Top 4 Trading Assets Of The Week
The jubilation of the Super Bowl has come and gone, and financial analysts, traders and investors are left with the grim reality that commodities prices are likely going to endure multiple years of depressed prices. This is the opinion that is shared by many commodities brokers, including the Chief Executive Officer (CEO) of Vitol. It was recently announced that Ian Taylor – the CEO of the Vitol Group – foresees crude oil prices remaining in a tight trading range between $40 per barrel and $60 per barrel right through until 2025. Such news hardly inspires confidence in a depressed energy sector which has been attempting to claw its way out of a rut with China weakness, dollar strength, ludicrous oversupply by OPEC and non-OPEC countries alike, and slack global demand. Indeed, any optimism shared by those in the energy sector has quickly evaporated and given way to a reality of what is likely to be a prolonged spell of slack energy prices.
The general opinion of those in the energy sector is that as long as China weakness persists, crude oil prices are likely to remain depressed. And the trading range that commodities experts are forecasting for oil in 2016 is between $40 per barrel and $50 per barrel at the very most. There are several reasons why prices will not be able to rise for any prolonged period of time, notably the enticement that higher prices bring to oil producers. As oil prices move higher, more oil producers are lured into the industry. This has the effect of over-saturating supply and causing a reduction in prices once again. The global economy, fueled by China weakness is in tatters; one only needs to look at the state of emerging markets to verify this. The currency depreciations taking place across the emerging market world are widespread, notably the South African Rand, the Turkish lira, the Brazilian real, the Venezuelan Bolívar, the Russian ruble, the Malaysian ringgit and others. Dollar strength is a disincentive to rising commodity prices, especially dollar-denominated commodities like crude oil, copper and the like.
1 – Commodities: Consider Put Options on Crude Oil
Crude oil prices have been tracking lower over the past several trading sessions, owing to negative sentiment from the industry personnel like the CEO of the Vitol Group. Consider that Goldman Sachs has been issuing statements to the effect that low oil prices are in fact good for the global economy. This informed sentiment is driving discussion in the industry, and consumers are lapping it up in their droves. In fact, low energy prices translate into greater personal disposable income for the everyday consumer. This means that more money is available for things like savings or retail expenditure, perhaps even leisure activities. This is precisely what we are seeing taking place in the US economy and elsewhere. We are likely to see more balance in the physical oil markets, but incredible deflationary pressures taking place in the oil supply chain with a shift to the downside being the norm. We cannot escape this grim reality that we are faced with today; oil producers will continue to oversupply for fear of losing market share. This will drive up supply well beyond what is being demanded and keep prices depressed for the remainder of 2016 and beyond. The consensus estimate for the week is to consider put options on WTI crude oil and Brent crude oil.
2 – Indices Trading: Put Options on the Nikkei 225 Index
On Friday, 5 February 2016, the impact of negative interest rates on the Nikkei 225 was clearly evident. The Japanese economy is an interesting one in that it is not plagued by structural weakness with the performance of the corporate sector. In other words Japan’s companies really are doing well and their profits are strong. However Japan is faced with an aging population and a small workforce, but more importantly deflation is impacting heavily on macroeconomic health and wellness. The Bank of Japan is steadily moving towards quantitative easing measures that are designed to make it difficult for customers to deposit their money in banks in the form of savings accounts and fixed deposits, so as to increase loans, credit expansion and the overall velocity flow of money through the Japanese economy. However the fact that the Bank of Japan moved towards negative interest rates for deposits has been perceived as a bearish measure by domestic and foreign investors. This is easily seen in the performance of the Nikkei 225 index. My forecast for binary option traders looking for indices to trade is to consider put options on the Nikkei 225.
3 – Stocks: Put Options on BHP Billiton Ltd
BHP Billiton (BHP) is currently trading at $22.51 (down 0.31%). It has a 52-week trading range of $18.46 on the low end and $52.98 on the high end. Clearly the stock is trading near its 1-year low, and continued weakness in China and emerging market economies is unlikely to help support a rally in the price of BHP Billiton stock. The overall trend is strongly bearish as evidenced from the plunge from over $40 per share to its current level of $22.52. Analysts may be divided in their opinions of the stock, but it is clearly not a buy option with an overall mean recommendation of 2.5 for the current week. On a rating scale of 1.0 (strong buy) to 5.0 (strong sell), the stock is leaning towards a hold or a sell as an investment. However as a binary options trader my feeling is that BHP Billiton Ltd is a put option given the negative sentiment being expressed by leading industry analysts and talking heads. Incidentally, there have been 2 downgrades and 2 upgrades of BHP Billiton in 2016 to date. The 2 downgrades were by Macquarie and CIBC on 8 January 2016 and the 2 upgrades were by Citigroup and Morgan Stanley on 13 January 2016. Since then however, things have moved progressively worse for energy and metals and short-term put options might be the right way to go.
4 – Currency Pair: call options on the USD/CAD currency pair
Just recently, I wrote a lengthy piece about this specific currency pair. While the USD has lost some ground in global markets of late, the Canadian dollar is faring more poorly. In fact, various opinion polls were taken about how Canadians feel about the loonie, and the overwhelming consensus was not too positive. Canada is primarily a commodity-reliant economy and this means that as long as metals, crude oil, natural gas and related commodity prices are depressed, the Canadian currency will likewise suffer immeasurable damage. We have seen a sharp depreciation in the exchange rate of the Canadian dollar vis-a-vis the US dollar. With more economic data releases scheduled this week, and further bearish sentiment about oil prices, the CAD is likely to continue on its inexorable march south against the greenback. The consensus forecast for the USD/CAD pair is to consider placing call options on the USD.
Disclosure: None.