Tips for Trading the Financial Markets this Week

The recent Fed rate hike of 25-basis points on Wednesday June 14, 2017 was the second increase to the Federal Funds Rate for the year. It is especially important as it relates to the USD and Wall Street indices. The Federal Reserve Bank has an inflated balance sheet of assets valued at $4.5 trillion and it is in the process of unwinding its asset holdings. Back in 2008, the Fed’s balance sheet was approximately $700 billion. The Fed currently holds some 33% of long-term bonds and some 15% of government debt. Given the Fed’s desire to reverse monetary policy from one of quantitative easing to one of quantitative tightening, the Fed will be required to sell bonds. The Fed wants to do this gradually. Initial accounts anticipate the Fed allowing $4 billion of mortgage bonds per month to expire, and $6 billion worth of Treasuries. The impact of this on financial markets is unknown. However, the Fed has embarked upon a process of gradual monetary easing.

Overall, the Fed’s activities should be bullish for the USD, but they appear to be bearish. More importantly, the interest-rate hikes have had the opposite effect on gold bullion, causing the precious metal to rise, rather than to fall. Equally interesting is the impact the Fed rate hikes are having on Wall Street indices. Instead of causing increased anxiety through greater costs on borrowed capital, Wall Street Bourses have risen. The gradual approach adopted by the Fed is indicative of the cooling of the US economy. Even the Federal Open Market Committee (FOMC) members have downgraded their expectations of Fed rate hikes for 2017, 2018 and 2019. This is the clearest such indicator that the US economy is a little slow out of the blocks. For example, the March 2017 FOMC forecast for interest rates was 1.40%, but the June forecast is 1.38%. For 2018, the March forecast was 2.32%, but the June forecast is 2.23%. Similar trends can be seen for the March forecast for 2019 at 2.89% and the June forecast for 2019 at 2.85%.

Trading Opportunity #1 – Gold is Short-Term Bearish

Gold is currently trading at $1,249.69 per ounce, down slightly on Monday, 19 June 2017. Over the past 30 days, gold is up 0.10%, or $1.30 per ounce, and over the past 6 months, the precious metal is up 9.95%, or $113.50 per ounce. This dovetails with the weaker performance of the US dollar in 2017. Recall that the greenback has eased significantly since the start of the year, with traders taking an increasingly bearish perspective on Trump Trade. Gold is currently trading near a 4-week low, on the back of a stronger USD.

Recall that the gold price moves in the opposite direction to the greenback, since it is a dollar-denominated asset. When the USD strengthens, demand for gold bullion decreases. Things could turn around quickly for gold, given that soft economic data in the US could prove bullish for the precious metal. It’s important to note that gold is trading in a tight range, and binary options traders will do well to wait this one out, before making call or put options on the commodity. There is a degree of indecision vis-a-vis gold prices, with resistance around the 10-day MA at $1,270 per ounce, and momentum appearing to be on the negative side.

Trading Opportunity #2 – Bank of America Stock is Trending Bearish

Bank stocks have been on a rollercoaster ride in 2017. What started out as a year of lofty expectations with Trump Trade, proposed interest-rate hikes, deregulation, decreased corporate taxation, and massive fiscal stimulus has not really materialized. We can see the sharp appreciation in BAC stock between February and March, followed by a strong downtrend. BAC stock is currently trading at $23.43 per share, marginally higher than the 200-day moving average ($21.19) and the 50-day moving average ($23.22). The proposed rate hikes for 2017 have not significantly boosted the share prices of US bank stocks like BAC. However, it is clear that there has been some positive movement in the run-up to the June 14 rate hike.

An additional rate hike is anticipated in 2017, and this will invariably feature positively for bank stocks like WFC, C, MS, BAC and the like. In the pre-market trading session, BAC stock was trading 0.60% higher at $23.57 per share, indicating that dollar strength and the impact of Fed rate hikes may indeed prove fortuitous. Many financial analysts believe that BAC stock is undervalued. There were concerns that Bank of America’s revenues may be slipping and employment data may not be as rosy as expected for the US economy, but that narrative is changing. Financial markets are less inclined to react to talk of impeachment against President Donald Trump, and the Fed’s policies in respect of interest rates have yet to catch up with the price of bank shares. Either way, BAC stock is undervalued and traders will find that it may prove beneficial to cash in before the inevitable upswing takes place later in the year.

Trading Opportunity #3 – Dow Jones Swings up

The Dow Jones Industrial Average is currently trading at 21,384.28, up 0.11% or 24.38 points. On the day, the 30-member index had 18 members up and 11 members down, with 1 member unchanged. The best performing stocks on the all-share index include the energy companies – Chevron Corporation (CVX) (up 1.90%) and Exxon Corporation (XOM) (up 1.50%). Johnson & Johnson (JNJ) (up 0.98%), Caterpillar Inc (CAT) (up 1.13%) and American Express Corporation (AXP) (up 0.93%) were also up. The worst performing stocks on the Dow include Walmart stores (WMT) (down 4.65%), Nike Inc. (NKE) (down 3.40%), and Apple Inc (AAPL) (down 1.40%). On Friday, 16 June, news of Amazon’s (AMZN) takeover of Whole Foods (WFM) sent shockwaves through the markets.

Retail operations have been put on notice that e-commerce giants like Amazon, Alibaba (BABA) and the like will be revolutionising the food industry and the retail industry overall. Nonetheless, the Dow is up, and this is largely thanks to the performance of the oil majors. The current price of WTI crude oil is $44.74 on the Nymex, and Brent crude oil is currently trading at $47.35 on the ICE. Wall Street Bourses are also buoyed by the performance of the USD, which has strengthened in the last day. The US dollar index is currently at 97.29, up 0.19%, or 0.18 points. Over the past 5 days, the DXY has increased by 0.13%, and its 1-month performance has also turned the corner and is now trading in the black. For binary options traders, the performance of the oil majors and the DXY will certainly help to keep the Dow in positive territory over the short-term.

Trading Opportunity #4 – USD/CAD

The USD/CAD currency pair is currently up 0.28% at 1.32. The greenback has strengthened in the last day, and this is evident in the call options being placed on the USD/CAD. Last week, the Canadian dollar enjoyed a bull run against the greenback. The USD/CAD plunged 240 points, as the currency pair closed at 1.3212. This week, there are key events on economic calendar that will certainly determine the direction of trading on this currency pair. For example, on Thursday at 12:30 retail sales and core retail sales figures will be released. On Friday, consumer price inflation figures will be released, and this is a major mover of the USD/CAD pair.

There is a resistance level around 1.3648 and the support level currently appears to be 1.3083. Below that, the next support level looks to be 1.2980. It is important to point out that there is little in the way of dollar support now that the Fed has raised interest rates by 25-basis points. That we didn’t see a sharp appreciation of the USD/CAD pair is significant. With just one more 25-basis point rate hike expected this year, dollar strength is going to be dependent on the performance of the US economy. If the Bank of Canada decides to increase interest rates, the USD/CAD could continue weakening.