Yellen Ups the Ante for Rate Hike…

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A short-term interest rate hike recently got a vote of confidence at the Jackson Hole, Wyoming conference courtesy of Janet Yellen. According to Yellen, US jobs growth figures are encouraging and this increases the likelihood of rates rising before the December 14, 2016, meeting of the Fed. In fact, Yellen indicated that rates could rise as soon as Wednesday, 21 September 2016. According to the CME Group FedWatch tool, the likelihood of the Federal Funds Rate rising to 0.50% – 0.75% is now 33%. The likelihood of interest rates remaining as they are at 0.25% – 0.50% is 67%.

Among others, Yellen alluded to payroll gains and robust consumer spending as drivers of economic growth in the economy. Yellen and the FOMC remain confident that the Fed will hit its 2% inflation target within the coming years. The Jackson Hole, Wyoming conference was presented by the Kansas City Fed and it was Yellen’s speech – Designing Resilient Monetary Policy Framework for the Future – that drew global attention. Analysts look for indications about upcoming Fed policy at the Jackson Hole, Wyoming pow-wows every year.

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1 – Trading Opportunities: USD/JPY Turns Bullish

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The Jackson Hole, Wyoming speech by Janet Yellen threw markets into a flutter. Analysts, economists, and speculators were eagerly awaiting this speech at the 2-day event, and the general mood appeared to indicate an increased likelihood of a rate hike. This had a mixed effect on markets, and volatility returned to global indices and currency markets. Yellen’s positive assessment of the US economy had a negative effect on indices, but it helped to boost the USD. This is evident in the sharp uptick for the USD/JPY currency pair.

The Fed has been increasingly hawkish of late, especially sentiments by New York Fed President, William C. Dudley. The USD/JPY pair appreciated by 1.27%, or $1.27 to close at 101.8100. The pair is clearly bullish over the past 5 days, having spiked from 100.1540 on Friday, 26 August at 3:20 PM to 101.9370 by 7:45 PM that evening. With the Fed meeting just three weeks away, and sentiment largely bullish, we can expect the USD/JPY pair to retain its momentum.

2 – Trading Opportunity: Hawkish Fed Sentiment is Bearish for Gold

Gold has an interesting relationship with monetary policy. When interest rates rise, the USD appreciates. A stronger USD means that dollar-denominated commodities such as gold become relatively more expensive for foreign buyers. This drives down the demand for gold which then lowers its price. The spot gold price of August 26, 2016, is now $1,320.87 per ounce and gold closed at $1,321.50 per ounce on the Comex on the same day. Over the past 6 months, gold has appreciated by $101.70 per ounce or 8.34%, and over the past year, the appreciation is $196.90 per ounce or 17.51%.

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Gold still remains a strong performer for 2016, although it is definitely losing momentum as the best performing commodity of the year. Mining stocks and gold stocks are now retreating, given the hawkish sentiment in the latest speech by Janet Yellen. Analysts are expecting the 200-day moving averages to be tested and a strong correction may be in the offing. Mining stocks and gold ETFs have been extremely overbought, and a reversion to the mean is likely to take place soon. This will present many buying opportunities for the precious metal and mining stocks.

3 – Trading Opportunity: Twitter (NYSE: TWTR) Preparing to Fly South for the Winter?

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Twitter, Incorporated (NYSE: TWTR) is currently trading at $18.30 per share, down 0.11% or $0.02. At current prices, the company has a market capitalisation of $12.81 billion with a price/earnings ratio of -30.40. The 1-year target estimate price is $16.79 and the 52-week trading range is $13.73 on the low end and $31.87 on the high end. The performance of Twitter Inc. (NYSE: TWTR) has been bearish over the past 5 days. It started trading at $19.02 and dropped to $18.30 by the end of the week. Over the past 1 month, however, the stock has performed strongly with gains of 16.04%. It reached a high of $20.86 on 15 August 2016 but has followed a downward trajectory over the past 13 days. The stock has shed $2.56 or 12.27% since 15 August. A recent piece on Motley Fool indicated bearish sentiment for Twitter based on the following 3 reasons:

• The monetization of Twitter is driving users away
• The average revenue per user is declining
• Twitter does not have a viable business moat

4 – Trading Opportunity: S&P 500 Index will Face Pressure in September

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Bloomberg reported substantial losses with the S&P 500 index over the past 2 days. This is to be expected given the recent sentiments of Fed policymakers. For the week ending Friday, 26 August 2016, the sharpest drop since June was recorded. August was a lacklustre month for major US listed companies, and the 0.7% decline for the week resulted in the index ending at 2169.04. This effectively erases all gains made during the month of August. As a result, we can expect sentiments to remain bearish this week. Over the past 6 trading sessions, the S&P 500 index has declined in 5 of them. Markets simply have no clear direction and that is why we are seeing limited trading ranges for the S&P 500 index. In fact, daily moves amount to less than 1% since July.