The Italian referendum was one of the most popular news stories during the past week, and for good reason. The outcome of this political movement is said to determine the potential stability of the Italian banking sector and these results could place an internal stimulus package of €5 billion euros at risk if the nerves of investors become frayed. So, online trading experts had been eyeing the markets carefully during and after the referendum itself. Surprisingly (or perhaps unsurprisingly), only small losses occurred before the markets stabilised after the news that the prime minister would be stepping down. What does this say about how the financial community within Europe is beginning to react to European-wide events? Can we draw upon any past examples? What can we expect in the future in regards to such responses? These are three interesting questions to examine.
Only a Small Hiccup
There are always those who predict the worst possible market scenarios following a certain political decision or upheaval. However, such “doom-and-gloom” stances tend to be viewed as fringe opinions as opposed to predominant thought. Much like in the case of the Brexit, the markets handled the Italian referendum with a unique sense of buoyancy. In fact, the euro recovered all but 0.14 per cent of its initial losses in relation to the dollar (1). Most domestic European markets fared similar. Many believe that this is due to the fact that the results of the referendum had already been priced into the market.
A Forthcoming Immunity to Politics?
We also have to remember that the online trading community has learned a great deal since the financial crisis of 2008. Although individuals are still likely to take knee-jerk reactions on occasion, institutional traders and organisation will be prone to adopt a more circumspect approach. The last thing that any major trader wants is to have to endure a great deal of unpredictable instability.
Some analysts such as City Index Direct Research Director Kathleen Brooks have even gone as far to say that the markets themselves may becoming immune to political risk (2). Whether or not this is actually the case will only be determined by time. Still, online traders need to appreciate why recent events such as the Brexit and the Italian referendum appear to have to caused little damage across the boards.
All About Big Data
It would be erroneous to assume that the online trading community itself has suddenly learned how to adapt to unforeseen political decisions. Instead, we need to realise that computerised algorithms and real-time news feeds have come to dominate the financial world. The interpretation of big data sets is now possible within a fraction of a second; providing traders with an insight and (in some cases) a proverbial looking glass into what may be around the next corner. This was not always the case.
In the past, investors primarily relied upon newspapers, live tickers and advice from experts to make important financial decisions. Not only were all of these methods far from perfect, but there were many times when traders were caught completely unprepared for a sudden movement within the markets. Prime examples here can be:
The financial crash of 19 October 1929.
The dot-com boom and bust.
The one-day crash of 29 September 2008.
The main point to realise here is that such massive losses could have been averted if big data had been playing a “bigger” role within trading computations and algorithmic interpretations.
The Bottom Line
Although volatility is not always desirable, the fact of the matter is that it is these very swings which generate profits. It is therefore altogether illogical to rule out unpredictable situations and their impacts upon trading. However, the role of big data is now more important than ever before.
When we combine these observations with the cutting-edge tools available at reputable online portals such as CMC Markets, it begins to become clear why traders are now more prepared than ever for what the day may bring. However, there is still no replacement for skill, experience and from time to time, even a bit of simple luck.