Trading Smart with Short-Term Bullish Sentiment in the US

On Friday the 5 August 2016 US non-farm payrolls data surprised markets. The consensus forecast was 180,000 new jobs but actual numbers came in at 255,000. In June, non-farm payrolls numbers were reported at 292,000, and that figure had a dramatic effect on investor sentiment. Following this news, the US dollar gained ground, as indicated by the rise in the US dollar index (DXY) while Treasury bonds moved sharply lower. Prior to the release of this important data, there were serious concerns about the direction of the US economy given the Fed’s decision to hold off on hiking interest rates.

There were several other positives in the July non-farm payrolls data including an increase in the average number of hours worked, and modest growth in wages. Perhaps the most important takeaway from the recent non-farm payrolls jobs data is this: The US economy is not headed towards a recession at this juncture. If anything, these figures are clear evidence that the bulls are running rampant and there is plenty of steel in the US economy. For now, it appears that the FOMC will have to take a long and hard look at the data and rethink its position on interest rates. If we examine the performance of the US economy (non-farm payrolls data) the following gains and losses are apparent:

• +43,000 in healthcare
• -6,000 in the mining sector
• +38,000 in government jobs
• +45,000 in leisure and hospitality
• +70,000 in professional and business services

Performance of the US Economy Since August 2015

Non-farm payrolls jobs growth has tended to be exceptionally bearish over the past 12 months. From August 2015 through August 2016 the US economy was seen to be struggling at key intervals. In August, jobs grew by 150,000, followed by 149,000 in September. From October through December 2015 non-farm payroll jobs declined from 295,000 to 280,000 to 271,000 respectively. In January 2016 non-farm payrolls jobs grew at a modest pace of 168,000, but spiked to 233,000 in February 2016. The global economic slowdown which hit equity markets hard on 11 February was evident in March as new non-farm payrolls grew at just 186,000, followed by 144,000 in April and a surprising 24,000 in May.

The June figure was extraordinary, and testament to the strength of the US economy when it comes to creating new non-farm payrolls jobs. This is evidenced by the resilience of Wall Street against global stress factors such as the Brexit vote, the commodity price crunch (crude oil) and weakness in emerging markets. July was largely expected to be a modest month of jobs gains with just 180,000 new hires. However, the US economy surprised analysts with 255,000 new jobs for the month. By the close of the trading day on Friday, 5 August, the NASDAQ composite index was up 1.06% at 5221.12, the S&P 500 gained 0.86% to close at 2182.87 and the Dow Jones gained 1.04% to close at 18,543.53.

It is against this backdrop that we examine the trading opportunities for the week ahead

1 – Trading Gold: A Bearish Prospect

On Friday, 5 August 2016, the gold price took a hit as news of the strong non-farm payrolls jobs data circulated through the market. Gold was last trading at $1,336.29 per ounce, down $12.60 or 0.9% for the week, but more importantly down 1.6% or $22.40 on the day. Over the past 30 days, gold has declined by $28.50 per ounce, or 2.09%. Over the past 1 year, the precious metal has gained 23.09% for an improvement of $250.70 per ounce. The recent sharp decline in the gold price was due to the strong NFP report. As news of stronger hires in the US economy makes its way through markets, so demand for gold declines.

This safe-haven asset does well with poor NFP numbers, as well as for GDP growth. This is partly why the precious metal surged after the June GDP figures were reported. The sharp reversals in the performance of the US economy are disconcerting to gold bugs and this is reflected in the reduced price of the precious metal. However, the long-term forecast for gold remains positive and for 2016 alone, gold is up 26%. This is true even with the retracement that we have seen in recent days.

If the Fed decides to bump up interest rates, this will invariably cause the gold price to weaken in September. We saw as much taking place during May when talk of a rate hike was imminent. It looked unlikely that rate hikes would be implemented after the lacklustre GBP numbers were reported, but now, NFP data seems to gel with a sharply improved US economy. This makes short-term positions on gold bearish and long-term positions bullish.

2 – Trading McDonald’s (NYSE: MCD) On the Up

McDonald’s Corporation is currently trading at $119.21 per share, up 0.77% or $0.91. In after-hours trading, the stock ended at $119.12. The company has a market capitalisation of $104.65 billion with a price/earnings ratio of 22.76. This stock’s dividend & yield is $3.56, or 2.99%. The 52-week trading range is $87.50 on the low end and $131.96 on the high end with a 1-year target estimate price of $130.29. While the recent earnings forecast for Q2 2016 was somewhat disappointing, with lower US sales figures, the CEO of McDonald’s remained confident that the company will work towards achieving its financial targets. Analysts rate the stock as a buy with a ratings recommendation of 2.4 on a rating scale of 1.0 (strong buy) to 5.0 (sell).

In terms of its upgrades and downgrades history of late, McDonald’s was last downgraded from a buy to a neutral rating on 22 June 2016 by Nomura. However, it was upgraded by Argus from a hold to buy in January and by Nomura from a neutral to buy in early January. Based on its current performance and its dominant position in the global market, it is a safe bet as a buy or hold rating for traders. The company currently employs 420,000 full-time workers and it operates an estimated 36,525 restaurants, with 30,081 franchises.

3 – Trading the EUR/GBP Currency Pair

The EUR/GBP currency pair is currently trading at 0.84787 As at Friday, 5 August 2016. The pair currently has the following support levels: S1 at 0.8250, S2 at 0.8100 and S3 at 0.8000. The resistance levels are as follows: R3 at 0.8700, R2 at 0.8626 and R1 at 0.8500. The Super Thursday decision by the Bank of England and the Monetary Policy Committee to slash interest rates by 25-basis points naturally had a positive impact on the EUR/GBP pair, and it has rallied since. Interest rates are now at 0.25% in the United Kingdom as the Bank of England is attempting to help drive up the inflation rate and investment in the UK. This naturally has a dampening effect on the GBP and it is evident in the weakness of the EUR/GBP pair. We are likely to see further gains for this currency pair as markets absorb the impact of low interest rates in the UK.

4 – Trading the FTSE 100 Index: Running with the Bulls

The FTSE 100 index is currently up 0.79%, or 53.31 points at 6,793.47. The index has a 52-week trading range of 5,499.50 on the low end and 6,802.41 on the high end. If one were to look at the FTSE 100 index performance for the year-to-date, it is anything but bearish. The reasons for this lie in the constituent components of the FTSE 100 index, most of which are based outside of the UK. In other words, when the GBP weakens, the profitability of companies listed on this index improves.

Profits that are repatriated back to the United Kingdom in euros, dollars and Japanese yen would be worth substantially more in the UK and this is why the index is rising at an unprecedented rate. The decision by the Bank of England to cut interest rates from 0.50% to 0.25% is naturally positive for all indices in the UK. It means that the cost of borrowed capital is significantly cheaper and this translates into higher profitability for the companies.