Assets to Watch for the Week Ahead - August 15, 2016

The Week that Was and How Markets Are Impacted…

Between June 2016 and July 2016 there was no growth in US retail sales. In June, the retail sales growth figure was revised upwards to 0.8%, and for July the consensus forecast among analysts was a 0.4% rise while the actual figure was 0%. The biggest gainers for the month were online sales, automobile sales and furniture sales. However, there were sharp declines in restaurants and bars, gas stations, appliance outlets, garden equipment, electronics, sports goods and hobby, building materials and clothing. The net effect of weak US retail sales data for July saw the major indices moving lower on Friday. The Dow Jones industrial average closed 0.20% lower, down 37.05 points at 18,576.47, the S&P 500 index was 0.08% lower at 2,184.05 and the New York Stock Exchange composite index was 0.13% lower at 10,822.41.

Across the Atlantic, indices were also weak. The Euro Stoxx 50 PR closed at 3,044.94 on Friday, 12 July, down 0.13%. The German DAX index was 0.27% lower at 10,713.43, the French CAC 40 index was 0.08% lower at 4,500.19 and the Spanish Ibex 35 index was 0.04% lower at 8,716.40. The only bright spark on the horizon was the FTSE 100 index which ended 0.02% higher at 6,916.02. The big concern for the UK however is weakness in the GBP. Following the Bank of England Monetary Policy Committee (MPC) decisions, the GBP has moved sharply lower against its trading partners. The all-important GBP/USD currency pair (the cable) ended 0.28% lower, down 0.0036 at 1.2920. The EUR/GBP pair gained 0.52% or 0.0044 to close the day at 0.8640. Sterling weakness is now a reality that the UK has to contend with, but it acts as a positive for the FTSE 100 index. Since the vast majority of companies listed on this index have overseas-based revenues, when converted into GBP they are worth more and this raises the stock price accordingly.

The big news for traders however, is the impact of global central bank policy on the world’s #1 safe haven commodity – gold. With low interest rates, demand for gold increases. While it is true that low interest rates favour equities markets, the global downturn and slow rate of growth in inflation makes it difficult to place too much stock in equities markets. Gold remains the go-to financial asset, and it has proven to be one of the most resilient commodities during volatile economic times. As we move closer towards the November elections in the US, volatility is going to increase, and healthcare stocks in particular will provide profitable trading opportunities as the GOP and the Dems could affect sharp moves in this sector.

1 -Trading Opportunities: Gold Looks Long-Term Bullish

Gold was trading at $1,343.20 per ounce on the Comex on Friday, 12 August. It was down 0.50% for the day or $6.80. The spot price of gold also declined on Friday, 0.21%, and was last trading at $1,335.97 per ounce. However, analysts remain convinced that central bank policies will bode well for the precious metal over the long-term. For the year-to-date, gold has gained 26.26%, but it is not the strongest commodity overall. Gold is bested by sugar which is up 26.47% for the year.

Other strongly performing commodities include soybeans up 14.97% and the S&P 500 index which is up 8.2% in 2016. The gold price is closely correlated with the USD. When the Fed decides to raise interest rates again, this will strengthen the USD and weaken the demand for gold. So far, the Fed has resisted raising interest rates owing to global economic uncertainty and Brexit pressures. For this reason, gold remains a favourable commodity and will likely stay that way for quite some time.

2 – Indices on the Bullish Side: The Nikkei 225 and the FTSE 100

The Nikkei 225 index has been rallying of late. The 52-week range of the index is 14,864.01 on the low end and 20,668.87 on the high end. The one-year return is a disappointing -15.97%, but the year-to-date return is improved at -11.11%. At the latest close, the 225-member index had 155 members up and 63 members down. The top performing stocks in the Nikkei 225 of late include: DeNA Co Ltd, up 10.34% or 275 points, Nisshindbo Holdings Inc up 6.67% or 63 points and UNY Group Holdings Co Ltd up 6.51% or 66 points. Japanese stocks and the Japanese yen tend to gain ground when there is weakness in China or when global economic uncertainty abounds. With so much central bank quantitative easing taking place and low rates of inflation evident, the Japanese index is a bullish performer.

The FTSE 100 index continues its upward trajectory in the post-Brexit era. The index is buoyed by a weak GBP, given that 75% of listed companies generate their profits outside of the UK. The GBP was last trading at 1.2920 to the USD, down 0.28 percent. This assists the FTSE 100 index in a big way. Further, quantitative easing policies in the United Kingdom have given plenty of momentum to stock markets, given the 0.25% bank rate decline and the additional £60 billion quantitative easing + £10 billion in corporate bond purchases. This raises overall quantitative easing to £435 billion.

3-Trading the GBP/USD to the downside

As mentioned above, the GBP/USD currency pair has come under tremendous pressure in the post-Brexit era. The currency pair was last trading at 1.2920, down 0.28%. The pair hit a day high of 1.3033, and plunged to 1.2909 before regaining some ground. The year-to-date return for this currency pair is -12.32%, and the 52-week trading range for the pair is 1.2798 on the low end and 1.5819 on the high end. Currency traders and binary options traders analysing the post-Brexit data agree that there is significantly more pressure bound to be placed on the GBP in upcoming weeks and months. This coming week, economic reports will indicate precisely how much weakness is evident in the UK economy, and there is downside risk for GBP traders. Some of the economic indicators we can expect to be released this coming week include the following:

• Inflation Rate year on year for July on Tuesday, 16 August with expectations of 0.6% and a previous figure of 0.5%.
• Claimant count change for July with a forecast of 5.5 K and a previous figure of 0.4 K on Wednesday 17 August 2016.
• Unemployment rate for June with a forecast of 4.9% on Wednesday, 17 August 2016.
• On Thursday, 18 August 2016, UK retail sales figures ex fuel and all-inclusive month on month and year on year will be released.

4 – The Stock to Watch is GoldCorp as it is Highly Responsive to Fluctuations in the Gold Price

The performance of GoldCorp Inc. (NYSE: GG) mirrors the performance of gold in 2016. As can be seen from the above chart, the sharp appreciation in the gold price has impacted positively on the share price of GoldCorp Inc. (NYSE: GG). The stock started trading at $11.56 per share at the start of the year and is now that $18.88 per share. Unfortunately, actual earnings have proven disappointing over consensus forecasts for the past 4 fiscal quarters overall, but the recent performance of the company stock is reflective of a bullish uptrend. If central bank policy is maintained, this will allow the gold price to rise and the share price of GoldCorp Inc. will move upwards accordingly.