all forex trades were on USD/CNH
Top markets
Top five indices
The most traded stock index during this event was the Dow Jones with 36% of all indices trades. The DAX was second with 30% and third was the FTSE 100 with 23%. Fourth was the S&P 500 with 4% and fifth, the NASDAQ with 1%.
Top five FX pairs
The most traded currency pair during this event was EUR/USD with 37% of all forex trades. In second was GBP/USD with 20% and third was USD/JPY with 8%. EUR/GBP was fourth with 6% and AUD/USD fifth, also with 6%.
Top three commodities
Oil was the commodity with the highest volume of trading – 41.6% of all UK commodity traders opened a position on Brent crude, and 31.4% traded US crude. Gold came in third with 20.9% of trades.
Top five shares
5.8% of IG’s UK share clients opened a position on miner and commodity trader Glencore. Tesco was the second most-traded with 4.9% of trades, Lloyds was third with 4.6% and fourth was Apple on 4.5%. Fifth was Barclays with 3.4%.
The UK votes for Brexit
Prime Minister David Cameron kept his pre-election promise, holding a referendum on Britain’s EU membership. Despite polls pointing to a narrow victory for Remain, the UK voted to leave by 52% to 48%.
'UK stocks have so far proved fairly immune to EU referendum polls, suggesting an exit is almost as likely as a vote to remain. That will change if the UK electorate does vote for Brexit.'
Chris Beauchamp, IG market analyst, London, 25 April 2016
How was it traded?3
Brexit saw a major uplift in trading over the Chinese slowdown, reflecting how much more important it was to UK traders. Overall, there were 38% more trades over this period, 42% more active traders, and 20% more markets traded.
The impact of Brexit on businesses was a major part of the Remain campaign, which may explain the major spike in shares trading. There were 155% more opened equities positions around Brexit than over the Chinese slowdown (and 137% more than around Trump’s election).
One major question in the aftermath of the vote was how Brexit might impact the UK banking sector. It’s perhaps unsurprising, then, that over 30% of all shares trades were on two of the biggest UK banks: Lloyds and Barclays.
With UK banks a potential victim of the UK’s split from the EU, some saw French banks as a potential beneficiary – after all, they had access to EU markets the UK could now miss out on. And while UK share traders focused on UK banks over Brexit, French share traders focused on French ones: over 40% of French share trading took place on Société Générale, BNP Paribas and Credit Agricole.
While many looked to the markets for an indication of how the UK referendum might play out, traders appeared to be just as much in the dark as anyone else. On the day Britain went to the polls, 56% of GBP/USD trades anticipated that the pound would rise against the dollar. Sentiment only changed after initial results from Newcastle were markedly less pro-Remain than had been anticipated.
Findings in full
Platform/trader
- 51% of all trades were executed via a mobile device, with the majority of mobile trading taking place between 2am and 5am
- 35% of all trades were via iPhone, compared to 16% via Android
- 59.3% of UK traders aged in their 30s used a mobile device to trade, compared to 28.7% of traders aged in their 60s
- The average Brexit trader was 43
Asset class
48% of trades opened during this event were on stock indices, while 25% of trades were on forex pairs. Share trades saw a higher volume than normal at 14%. Commodities were the fourth most-popular asset class with 12% of all trades.
Key markets
GBP/USD
- In the three days before Britain voted on 23 June, 60% of trades on GBP/USD were taking a negative view
- On the day itself, sentiment changed and 56% of trades took a positive outlook on the pound
- In the two hours before results from Newcastle made it clear that polls were wrong and Leave could win, 62% of trades on GBP/USD were positive
- By 3am, 56% of trades were taking a short position1
FTSE 100
GBP/USD and the FTSE 100 dominated in the 24 hours over Brexit with over 32% of all trading
Top markets
Top five indices
The most-traded stock index was the FTSE 100 with 38.2% of all indices trades. In second was the Dow Jones with 23.8% and third was the DAX with 19.8%. Fourth was the S&P 500 with 5.7% and fifth, the Nikkei 225 with 3.3%.
Top five FX pairs
GBP/USD dominated forex trading during this event, with 36.9% of all trades. In second was EUR/USD with 10.8% and third was USD/JPYwith 8.4%. EUR/GBP was fourth with 4.8% and GBP/JPY fifth with 4%.
Top five shares
The vast majority of share trading took place on major UK banks. Lloyds was the most-traded company share with 17.3% of trades. Barclays was second with 15.3% and Tesco was third with 3.8%. Fourth was RBS with 2.9% and fifth was builder Taylor Wimpey with 2.7%.
Top three commodities
48.8% of UK commodity traders opened a position on gold during this event. The second most-popular market was US crude with 23.4% of all commodity trades, while Brent crude came in third with 22.2% of trades.
US presidential election
Hillary Clinton and Donald Trump went head to head in a bitterly fought election contest, with polling once again proving unreliable as Trump stormed to victory. In the markets, initial pessimism gave way to a major Trump rally.
'We have finally arrived at the week in which the person who holds the fate for the next four years of the world’s largest economy will be made known. The markets are strongly favouring Democratic nominee Hillary Clinton over Republican candidate Donald Trump, the latter associated with heightened volatility.'
Jingyi Pan, IG market analyst, Singapore, 4 November 2016
How was it traded?4
Global markets may have chosen to get behind the new president, but UK traders appear to have been more sceptical. 56% of trades on the Dow Jones on 9 November took a negative view, even as the index surged. This marks a clearly contrarian view to the ‘Trump trade’ – and on the previous day, when polls pointed to a victory for Hillary Clinton, sentiment was 54% positive.
Further evidence that UK traders were wary of President Trump comes in the popularity of gold, a market traditionally viewed as a safe haven, over this period. As Trump won the election, 61% of all commodity trades were on the precious metal, an even higher percentage than over Brexit.
With 144,883 positions opened, the US presidential election is by far the most trade volatility event of 2016 – beating Brexit by 49% and the China slowdown by 106%.
Trading around Trump, however, was focused on fewer markets than the events that preceded it – just 996. This is also reflected in the huge popularity of the Dow Jones, which saw 28% of all trades over this period, and the relative unpopularity of US shares (only two feature in the top ten most-traded shares: Apple and Amazon). The complex impact of the new president on individual US stocks may be responsible for this.
Findings in full
Platform/trader
- 57% of all trades were executed via a mobile device, with the majority of mobile trading taking place between 2am and 5am
- 40% of all trades were via iPhone, compared to 17% via Android
- 66% of UK traders aged in their 30s traded via mobile, compared to 30% aged in their 60s
- The average US election trader was 44
Asset class
67% of trades opened during this event were on stock indices, while 20% were on currency pairs and 9% on commodities. Shares were the fourth most-popular asset class with 4%. 67% of trades opened during this event were on stock indices, while 20% were on currency pairs and 9% on commodities. Shares were the fourth most-popular asset class with 4%.
Key markets
Dow Jones
- 56% of trades on 8 November were negative, compared to 46% on the previous day
- Dow Jones trading peaked at 2am on 9 November, and at one point more than four of every ten trades were on the US index
- Just 33% of trades were negative at 1am, while 52% were at 2am1
- Over 28% of all trading over the 24hrs as Trump was elected took place on the Dow Jones alone
USD/MXN
- USD/MXN, seen by many as a key indicator of which way the markets thought the election could go, was the sixth most-traded currency pair on the day of the US election with 2.3% of all forex trades (over 20 times more than on 23 June)
Top markets
Top five indices
The most popular stock index was the Dow Jones, with 42.7% of all indices trades. In second was the FTSE 100 with 22.3% and third was the DAX with 19.7%. The S&P 500 was fourth with 7.9% and fifth, the Nikkei 225 with 1.4%.
Top five FX pairs
The most popular currency pair traded during this event was GBP/USD with 28.1% of all forex trades. In second was USD/JPY with 25.3% and third was EUR/USD with 22.6%. EUR/GBP was fourth with 3.7% and AUD/USD fifth with 3.6%.
Top three commodities
61% of all UK commodity trades were on gold, ahead of US crude (with 18.8% of all commodity trades), and Brent crude (with 11.6%).
Top five shares
Barclays was the most-traded stock with 6.3% of all trades. Lloyds was the second with 5.8% and Apple was third with 3.8%. Fourth was Tesco with 2.1% and fifth Sainsbury’s with 2%.
Conclusion
With more elections set to take place, talks to get underway and new legislation to be implemented in the year ahead, there is bound to be more volatility on the cards. So for all the unexpected events and complex market reactions, what lessons can we take from the last twelve months?
The markets to watch
Clearly no major event has the same repercussions, but it seems wherever there’s volatility, there are always a few markets first in line for traders.
Take those who traded on China, Brexit and Trump, for example. In every case, the top three indices they rushed towards were the Dow, the FTSE 100 and the DAX, and the top three currency pairs were GBP/USD, USD/JPY and EUR/USD. In light of the globally significant nature of these markets, it may come as no surprise that these are where major trading opportunities lie. But they may also offer hints as to how the long-term fallout of the event could turn out.
Trading goes mobile
Given that high-volatility events unfold over the course of a number of hours or days, it makes sense that traders wouldn’t be tied to their desktops.
Around half of all trades placed during the three events were carried out on iPhone or Android, no doubt owing to the flexibility of trading on the move. Of these, there is a significant discrepancy between older traders and younger, who are far more comfortable with this new way to tap into the markets. This suggests not only that the mobile trading sphere is more important than ever, but that how clients trade looks set to continue to evolve over the next few years.
Untapped potential in unfamiliar markets
Despite the significant market shift brought about by the Chinese slowdown, IG clients were more reluctant to get involved than they were with the US election or Brexit.
For those who took advantage, the dollar and Dow were the orders of the day, offering a way to gain exposure to the Chinese fallout indirectly. This is likely due to a lack of familiarity with the yuan or China 300. But with the Asian powerhouse’s ever-growing bearing on the world stage, it may well be worth getting to grips with new markets like these moving forward, as opportunities for shrewd traders start to arise further afield.
1 All times are London times.
2 All positions opened by experienced UK clients on our web platform, Android and iPhone from 9pm on 6 January to 9pm on 7 January 2016, and all China 300 positions opened by experienced UK clients on our web platform, Android and iPhone from 31 December 2015 to 14 January 2016.
3 All positions opened by experienced UK clients on our web platform, Android and iPhone from 7pm on 23 June to 7pm on 23 June 2016, and all GBPUSD positions opened by experienced UK clients on our web platform, Android and iPhone from 17 June to 1 July.
4 All positions opened by experienced UK clients on our web platform, Android and iPhone from 9pm on 8 November to 9pm on 9 November 2016, and all positions opened by experienced UK clients on our web platform, Android and iPhone from 2 November to 15 November 2016.
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