According to the 2023 UK online investing report from research firm Investment Trends, the number of traders who placed at least one stock trade in the preceding 12 months remained almost unchanged between May 2021 (1.2 million) and May 2023 (1.23 million).

Stock Trading Is the New Trend

However, stock trading activity appears to have increased recently. AvaTrade has observed an increase in stock trading volumes over the past few weeks, which can be partly attributed to the earnings season the Chief Market Analyst, Kate Leaman suggested.

“Additionally, customers seeking dividend-paying stocks could have contributed to this surge, as they often look for stable investments with regular income streams in tumultuous markets,” she said.

Historically, Pepperstone’s equity clients are biased to momentum strategies in high beta plays (such as technology and AI names, as well as Tesla) and although at this juncture price action is choppy, that could change as traders eye year-end flows and a seasonally strong period.

“There has been some pick up in traders capturing tactical opportunities, with oil plays and banks getting two-way interest,” explained Chris Weston, the Head of Research at Pepperstone. “US Q3 earnings are ramping up, so we should see good interest in names that have outsized moves on the day of reporting. We typically see momentum names going with the move, while counter traders typically like to take the other side - especially in stocks that have had big moves driven notably by a high accumulation of short interest.”

It has been suggested in some quarters that increased stock trading volumes have come at the expense of foreign exchange transactions, but neither Leaman nor Weston have detected this trend.

FX Volumes Are Still High

“FX trading volumes have remained notably high, which can be explained by an increasing number of customers diversifying their cash holdings into USD,” said Leaman. “The US dollar, being a global reserve currency, tends to be a preferred choice for diversification during periods of economic uncertainty.”

FX volumes have risen and while implied volatility across the G10 pairs is still not where most CFD traders (ex-carry traders) would ideally like it, there have been some big themes playing through which have offered abundant opportunity according to Weston.

The rampant sell-off in US real rates and long-end treasuries moving closer to 5%, along with broad US exceptionalism, has seen good trending conditions across the USD pairs, although volumes would have been far higher if the USD rally had been premised on genuine risk aversion, Weston suggested.

“The primary driver has been US economic resilience and a blow up in rising real rates,” added Weston. “There is certainly a view that central banks are done hiking, but when the bulk of clients are technically focused the view on rates is less important than reacting to intra-day price action.”

Alexander Kuptsikevich, a Senior Analyst at FxPro referred to a strong positive correlation between FX traders’ activity (in term of both numbers and volume) and market volatility. “So it was a quiet summer followed by a busy second part of September as the most traded instruments started updating their local extremes,” he said.

Kuptsikevich expects FX market volatility to increase notably in the next couple of weeks before reversing later in the year. “For EUR/USD it may be a new multi-month low that will wipe out a lot of retail positions from the market following a strong reversal,” he added.

In terms of prospects for stock market volatility, Q3 saw equities in the US and eurozone reach a 2023 high before tumbling as treasury yields soared on the prospect of higher rates for longer. The Fed has been clear that it plans to raise interest rates again this year and ease less next year but the market is not convinced that it will be as hawkish, pricing in a 74% probability that rates will remain unchanged at 5.25%-5.5% at the end of the year.

Geopolitics and Interest Rates

With escalating tension in the Middle East exacerbating supply concerns, oil prices could remain elevated across the final quarter of the year, supporting the view that central banks will need to keep rates higher.

“The mismatch between the Fed’s dot plot and the market pricing for rates creates a potential source of volatility in the market,” explained Fiona Cincotta, a Senior Financial Markets Analyst at StoneX. “The Fed and the market can’t both be correct so at some point over the coming quarter either the market will reprice a higher probability of a rate hike, or the Fed will lower its guidance.”

Russell Shor, a Senior Market Specialist at FXCM agreed that stock markets are set up for an interesting end to the year. “As we move into Q4, the major US indices such as the S&P 500, the Nasdaq and the Dow Jones Industrial Average are all showing concerning signs,” he said. “They have charted lower peaks followed by lower troughs on significant time frame measures, which denotes weakness. Moreover, the smaller companies’ index, the Russell 2000, which is considered closer to the macroeconomics on the ground is also weak.”

Market participants face a number of uncertainties. The ‘higher for longer’ interest rate environment is acting as a headwind to risk markets, as is geopolitical risk. Potential earnings fragility and forward guidance are adding to concerns, while the big six US banks, cornerstones of bull markets, are underperforming.

Anticipated volatility in stock markets over the remainder of 2023 can be attributed to the uneasy political situation in the US, suggested Leaman.

“In addition, the holiday season tends to introduce volatility in financial markets,” she added. “During this period, trading activity can be affected by lower liquidity as many market participants take time off, which can exacerbate price fluctuations.”

Weston also expects volatility to rise but is hesitant to predict anything that could be considered disorderly. “A change in Bank of Japan policy that was not well telegraphed could see higher volatility across G10 FX, and China’s property sector has landmines that need monitoring,” he said.

“However, the US economy is the main issue, and timing a recession, if it comes at all, is still the big ticket risk to manage over the medium term. That is a Q2 2024 story at best and the Fed has already shown an appetite to react if needed and could use its balance sheet in any emergency.”