Top 4 Assets to Watch this Week – Monday, March 13

Yellen is Likely to Raise Interest Rates on Wednesday This Week..

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Two important benchmarks are now within reach – the inflation target of 2%, and maximum employment. For the Federal Reserve Bank, these joint targets act as the barometer of the health of the US economy. Currently, the US unemployment rate for February 2017 is 4.7% – the lowest figure since December 2016. The US jobless rate plunged to 4.7%, from the forecast figure of 4.8% for February 2017. The total number of unemployed persons in the US remained unchanged at 7.5 million, while the LFPR (labour force participation rate) edged 0.1% higher to 63%. Among individual groups, the highest unemployment rate was with black people at 8.1%, followed by Hispanics at 5.6%, white people at 4.1%, and Asians at 3.4%. Overall though, these figures bode well for a tightening of monetary policy in the US. As a binary options trader, a falling unemployment rate (a move towards full employment) is associated with a robust economy, a strong USD, and a bullish Wall Street.

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Currently, the inflation rate in the US (as at 15 February 2017) is 2.5%. This is the highest inflation rate in the US in years, and this is evident in the above chart which shows steadily increasing prices over time. Naturally, the Fed sees this as a green light for raising the federal funds rate (FFR) by 25-basis points when the FOMC meets on Tuesday/Wednesday this week. If the rate hike happens, the FFR will be 0.75% – 1.00%. The current probability of a rate hike this week is now at 88.6% – a slam-dunk in the opinions of economists and analysts. It is against this backdrop that we evaluate the top 4 trading assets this week and whether call or put options are appropriate.

Trading option #1 – Gold Continues to Slide

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Multiple factors heavily influence the gold price, including the volatile European elections (notably France), and Brexit concerns. For example, in Dubai, the price of gold jewelry has plunged to its lowest level for 2017. This is due in no small part to the strong likelihood of a federal funds rate (FFR) increase this week. That gold bullion was trading around $1,200 per ounce earlier this year is some ways off its price of $1,300 per ounce in Q4 2016. Analysts are giving the precious metal a broad range of $1,100 per ounce on the low end to $1,300 per ounce on the high-end.

A Fed rate hike is bad for gold because gold is not an interest-bearing asset. Money will flow from gold markets to fixed-interest-bearing securities and equities as the interest rates increase. Overall, analysts are bearish on gold bullion, believing that the precious metal is undergoing one of its worst spells in quite some time. Various support levels are being tested, and price revisions are all moving lower. If the USD and Wall Street stocks continue to surge, binary options traders will have no alternative but to go short on gold with put options. Fortunately, traders can profit with directional trading of the trends without worrying too much about the size of price movements.

Trading Opportunity #2 – BAC Gearing up for a Rally

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Bank of America stock is priced at $25.31 per share, down slightly on Friday, but ready for the imminent rate hike. BAC stock has gained 14.52% in 2017, and further gains are all but assured. At current prices, the company’s market capitalization is $253.74 billion, with a price/earnings ratio of 16.91. Anything beneath 20 is considered a potential high-value investment, and BAC certainly fits the bill. The next earnings date for the bank will be 12 April 2017, and we can expect some positive reports to post. There is plenty of reason to celebrate with revenue and earnings increases between 2015 and 2016. BAC stock generated revenues of $93.51 billion in 2015 and $93.66 billion in 2016. Earnings increased from $15.84 billion to $17.91 billion. In other words, the stock is positioned well for strong revenue and earnings increases this year.

We have seen a dramatic decrease in the number of hold ratings on the stock and a strong uptick in the number of buy/strong buy recommendations. On a scale of 1.0 (strong buy) to 5.0 (sell), BAC is now firmly at 2. As a binary options trader, you will want to cash in just before the rate hike is announced because the upside potential is coming. Consider that BAC stock has rallied by more than 53% since Trump was elected on 8 November 2016. There are some negative aspects on the horizon, including the fact that it has a 5% premium to its book value. Most stocks have a 52% premium on average to their book value. This indicates two things: there is tremendous upside potential with the stock, but there also concerns about profitability. For example, BAC was targeting a 12% return on equity, but it only posted a 9.54% return. In any event, a 25-basis point rate hike on Wednesday will do wonders for the stock moving forward.

Trading Opportunity #3 – GBP/USD Looking Soft

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As you might expect, the Fed will have a big impact on demand for the GBP/USD currency pair. When the FOMC meets on Tuesday/Wednesday and Janet Yellen announces a rate hike, the GBP/USD pair will be hit by put options. But there are also other factors that we need to bear in mind, unrelated to the Fed, but closely related to the European Central Bank. Recently, Mario Draghi alluded to the possibility of decreases to quantitative easing. In other words, less EUR would be flooding the markets to buy up assets. A tapering of monetary accommodation would strengthen the EUR, and weaken the GBP.

Of more concern is the effect of a 25-basis point rate hike on the GBP/USD pair. Given that the US economy is approaching its dual objectives of full employment and 2% inflation, pressure is being brought to bear on the sterling. The Spring Budget did little to assuage concerns about a slowdown in the UK economy. The GBP looks weak, and is likely oversold at this point. Resistance currently appears to be holding around the 1.2250 level. The big issue of course is Article 50 of the Lisbon Treaty, but precisely when Prime Minister Theresa May will trigger that is unknown. For now, we can expect short-term negative pressure to continue and multiple successive sessions of declines for the rest of the week.

Trading Opportunity #4 – FTSE 100 index Likely to Benefit from Weak GBP

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The inverse relationship between the performance of the FTSE 100 index and the strength of the GBP is well known. If you’re looking to refresh your memory, simply look at the performance of the FTSE 100 index since the ill-fated Brexit referendum on 23 June 2016. It’s been all uphill for the premier UK index as the GBP plunged towards 31-year lows. The reason for this correlation is the composition of companies on the premier index. 75% of revenues on the FTSE 100 are generated outside of the UK. This means that as the GBP weakens, those foreign country currencies are relatively stronger. When profits are repatriated, or converted into GBP, they are much stronger, boosting the share price of stocks and raising the overall level of the index. Currently, the FTSE 100 index is up at 7,343.08, the FTSE 250 is at 18,961.42 and the FTSE 350 is at 4,055.49. All UK indices are in the black, some respite from the ongoing Brexit woes.