Dax - It's In the Hedging

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While most of us were watching the US markets limber up for a crash in December, the Dax actually did crash. It fell from 13696 to 10279 – a 24.3% fall (the old school measurement for a market crash is a drop of 25%). Since then it has rebounded by 10%.

The reason for the fall and the reason for the bounce are the same. Up until recently, the Federal Reserve was doing the reverse of QE (Quantitative Easing): QT (Quantitative Tightening), and the ECB was ending its program and likely to follow suit. However, since then the Federal reserve has announced the imminent death of QT and the ECB had suggested it would get back QE’ing again.

Make no mistake, QE/QT is the Ax, that is to say the key driver. QE puts money into the system and QT takes money out.  It’s not the old crude printing press method; the new money comes in the form of credit that holders must repay. Rather than the old-fashioned injection of a naked cash asset, QE comes attached with a liability.



With this Provider you can trade CFD’s on the DAX 30.
Account opening in 15 minutes. Deposits by credit card or PayPal possible.

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80.6% of retail CFD accounts lose money.


So how does this affect the market?

You might think it’s complicated but like all good trades it is quite simple… The central bank offers ‘free money’ to institutions at a low rate of interest to put to work. This could be short-term lending, so it has to be applied short term to avoid the risk of getting caught short if QT strikes. Clearly the bank doesn’t want to lend it to someone who might not repay so there aren’t many places the institution can apply the cash. But wait, what about equities? You can put cash in and pull cash out in a blink of an eye. QE should drive them higher and many have a dividend greater than the borrowing cost. As such, this equity carry trade is where the QE money goes and why stocks have been so very strong during QE.

Stop the tap of QE liquidity and start hoovering it up and the markets come unglued… As we have seen.

However, US QT has thrown the world onto the brink of recession so off goes the QT and on go the QE taps again in Europe and perhaps even the US.

This is why the Dax is recovering and may well be headed back to previous highs.

As such, any Euro-denominated trader should be long Germany and what better way to do this than by being long DAX over that golden 90-120 day window that makes most spread betters their best returns.

Now the big problem for UK traders – or rather ones who aren’t using a CFD – is currency hedging. The UK pound could quite easily go ballistic at any time because Brexit might be killed. In fact, the Euro/UKP chart looks very bullish for the pound.


No point catching a 10% Dax rise only to get clipped with a 10% UKP rise to cancel out the win in pounds. Happily, with a CFD the hedging is taken care of for you by Plus500 because it is denominated in £’s a Dax point. Trying to do this hedging yourself using say a DAX ETF and putting on a currency position is a fiddly nightmare with cost and execution negatives. Currency hedged international index positions is one of the big benefits of CFDs and perfect for this sort of positional trade where the Forex risk is huge.




With this Provider you can trade CFD’s on the DAX 30.
Account opening in 15 minutes. Deposits by credit card or PayPal possible.

Click here

80.6% of retail CFD accounts lose money.


Product : If you want to buy or sell the DAX as a CFD, you can use Plus500, among other things . Incidentally, Plus500 offers deposit by credit card and PayPal, as well as a very fast account opening. Of course, you can also use any other CFD broker of your choice.

80.6% of retail accounts lose money on CFD Trading with this provider. You should consider whether you can afford to take the high risk of losing your money.

Clem Chambers is CEO of ADVFN, Europe’s largest stock trading community, winner of the State Street Journalist of the year 2018, Market Commentary and twice nominated Print Publishers Association columnist of the year.


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