Trading Opportunities For The Week Ahead - July 26, 2016
With Waning Global Confidence G-20 Nations Stand United……
Britain’s future relations with the European Union will come under the spotlight when G-20 nations meet to discuss the Brexit saga in Chengdu, China in September. While the broader implications of a Brexit remain unknown, G-20 nations are not taking any chances. The upcoming meeting in China will see central bankers and finance ministers meeting to discuss ways of coordinating policy to support European economic growth.
The Finance Ministry of China released a statement to the effect that the UK referendum result has added uncertainty to economic growth prospects for the global economy. The 2-day meeting in China focused strongly on the risks associated with Britain’s surprise departure from the European Union. A degree of optimism remains about Britain’s prospects with the EU, as indicated by Philip Hammond, the chancellor of the exchequer. This means that bilateral trade agreements are front and centre with European nations and the United Kingdom, despite the Brexit decision.
As for Article 50 of the Lisbon Treaty, that is unlikely to end market volatility. According to Hammond, only when Britain has signed off on the deal with its EU partners will things calm down. That the G-20 has been determined to use all policy tools at its disposal is reminiscent of the February meeting on fiscal stimulus in Shanghai. There is a lack of consensus about precisely how far to go with stimulus measures in the European Union, but the German Finance Ministry is of the opinion that the UK must determine its own ‘cushioning’ with respect to how its economy fares in the aftermath.
Meanwhile the vice finance minister of China, Zhu Guangyao does not believe that a devaluation of the CNY is called for at this time. He alluded to the strong growth of the Chinese economy with a 6.7% growth rate during Q1 and Q2 of 2016. The announcement by Guangyao came hot on the heels of comments by GOP candidate Donald Trump that China was involved in currency manipulation. The Chinese leadership were unfazed by comments made by GOP presidential candidate Trump, and referenced the strong economic fundamentals that were keeping the renminbi stable. While the Chinese leadership has not passed comment on the US presidential race, it has stressed the importance of economic relations between both countries.
It is against this backdrop that analysts suggest the top 4 trading assets for the upcoming week.
1 -Trading Opportunity: EUR/USD Currency Pair
For the week ahead, the EUR/USD currency pair is likely to continue moving lower. The currency pair is trading at 1.0981, down 0.41% or $0.0051. For the year-to-date, this currency pair is 0.40% higher and over the past 3 months it has weakened by 1.79%. Over the past 1 month it has declined by 2.61% and over the past 5 trading days by -0.71%. On Monday, 18 July the pair was trading at 1.1061 and it is now at 1.0981. This indicates that less dollars are required for every euro that is purchased. The upcoming calendar week is filled with economic indicators, and there are important stress tests for European banks that will come into play. It is still uncertain which policy measures if any will be adopted by the European Central Bank vis-a-vis quantitative easing in September.
While the Brexit saga has rocked global financial markets, it does not appear to be an issue of prime significance for the president of the ECB, Marie Draghi. He is more concerned with bailing out Italian banks with NPLs (non-performing loans). One of the important economic indicators is US manufacturing activity. It is presently at 52.9 (July 2016) from 51.3 in June 2016. This bested market expectation of 51.6. This is a natural catalyst to the strengthening greenback. The US manufacturing PMI data is at 9-month high. In other news, US stocks on the Dow Jones Industrial Average rose more than expected with strong earnings from General Electric. The Dow closed at 18,551 on Friday, 22 July. US jobless claims dropped to a 3-month low and US housing starts are at a 4-month high. All of this data is naturally positive for the USD.
2 – Trading Opportunity: Dow Jones Rallying
The Dow Jones Industrial Average is currently trading at 18,570.85, up 0.34% over the past 5 days. On Friday, 22 July, the index gained 0.29%. For the year-to-date the Dow has performed relatively well given the risk-off approach adopted to equities markets globally. It started the year at 17,425.03 and appreciated by 6.58% to its current level. Compared to the NASDAQ composite index, the Dow has performed over three times stronger (NASDAQ at 1.85% for the year-to-date). The S&P 500 index has appreciated by 6.41% for the year-to-date and is neck and neck with the Dow.
Nonetheless, the recent trends with the Dow Jones Industrial Average are notable over the past 1 month. On 27 June, the Dow was at 17,140.24, and has rallied over 1,400 points since then. The strong performance of this index is attributed to a stronger dollar, a shift away from a risk-off approach following the Brexit vote and the relative stabilization of the UK economy. The recent strength of the Dow Jones is attributed to Honeywell, General Electric, Stanley Black & Decker, Whirlpool, American Airlines et al. Their actual revenue figures bested expectations with analyst forecasts.
3 – Trading Opportunity: Bank of America Stock
Bank of America Corporation (NYSE: BAC) is currently trading at $14.38 per share, up 0.77% as at Friday, 22 July 2016. For the year-to-date, the stock is down 14.56% after opening at $16.83 per share and dropping to its present level. The 3-month performance of the stock shows declines of 3.88%, while the 1-year performance of the stock reflects a reversal of +2.42%. Over the past 5 trading days, the stock has appreciated sharply by 5.74% after opening on Monday, 18 July at $13.59 and rising approximately $0.80 to its present level. The 52-week trading range of the stock is $10.99 on the low end and $18.29 on the high end.
The market capitalisation at current prices is $146.92 billion, with a price/earnings ratio of 12.07 and earnings per share (EPS) of 1.19. The 1-year target estimate price for the stock is $17.07 per share. It is interesting to point out that the last 4 earnings reports from Bank of America Corp., (NYSE: BAC) have all come in either above expectations or at expectation. This was true in Q3 2015, Q4 2015, Q1 2016 and Q2 2016.EPS has been dropping since Q3 2015 to Q1 2016, but a reversal has taken place since and the uptrend is likely to continue into Q3 2016.
4 – Trading Opportunity: Gold Takes a Hit
Gold is currently trading at $1,321.70 per ounce, down 0.11% or $1.40. The precious metal has been one of the star performers for the year-to-date, acting as the perfect foil for equity weakness. The geopolitical uncertainty that has racked financial markets has resulted in strong gains for gold, but the recent risk-on approach to equities has seen demand for gold declining. This is evident in the lower price. Over the past six months, gold has appreciated by 20.59%, over the past 30 days it has appreciated by 4.35% and on Friday, 22 July 2016 it declined by 0.11% or $1.40 per ounce. A caveat is in order as JP Morgan analysts believe that US government debt and gold bullion prices – traditional safe havens – may not be as ironclad as expected. We are seeing economic surprises in the United States besting forecasts and the actual data is the best since early 2015. US markets appear to be highly resilient to foreign surprises and shocks, and this does not necessarily bode well for gold.
Disclosure: None.