The State of the Financial Markets

While the Fed and the ECB move in opposite directions, the EUR plunged to its lowest level against the USD since March 2016. The EUR/USD is currently trading at 1.0887, down 0.3919% or $0.0043. The 52-week trading range on the pair is 1.05 on the low end and 1.16 on the high end. Over the past 5 days, the pair is down 0.77%, after trading at 1.0975 on Monday, 17 October 2016. For the year-to-date, the EUR/USD pair is up 0.66%. Meanwhile, Wall Street indices have whipsawed in mid-October. The S&P 500 index closed at 2,141.16 on Friday, 21 October 2016. The Dow Jones Industrial Average ended 0.09% lower at 18,145.71, and the NASDAQ closed 0.30% higher at 5,257.40.

Driving the S&P 500 index were earnings reports from General Electric (GE) and Microsoft (MSFT). Equity markets also came under pressure with a stronger dollar weighing on the markets. The US dollar index (DXY) is currently trading at 98.63, up 0.31%. The index has a 52-week low of 91.92 and a 52-week high of 100.51. A stronger dollar has a negative impact on equities markets since the export potential of listed companies diminishes when the currency is too strong. On Friday, 21 October 2016, the USD strengthened to its best level in 8 months against a basket of currencies. It is likely that the ECB (European Central Bank) will adopt further stimulus measures to boost the Eurozone. That the EUR plunged to a 7-month low against the USD on Friday is evidence enough that massive stimulus is expected. Meanwhile, the US dollar index rose 0.4% to climb as high as 98.772 before retreating.

Currency Woes Continue for GBP

On Thursday, 20 October 2016, Mario Draghi (President of the European Central Bank) intimated that further QE measures may be adopted. If this proves true, monetary stimulus will continue beyond March 2017. EUR sales continued after the ECB President announced that no curtailing of asset purchases would be taking place. However, the EUR remains far more bullish than it otherwise would have been as a result of GBP weakness. Year-on-year, the EUR is up approximately 30% versus the GBP. In related currency news, the GBP/USD currency pair is down 0.1877% after it was announced that Brexit discussions would be difficult. The GBP has been flailing against the greenback and the EUR in the second half of 2016. In late trading in New York, the GBP was listed at 1.2229 against the dollar, after hitting a session low of 1.2176.

Trading Opportunity #1: EUR/USD and GBP/USD Pairs Slide

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The EUR/USD currency pair is trading at 1.0884, down 0.38% or $0.0042. The pair has a 52-week trading range of 1.05 on the low end and 1.16 on the high end. For the year-to-date, the pair is up 0.66%, but over the past 5 trading days, the pair is down 0.77%. That the pair managed to break through the critical 1.09 level is significant. It is also important to point out that expectations of a Fed rate hike have diminished somewhat over the past week. According to the CME Group FedWatch tool, the probability of a rate hike in the next 2 meetings of the Fed reads as such:

• On Wednesday, 2 November 2016 there is an 8.3% likelihood of a 25-basis point rate hike to 0.50%-0.75%. The likelihood of interest rates remaining at their current level (0.25% – 0.50%) is 91.7%.
• On Wednesday, 14 December 2016, the probability of a 25-basis point rate hike to 0.50% – 0.75% is now down to 64%. The likelihood of interest rates remaining at their current level (0.25% – 0.50%) is up at 30.5%. There is a slim probability of rates rising beyond 25-basis points. The current probability of interest rates at 0.75% – 1.00% is now 5.5%, down from 5.9%.

The significance of a Fed rate hike cannot be understated. If the Fed plans to raise interest rates, this will invariably boost demand for the dollar. This in turn adds downward pressure on to Wall Street indices and it strengthens the USD component of currency pairs. For this reason, a strong dollar index will weaken the GBP/USD pair and the EUR/USD pair. Thanks to sentiments expressed by the president of the European Central Bank, Mario Draghi it looks unlikely that the ECB will curtail its bond buying program. This also added downward pressure on the EUR/USD pair. The GBP/USD pair is currently Down 16.84% for the Year-To-Date, Although It Has Rallied Somewhat against the USD over the past 5 Trading Days – up 0.63%.

Trading Opportunity #2: Yahoo! Stock up 2% over the past Week

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Yahoo! Inc stock was trading at $42.17 per share as at Friday, 21 October 2016. The stock has appreciated by 26.79% for the year-to-date, after starting the year at $33.26. Over the past 3 months, the stock is up 7.08%, and over the past 5 trading days the stock is up 2.11%. At its current stock price, Yahoo! Inc (Nasdaq: YHOO) has a market capitalisation of $40.14 billion, and a price/earnings ratio of -8.26. There is no dividend or yield to speak of, and the 52-week trading range for the stock is $26.15 on the low end and $44.92 on the high end. Analysts expect the stock to reach a 1-year target price of $45.28 per share. The earnings history (actual figures versus estimate figures) paints an interesting picture:

• In Q3 2016, estimated earnings were $0.14
• In Q2 2016, estimated earnings of $0.1 were reported and actual earnings came in at $0.09.
• In Q1 2016, estimated earnings of $0.07 were reported with actual earnings of $0.08.
• In Q4 2015, estimated earnings of $0.13 were reported with actual earnings of $0.13.
• In Q3 2015, estimated earnings of $0.17 were reported with actual earnings of $0.15.

Yahoo enjoyed relatively strong earnings growth between 2013 and 2014, but revenues declined. In 2015, earnings were reported at $-4.36 billion with revenue of $4.97 billion. In terms of recommendation trends, there has been a shift away from strong buy/buy ratings to hold rating. On a scale 1.0 (strong buy) to 5.0 (sell), Yahoo! is at 2.4.

Trading Opportunity #3: S&P 500 index down 0.01% at 2141.16

The S&P 500 index measures large Equities in the US. The index has an approximate dollar value of $7.8 trillion associated with it. Index assets in the SPX are valued at $2.2 trillion, with 500 top US companies and 80% coverage of all market cap. For the year-to-date, the S&P 500 index has generated returns of 4.76%. Over the course of 1 year, the S&P 500 index has generated returns of 6.05%. The S&P 500 index is comprised of the following sectors:

• Information Technology – 21.2%
• Health Care – 14.7%
• Financials – 12.8%
• Consumer Discretionary – 12.5%
• Consumer Staples – 9.9%
• Industrials – 9.7%
• Energy – 7.3%
• Utilities – 3.3%
• Real Estate – 3.1%
• Materials – 2.9%
• Telecommunication Services – 2.6%

At the close of the trading session on Friday, 21 October 2016, strong earnings from Microsoft Corporation (MSFT) helped to drag the S&P 500 index higher. A stronger dollar is a deterrent to equities growth projections. Several important deals helped to bolster equities markets including the purchase offer from British American Tobacco plc for Reynolds American Inc to the tune of $47 billion. Additionally, AT&T Inc is looking to purchase Time Warner Inc. The 0.5% decline in the S&P 500 index was all but erased by the end of Friday’s trading session.

Trading Opportunity #4: Silver on the Retreat

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Silver is currently trading at $17.54 per ounce, or $563.99 per kilo. The precious metal has been trending bearish since 19 September 2016. At that point, silver was trading at $637.76 per kilogram, $19.84 per ounce. Back on 1 January 2016, silver was trading at $13.90 per ounce, and it appreciated to $20.63 per ounce by 31 July 2016. Since then however, the precious metal has declined swiftly. The asset price movement of silver parallels that of gold. Both metals are seen as safe haven assets in times of geopolitical uncertainty. With a strong USD, demand for silver and gold naturally declines as foreign buyers find it relatively more expensive to purchase the precious metal. We can expect the price of silver to remain depressed if the Fed moves to hike interest rates on 2 November 2016 or 14 December 2016. Additionally, ECB fiscal stimulus will weaken the EUR and decrease demand from that sector.