The Middle East war started on October 7, 2023, and has remained in the headlines. Cease-fire discussions are ongoing, with negotiators hoping that a two-month pause that allowed Hamas to release over 100 hostages will pave the way for further concessions. While Israel is focusing on the release of hostages, Hamas would like Israel to pull back and release thousands of prisoners. The gap between the two sides remains wide. The war in the Middle East has extended to the Red Sea as Huti rebels attack merchant ships, requiring US warships to patrol the region. The activity in the Red Sea has impacted shipping in the Suez Canal, creating supply chain disruptions as ships moving from East to West now need to sail around the tip of Africa. The interruption in shipping routes has impacted the capital markets and generated volatility for financial products such as CFDs.
What Are CFDs
CFDs, or Contracts for Difference, refer to a financial derivative product commonly used in trading. CFDs allow investors to speculate on the price movements of various underlying assets, such as stocks, commodities, indices, cryptocurrencies, or currencies, without owning the underlying asset.
When trading CFDs, you enter into a contract with a broker to exchange the difference in the underlying asset's price from when the contract is opened to when it is closed. If the price moves in your favor, you profit; if it goes against you, you incur a loss.
CFD trading offers several advantages, including the ability to trade on rising and falling markets, leverage that allows traders to amplify their positions, and access to a wide range of global markets. However, it's important to note that CFDs are complex instruments with high risk. Therefore, it is crucial to understand the risks involved and have sufficient knowledge and experience before trading CFDs.
How Has the War in the Middle East Impacted CFDs?
The war has created issues with shipping and, therefore, has generated volatility in several parts of the capital market's structure. Several different commodities that are shipped have experienced price movements.
Middle East as a major oil producer. The Middle East is a significant region for oil production, accounting for a large portion of global oil reserves. It is home to major oil-producing countries such as Saudi Arabia, Iraq, and Iran. Any regional conflict or geopolitical tensions could disrupt oil production and supply, leading to reduced global oil output.
The Middle East is a crucial transit point for oil transportation. Major oil shipping routes, such as the Strait of Hormuz, the Suez Canal, and the Bab el-Mandeb Strait, and pipelines connecting the region to global markets pass through the Middle East. During times of conflict or heightened tensions, there can be concerns about the safety and security of these transportation routes. Any oil transportation disruption can restrict oil flow to consumers, leading to an increase in prices.
War or geopolitical instability in the Middle East can create uncertainty in the commodity market. Investors may become worried about supply disruptions or escalating tensions, leading to increased volatility in oil prices. Market sentiment plays a significant role in determining commodity prices, and any perceived risks to supply can result in higher prices as traders anticipate potential supply shortages.
Approximately 12% of the goods traded globally move through the Suez Canal annually. The global energy market is highly interconnected, even if the conflict does not directly impact a particular country's oil production. Any disruption in oil supply from the Middle East can have a cascading effect on oil prices worldwide. Market participants react to geopolitical events and adjust their trading strategies, which can impact oil prices globally.
What Are the Impacts on CFD Trading During High Volatility
When there is robust volatility and high leverage in trading, there are several implications and considerations.
Robust volatility can create more significant price movements, presenting opportunities for enormous profits. With high leverage, traders can amplify their exposure to these price movements, potentially magnifying their earnings if their trades are successful.
While high leverage can enhance potential profits, it also amplifies losses. Rapid and substantial price swings in a volatile market can result in significant losses. If trades move against a trader's position, the losses can exceed the initial investment, potentially leading to margin calls or even account liquidation.
In periods of robust volatility, brokers may revise their margin requirements to manage risk. Higher volatility often leads to increased margin requirements to account for the potential for larger price fluctuations. If a trader's account balance falls below the required margin level, they may receive a margin call and be required to deposit additional funds to maintain their positions.
The Bottom Line
The Middle East can significantly impact CFD (Contract for Difference) trading due to increased market volatility and uncertainty.
Financial markets can experience heightened volatility during war or geopolitical tensions. CFD prices can fluctuate rapidly as investors react to news and events related to the war. Increased volatility can lead to more significant price swings, making predicting and capitalizing on market movements more challenging.
During the war, investors might seek safer assets, such as government bonds, safe-haven currencies, commodities like the US dollar, Swiss franc, Japanese yen, and gold. This flight to safety can reduce trading volumes and liquidity in CFD markets, making executing trades at desired prices more difficult.
During periods of robust volatility, there may be reduced liquidity in the markets. It can be more challenging to execute trades at desired prices, and there may be situations of slippage where the actual execution price differs from the expected price. Slippage can impact both entry and exit points, potentially affecting trading outcomes.
