The Current State of the Markets

There is never a dull moment in the investment arena, and this week is shaping up to be laden with opportunities to embrace and risks to avoid. On a macroeconomic level, the US dollar has turned the corner and is now showing plenty of bullish sentiment vis-à-vis the US Dollar Index. The dollar spot index was last trading at 95.334 as at Friday, 20 May 2016, and that represents a 0.05% uptick, or +0.047. While the year to date return for the US dollar index remains negative at -3.34%, this is the highest level for the index in over a month. This has far-reaching implications for dollar-denominated commodities like gold, crude oil, copper, iron ore and the like. As the USD appreciates, so demand for dollar-denominated commodities naturally decreases.

Equally important is the impact of a strong dollar on the ability of US companies to export overseas. If US goods are relatively more expensive, less of them will be demanded and this ultimately hurts the trade balance. Analysts at the Fed will be closely eyeing the USD, and the economy for signs of an improvement. Important economic data was released for existing home sales in April, which indicates the second successive month of increases for an adjusted yearly rate of 5.45 million. The Fed will also be taking this into account when determining whether to raise interest rates midway through June 2016.

In other news, the GBP has appreciated sharply against a basket of currencies, in the run-up to the Brexit referendum on 23 June 2016. Opinion polls now show the ‘stay campaign’ opening a wide lead over the ‘Brexiteers’. This has allowed the GBP to appreciate relative to other currencies, and this is evident in the bullish sentiment among currency traders. The prospect of a Brexit is not one that is welcomed by euro zone countries, notably the G7 which came out with a unified statement against a Brexit. Prime Minister David Cameron, Chancellor of the Exchequer George Osborne, head of the IMF Christine Lagarde, and other leading stay campaigners have been burning the candle at both ends to caution Britons about the impact of a Brexit on their personal fortunes, the housing sector, the GBP, et al.

The recent inflation report by the UK treasury indicates that the poor performance of the UK economy in Q1 2016 will likely be followed up by an equally bearish performance in Q2 2016 – irrespective of the outcome of the Brexit vote. For this reason, there is significant concern about the performance of the UK economy of late. The Bank of England may be forced to adopt a quantitative easing policy which would be contrary to the quantitative tightening policy that is expected for the Fed in June. This brings us to the many lucrative trading opportunities that abound in this convoluted market.

1 – The US dollar index is bullish

As one might expect, the performance of the US dollar index is likely to remain bullish given the slew of economic data being released in the US. That the Fed is seriously considering adopting a more hawkish stance vis-à-vis interest rates bodes well for the US dollar index and currency traders expect an uptick in the performance of the current dollar index as the week progresses. Presently, the US dollar index is at 95.334, which is its best level since March 2016. The US dollar index has gained momentum on the back of comments made by presidents and governors of Federal Reserve banks around the country to the effect that a rate hike is imminent. This is further bolstered by opinion polls which indicate a greater percentage of analysts expecting a June rate hike. One such poll is the CME Group FedWatch which now has the June 15, 2016 FOMC rate hike likelihood at 26%.

2 – Analysts are going long on the GBP/USD pair

The GBP/USD currency pair is trading at 1.4510, up 0.0035%. For the year to date, this pair has shed 0.93%, but it is interesting to point out that a strong uptick has taken place since 29 February 2016 when the GBP was trading at $1.3862. The reversal since March is due to the results of online, newspaper and telephonic polls about a Brexit. An increasing percentage of UK voters is now firmly in favour of remaining part of the EU. This reversal in sentiment is evident in the currency exchange rate with the GBP and all other currencies. Opinion polls have shown a widening of the gap between the stay campaign and the Brexiteers. Based on this alone, the GBP has enjoyed a Bull Run and this will likely continue unless the momentum is stunted.

3 – Exxon Mobil Corporation is looking skyward

Exxon Mobil Corporation (XOM) is an interesting stock in that it has consistently shown bullish performance under extreme conditions for the year to date. Consider for example that the stock has appreciated by 15.13% in 2016, after it started the year at $77.95, and is now trading at $89.74 per share. In terms of analyst opinion, the stock has improved in outlook from a rating of 3.0 to a rating of 2.9 on a rating scale of 1.0 (strong buy) to 5.0 (strong sell). The most recent upgrade/downgrade for the stock took place on 18 May 2016 where Argus upgraded it from a hold to a buy. For this reason, and several others, analysts are going long on the stock and it is evident in the appreciation in the stock price.

4 –The FTSE 100 index is showing some steel

One of the most-watched European bourses is the FTSE 100 index. This is to be expected given the upcoming Brexit referendum in exactly 4 weeks. Opinion polls have largely allayed the fears of Britons, with investors taking a more upbeat approach to the GBP and the FTSE 100 index of late. It should be pointed out that approximately 50% of all earnings generated in the FTSE 250 index are overseas-based and approximately 70% of all earnings generated in the FTSE 100 index are overseas based. In the event of a Brexit, the GBP would weaken and overseas earnings would be worth substantially more in GBP on the FTSE 100 index. So, oddly enough this may present as another reason for increased bullishness for the FTSE 100 index.