The State of the Financial Markets this Week: Trump, Clinton & May

The US political establishment has been thrown into disarray after a series of missteps by GOP frontrunner Donald J. Trump. The brash, billionaire businessman is no stranger to controversy but his off-the-cuff comments to Howard Stern are hurting his chances of being elected. The ‘Dump Trump’ campaign continues to gather momentum at the expense of the inroads he was making on Hillary R. Clinton’s campaign of late. This US presidential election features two of the least favourable candidates, perhaps in the history of US presidential politics. Trump’s blunt comments have been the source of his undoing, but Clinton’s integrity problems are perhaps even more damaging.

Investors by and large prefer the stability of a Clinton presidency as opposed to the hotheaded approach of Donald Trump. Prominent Republicans including Jeff Flake (R- AZ). Kelly Ayotte, and Mike Lee (R- UT) are among a chorus of top-level GOP leaders who have turned their backs on Donald Trump. The problem for the GOP is that no effective ‘escape mechanism’ exists so late into the election cycle. While the RNC rules allow for a candidate to be replaced on death or declining the nomination, no rules exist for an unpopular candidate after being elected. GOP VP pick Mike Pence has been tipped to run at the head of the ticket – but Trump is not backing down. 

What is Going on with the GBP?

Further afield, the GBP is front and centre in the economic news. Investors are bracing themselves for a further weakening of the GBP. The GBP plunged more than 6% against the greenback on Friday, 7 October 2016. However, the sterling recovered most of its losses by the end of the trading day. The reason cited for the sharp depreciation of the GBP/USD currency pair is Prime Minister Theresa May’s Brexit schedule. The GBP/USD pair dropped to 1.1841 with 2 minutes on Friday, and there were growing concerns that the shock drop was attributed to a ‘rogue algorithmic trading problem’. This level proved to be the lowest trading level for the GBP/USD pair in 31 years, and it dovetails with the 11.1% decline on the day following the Brexit decision.

By the close of the trading day in London, the GBP/USD pair was 1.8% lower at 1.2381. A weak GBP also propels sales of UK government debt. The yield on 10-year UK gilts spiked 1% – the first time in four months that this has happened. The sharp decline in the GBP culminated in a disastrous week for the UK currency. Since Prime Minister Theresa May announced the Brexit timetable for early 2017, the GBP/USD pair has depreciated by 4.6%. The ETA for a Brexit is March 2017. French President François Hollande was particularly harsh on the upcoming Brexit negotiations between the EU and the UK. His comments may have accelerated declines in the GBP. According to Hollande, ‘… The UK has decided to do a Brexit, I believe even a hard Brexit. Well, then we must all the way through the U.K.’s willingness to leave the EU,’

Trading Opportunity #1: GBP/USD Currency Pair Bearish

The GBP/USD currency pair hit a new low on Friday, 7 October 2016. After the GBP/USD pair plunged to 1.18, it quickly rebounded and recovered its 6% declines to trade in a tight range between 1.22 and 1.24. The drop in the GBP/USD pair took place at the weakest point in the trading day. The non-farm payrolls report was released later in the day on Friday, 7 October, and the actual figures came in lower than expected. This helped to weaken the USD, which in turn helped the GBP/USD pair to recover.

Automated trading is becoming an increasingly more important component of overall trading activity. It is entirely possible that algorithmic auto trades can lead to shock drops in currency pairs, much like what happened with the GBP/USD pair in 2 minutes. Weakness in the GBP was short-lived, but there are real fears about the implications of a Brexit. In terms of the major currency pairs for 2016 (G10 currency pairs) the GBP is the worst performing of all with declines of over 15% against the greenback. The strongest performing currency pair is the JPY/USD pair, with an appreciation of over 15%.

Trading Opportunity #2: FTSE 100 Index on the Rise

The FTSE 100 index is currently trading at 7,044.39, up 0.63% or 44.43 points. The day’s trading range hit a low of 6,999.96 and a high of 7,079.25. In terms of its 52-week performance, a low 5,499.50 was reported with a high of 7,079.25. The FTSE 100 index continues to rally on the back of a weak GBP. Since the majority of listed companies on the FTSE 100 index are based outside of the UK, the repatriated earnings are worth more in GBP. This index is clearly a bullish trading opportunity for binary options traders. The FTSE 100 index gained 0.6% after the GBP/USD pair declined on Friday. British exports are inherently more competitive with a weak GBP.

Trading Opportunity #3: Gold Declines

Gold bullion continues its downward march, after it hit a 4-month low on Thursday, 6 October 2016. The precious metal was pummeled by positive economic data from the world’s #1 biggest economy. It is now increasingly more likely that the Fed FOMC will hike interest rates by December 14, 2016. Gold for delivery in December closed at $1,253 per ounce, down 1.2% on the Comex. Fed officials have been making increasingly hawkish comments, which bodes well for a 25-basis point rate hike in December.

Gold has declined by approximately 5% since Friday a week ago, and the trend is clearly bearish. What typically happens with a decline in the gold price is that it brings traders back into the fold. This has not happened yet, especially since a US presidential election is underway and a Fed rate hike decision will soon follow. The demand for physical gold bullion could be enhanced by its weak price. It is possible that Indian demand for gold will increase, but Chinese demand will remain subdued owing to the national holidays this week. For binary options traders, the trend is your friend and gold price weakness is likely to continue.

Trading Opportunity #4: JPMorgan Chase & Co Earnings Reports Expected on Friday

JPMorgan Chase & Company (NYSE: JPM) is currently trading at $68.11 per share, up 0.35% or $0.24. The stock has a 1-year target estimate price of $71.06 per share, and a 52-week trading range of $52.50 on the low end and $69.03 on the high end. The next earnings date is Friday, 14 October 2016. At current prices, the company is valued at $245.98 billion. To gain a sense of which way the earnings reports are likely to go, is a good idea to evaluate actual earnings versus estimate earnings.

• During Q2 2016, actual earnings of $1.55 were reported with estimated earnings of $1.43
• During Q1 2016, actual earnings of $1.35 were reported with estimated earnings of $1.26
• During Q4 2015, actual earnings of $1.32 were reported with estimated earnings of $1.25
• During Q3 2015, actual earnings of $1.68 were reported with estimated earnings of $1.37

It is apparent in all instances that actual results bested estimate results and positive earnings surprises. Of equal importance is the uptick in earnings between 2013 and 2015, despite falling revenues. For example, 2013 revenues of $97.14 billion were reported with earnings of $17.89 billion. By 2014 revenues of $91.97 billion were reported with earnings of $21.75 billion. In 2015, revenue came in at $89.72 billion and earnings of $24.44 billion were reported. On a rating scale of 1.0 (strong buy) to 5.0 (sell), JPM stock is rated at 2.1.