The volatility in the US100 and S&P 500 indexes CFD is seldom limited to the equity market alone. Large movements in US indexes frequently impact the forex market, gold prices, and overall market sentiment. This may be useful information for CFD traders to consider when trading more than one instrument.
The US100 index may be influenced by attitudes to technology and growth stocks, while the S&P 500 provides a bigger picture of the US equities market. In case of substantial fluctuations of these CFD indices, traders tend to reevaluate their risks.
The role of VIX
Also referred to as the market’s “fear gauge,” the VIX index gauges the level of anticipated volatility in the S&P 500.
An increase in VIX values is commonly an indicator of growing market uncertainty, which would typically fuel the demand for safe-haven assets like the US dollar, Japanese yen, or gold. On the other hand, a decrease in VIX values would normally point to growing investor confidence.
Why forex traders watch US indices
It is common for index volatility to extend to the foreign exchange market as well; however, the effect will usually depend on the cause of the volatility. In the case of stocks falling due to investor risk aversion, the US dollar could rally as capital moves to liquidity, leading to potential problems in the EUR/USD and GBP/USD currency pairs CFD.
Alternatively, if the stocks fall because of expectations of slower economic growth in the US or an easy policy from the Federal Reserve, the dollar could weaken instead. When dealing with high volatility conditions, it is also necessary to pay attention to the Japanese yen as investors tend to move towards the safe haven when selling risky assets CFD.
Gold and changing risk sentiment
While gold usually performs well during times of increased uncertainty, its correlation with equity markets is anything but clear cut.
Aside from fluctuations in the stock markets, gold is affected by the US dollar, interest rates, inflation expectations, and central bank policies. That is why most investors use both technical and macroeconomic analysis together rather than depending solely on correlation.
Managing volatility
Opportunities exist where volatility does too, but there is added risk involved with execution. In times leading up to important releases like inflation figures, FED meetings, quarterly earnings, or other geopolitical risks, markets may have increased spreads, volatility, and false breakouts.
Most professional traders rely on proper execution by ensuring proper position sizing, stop-loss placement, and verification of setups before trading, while remaining diversified away from highly correlated positions.
Looking beyond a single market
Professional traders do not usually focus on only one CFD asset class. Observing US100 and S&P 500 CFDs in connection with the VIX index, the dollar and yen, as well as gold, may give a wider picture of the state of the market and may allow finding certain opportunities which might be overlooked on a single chart.
Platforms such as JustMarkets which offer an opportunity to trade CFD in several asset classes make this task more accessible. It is possible to observe and trade CFD contracts of stock indices, currency pairs, commodities, stocks, and cryptos in one platform.
Disclaimer: For informational purposes only. Trading financial instruments involves significant risk and may not be suitable for all investors. Ensure you understand the risks involved and trade responsibly.
