Assets Worth Watching This Week - 7/4/2016

The Road Less Traveled: Britain Post Brexit

The global economy has endured significant upheaval since the June 23 referendum which resulted in a break from European Union. The decision, while not legally binding, is an advisory one which UK political leaders have taken into consideration for the upcoming general elections. That Prime Minister David Cameron has decided to resign in October is especially significant. There are all manner of implications in the political arena, given the tumult in the Labour Party and the Conservative Party. The race is officially on for the Prime Minister’s office at 10 Downing Street.

The political arena remains a hotbed of uncertainty, and the economic implications thereof are dire at best. It should be remembered though, that Britain has done nothing as of yet to initiate the divorce proceedings from the European Union. In order to do this, the Prime Minister’s office would have to invoke Article 50 of the Lisbon Treaty to begin the painful process of separation and disentanglement from the EU. How great the disruption may be remains uncertain. In the short term, there is increased volatility, driven mainly by the political upheaval as a result of the Brexit vote.

The United Kingdom currently has all of its trade agreements in place with the European Union, and nothing as yet has changed. However, there are moves afoot by major multinational companies (automobile manufacturers, banks, financial juggernauts and the like) to reassess their base of operations in the United Kingdom. If and when companies decide to move their headquarters from the City of London to other European capitals, this will directly impact on employment, investment and ultimately the overall economy of the EU and the UK. Once again, it should be remembered that UK citizens are free to work and travel anywhere in the European Union and vice versa. Nothing as yet has changed.

Businesses across the UK have been stunned by the Brexit referendum. But it’s the long-term uncertainty that has given rise to high levels of volatility in financial markets. For the remainder of July we can expect instability in financial markets to continue. But as we approach August we will start to see economic data becoming available including figures on industrial production, retail sales and employment. Regardless, it is evident that the UK economy is buckling under the strain given the weakness in the GBP. The pound plunged to its lowest level in 31 years against the dollar, a week ago. It should be noted that GBP weakness against the EUR is not as severe and remains at a 5-year average level. However, not everything is doom and gloom for the United Kingdom. A weak GBP is especially beneficial to UK exporters who can now provide the global economy with relatively cheaper goods and services. On the import side, things are relatively more expensive and more GBP will have to be spent per US dollar of imports.

It is against this backdrop that we examine the top 4 financial instruments for the week.

Trading Opportunity #1 – Gold Rush Continues

Gold is the world’s favorite safe-haven asset and it thrives during times of geopolitical uncertainty. This has been proven once again with the recent tumult generated by the Brexit referendum. After the UK voted to break from the EU, the price of gold spiked. In fact, the gold price hit its highest level in 3 years on Friday, 24 June 2016. Investors adopted a risk-off approach to equities and instead shored up their financial portfolios with a rush to gold bullion. The 3-year high price for gold reached $1,355 per ounce, but presently it is trading well above the $1.300 per ounce support level at $1,310 – $1,330.

Recall that gold reached as high as $1,900 per ounce back in 2012, but it has pulled back sharply since then. With uncertainty remaining in financial markets, at least in the short term, we are likely to see a rush to gold and prices moving closer towards $1,350 per ounce perhaps by the end of July. However, it should be remembered that we are unlikely to see large and sustained increases in the price of gold over the long-term. The short-term volatility in global markets will invariably be good for gold, but analysts do not foresee a long-term bullish uptrend. There have been some notable changes in the gold market with small investors piling into gold coins as a hedge against global uncertainty.

Trading Opportunity #2: Short on the GBP/USD Pair

The GBP/USD currency pair is trading at 1.3269, down 0.1000% or $0.0013. Over the past 5 days the GBP/USD pair has appreciated by 1.39%, but has stabilized on Friday, 1 July. The currency pair now finds itself trading in a tight range between 1.3250 and 1.3350, but further moves to the downside are expected as the uncertainty surrounding the Brexit vote becomes clearer. There are expectations that the Bank of England (BOE) will move on quantitative easing policies in the summer months. This will likely take the form of lower interest rates which will invariably be negative for the GBP.

Recall that as interest rates decline, the attractiveness of that currency declines accordingly. With the GBP already under immense strain, the short-term implications of a rate cut from the current level of 0.50% will be negative. However, the reason for cutting interest rates is to spur economic growth, and ultimately this will help the GBP in the long-term. For now, the cable (GBP/USD currency pair) is holding steady in a tight trading range and the technical indicators reflect stability in that range for the time being. It is possible that the 1.3230 level which was reached post-Brexit will hold as the low point, while the current resistance level at 1.3440 looks likely to be the next target in sight.

Trading Opportunity #3: JPMorgan Chase & Co Bounces

JP Morgan Chase & Co (NYSE: JPM) is currently trading at $61.26 per share, down $0.40 0.65%. The stock reached $61.33 in after-hours trading on Friday the second first of July 2016 when it traded up 0.11% or $0.07. Over the past 5 trading days, the stock has appreciated by 4.04%, after starting at $59.01 on June 27, 2016 and ending at its current level of $61.26 per share. For the year-to-date the stock has depreciated by 7.22% after starting at $66.19 on 1 January 2016. The 52-week high is $70.61 per share in the 52-week low is $50.07 per share.

The price/earnings ratio is 10.38 and the earnings per share is a respectable $5.90. In terms of market capitalisation, the company is valued at $223.98 billion. The 1-year target estimate price of JPMorgan Chase & Co is $70.73 per share. An article in Forbes Magazine pointed out that JPMorgan Chase & Co is a high-value stock. This is due to the torrid time that banking stocks have endured in 2016. Recall that there was widespread expectation of at least 2 interest-rate hikes in 2016, but as yet none have come to pass. This has resulted in a risk-off approach to big name banks like JPMorgan Chase & Co, Bank of America Merrill Lynch, Wells Fargo and others.

Analysts are quick to point out that value stocks are always an attractive proposition, despite the short-term vulnerability of banking stocks. JP Morgan Chase & Co is exposed to approximately $44 billion worth of loans to gas companies and oil companies, but overall the real exposure is with development firms and exploration firms. Combined they only account for $9 billion worth of loans which is just 2% of JPMorgan Chase & Co’s overall loans. The other plus point for this stock is that the recently revealed results of the Federal Reserve Bank stress test indicated that JPMorgan Chase & Co passed with flying colors.

Trading Opportunity #4: Nikkei 225 is Bullish

The Japanese Nikkei 225 index is an interesting one at this juncture. The index is currently trading at 15,682.48, up 0.68% to 106.56 points. The year-to-date return for the index is -17.61%, but that beats the 1-year return of -22.22%. The Japanese index has a 52-week trading range of 14,864.01 on the low end and 20,946.93 on the high end. As of Monday, 4 July 2016 the index at 76 members down and 137 members up, with a total of 225 members listed.

The day’s best performers include Sumitomo Dainippon Pharma Co Ltd and the Tokuyama Corporation with gains of 6.28% and 5.38% respectively. The day’s worst performers include Furukawa Co Ltd and Mitsui OSK Lines Ltd with losses of 4.20% in 2.31% respectively. The Japanese yen has been a surprisingly solid performer in times of geopolitical uncertainty, which is well recognized by currency traders and investment gurus alike. The yen remains the currency of choice, alongside the USD, with the Brexit referendum and the global uncertainty that abounds.