Assets To Watch This Week – 10/05/2016
The Final Sprint: Investors Brace for Volatility in Run-Up to US Election
With Q3 soon in the rearview mirror, investors are gearing up for the final stretch of 2016. The choice is clear: purchase lagging equities in the hope of sharp appreciation in 2017, or stick with the bullish stocks. One of the biggest drivers of market volatility at this point in time is the November 8 US presidential election. Other major economic drivers include the US Federal Reserve Bank decision on whether or not to raise interest rates by December 14, 2016. With 2 rate meetings before the end of the year, the probability of a rate rise in at least one of them is growing by the week. According to the latest indicators from the CME Group FedWatch, the probability of a rate hike is as follows:
- There is a 10.3% probability of interest rates rising to 0.50% – 0.75% on Wednesday, 2 November 2016. The likelihood of interest rates remaining at the current level of 0.25% – 0.50% is 89.7%. (Likely Verdict: No Rate hike in November)
- There is a 55.7% probability of interest rates rising to 0.50% – 0.75% on Wednesday, 14 December 2016. There is a 38.3% probability of rates remaining at their current level of 0.25% as 0.50%. There is also a small probability of rates rising even higher to 0.75% – 1.00% (5.9%). (Likely Verdict: A Rate Hike in December)
There are additional issues to consider, notably the meeting among OPEC countries (Organisation of Petroleum Exporting Countries) later on in the month. Over the past week, there was subdued optimism about OPEC nations agreeing to cut production to facilitate a price rise. That expectation waned towards the end of the week. The 15th International Energy Forum held in Algiers earlier last week resulted in OPEC countries make a decision to slash production by approximately 800,000 barrels per day.
This marks the first such production cut in 8 years. According to the Algerian Energy Minister, Noureddine Boutarfa, ‘… Today OPEC has taken an historic decision. OPEC will go back to its role of monitoring the market… It is a role that it lost many years ago, that it is now reclaiming.’ In 2014, oil was trading at $110 + per barrel and it plunged to under $30 per barrel in 2016. Currently, the price of WTI crude oil is $48.24 per barrel on the Nymex and Brent crude oil is trading at $50.19 on the ICE.
Equities were particularly volatile in Q3 2016. However, there was a strong rebound from mid-September 2016 onwards. Since the sharp uptick in the German DAX (+7.5% since July) and the 7.8% rise in the Japan Topix, equities markets have been particularly bullish. Technology shares have helped to drive the S&P 500 index for a quarterly appreciation of 2.5%. Leading the energy shares rush is the aforementioned production deal with OPEC countries. On the financial front, banking shares have been buoyed by a flurry of positive activity with Japanese, American and European bank shares rising strongly.
However, this is all viewed against the backdrop of negative interest rates, or exceptionally low interest rates. If the Fed decides to hike rates by the end of 2016, this will bode well for banking and financial stocks. There are however deep concerns about the fragility of European banks, as evidenced by comments from the CEO of Credit Suisse. Deutsche Bank shares are at multi-year lows, and this is of grave concern to the European banking sector. Whether or not US equities can retain their shine will depend on how well corporate US stocks perform and how bullish guidance is.
Trading Opportunity #1: Commodities – Gold
Investors are always keenly eyeing fluctuations in the gold price for an indication of overall market sentiment. When equities markets are rallying, the gold price typically plunges. Likewise, when the USD is set to appreciate the gold price reacts accordingly. During Q1 and Q2 of 2016, gold was the darling investment. However, after it peaked at $1,375.50 per ounce in early July, it has failed to recapture that shine. During September, gold traded at a low of $1302 per ounce. Much of the momentum has been drained by a stronger USD and increased consumer sentiment in the US economy. Interestingly enough, in July and August 2016, the price of gold moved opposite to the price of Brent crude oil but since September, They’ve Moved in Unison.
Trading Opportunity #2: Equities – Deutsche Bank (DB)
Deutsche Bank AG closed at $11.85 on the New York Stock Exchange. For the year-to-date, the stock has plunged over 50% and is extremely bearish. The stock has taken a big hit in 2016 with eroding confidence in financial. It opened the year at $27.14 per share. The market capitalisation of the stock is $17.73 billion, with a price/earnings ratio of -1.98 and no dividend or yield to speak of. The 52-week trading range for the stock is $11.19 on the low end and $30.82 on the high end. The 1-year target estimate price is approximately $2 lower than the prevailing price at $11.16. Deutsche Bank AG has been hit hard by declining revenues and earnings since 2014.
- In 2013 revenues of $58.81 billion were reported with earnings of $918 million.
- In 2014 revenues of $51.64 billion were reported with earnings of $2.01 billion.
- In 2015 revenues of $47.38 billion were reported with earnings of $-7.38 billion.
In terms of recommendation ratings for the stock, the vast number of analysts rate it as an underperform stock. On a rating scale of 1.0 (strong buy) to 5.0 (sell), the stock is rated at #4.
Trading Opportunity #3: Currencies USD/JPY
The USD/JPY currency pair is trading at 101.1990, down 15.87% for the year-to-date. Over the past 3 months, the currency pair is depreciated by 1.82%. However, over the past 5 trading days, there is been as 0.25% appreciation in the pair, owing to a resurgent USD. The US dollar index is currently at 95.42, down 0.11%. It previously closed at 95.53. It has a 52-week low of 91.92 and a 52-week high of 100.51. The USD/JPY currency pair is one of the most heavily traded pairs in the world. It is largely determined by interest-rate policy set by the BOJ and the Federal Reserve Bank.
With an increased likelihood of a rate hike in December 2016, the USD has managed to gain some momentum. The weekly outlook for the pair remains unchanged and positive. A consolidation towards 98.97 is possible, but it is more likely that the price will rise to 104.31 if USD gains are maintained. A long-term downtrend appears to be likely given the technical indicators. Analysts are overwhelmingly expecting the yen to appreciate over time, possibly reaching the next level of 98.00 and then possibly 94.76. For Monday, 3 October 2016, a resistance level of 102.00 is expected with support at 100.00.
Start Trading the USD/JPY Binary Options
Trading Opportunity #4: DAX is Short-Term Bullish
The German SE XETRA Day Index (DAXX: GER) is currently trading at 10,511.02, up 105.48 or 1.01%. The total number of shares traded on Friday, September 30, 2016 was 188.17 million. The 1-you change for this index is 8.80% +. The 52-week trading range for the index is 8,699.29 on the low end and 11,430.87 on the high end. It is interesting to evaluate the performance of the DAX against the FTSE 100 index, the Nikkei 225 index and the CAC 40 index over the past 1 month. The following chart indicates the lacklustre performance of the DAX, despite its short-term bullish trend.
Disclosure: None.