Major Economic Announcements Slated for Thursday, 4 August 2016

This is going to be an important week for the United Kingdom and the spillover effects will impact the global economy. For starters, Monday, 1 August will see construction PMI and CIPS manufacturing PMI for July being released in the UK. But the big decisions will be announced on Thursday, 4 August 2016 when the Bank of England will announce its interest-rate decision followed by the Monetary Policy Committee meeting minutes. The announcement will also include The Monetary Policy Committee vote hike, details of quantitative easing, the inflation report and other important economic data releases.

It has already been established that the Governor of the Bank of England, Mark Carney will downgrade growth forecasts for the UK economy moving forward. This is a direct consequence of the UKs decision to break from the EU in the June 23 referendum. According to Carney, the economy will likely be plunged into a technical recession, defined as 2 successive quarters of declining growth. MPC members will reveal their thoughts on the matter when the meeting minutes are released. It is expected that the UK's growth forecasts for the remainder of the year will be near zero or negative. On Thursday, 14 July 2016, the market was surprised by the 8-1 decision by the MPC in favour of an unchanged interest rate.

Now, it is likely that the Bank of England will act decisively to address shrinking economic growth by cutting interest rates from the current level of 0.50%. A further loosening of monetary policy will have a stimulatory effect on the UK economy. It is still unclear precisely what impact a Brexit has had on the UK economy to date, and data will only be made available closer to September. The Bank of England is holding a double edged sword in this precariously balanced scenario. It can act by cutting interest rates to 0 or close to it, and then have no leeway to move if the economy does not react accordingly. It can also do nothing and run the risk of whatever transpires.

All forecasts made by the Bank of England are effectively being made in a vacuum. There is no substantive data to correctly ascertain what type of impact a Brexit has had, or will have on the UK economy. Two weeks ago when the MPC decided not to do anything, reports suggested that the Brexit vote had a minimal impact on business activity. But we have seen a sharp decline in business confidence and consumer confidence since then. MPC members are now better informed about the state of the economy post-Brexit than they were on 14 July. The IMF (International Monetary Fund) has cut its growth forecast for the United Kingdom by 0.2% for 2016.

It is against this backdrop that we examine the many profitable trading opportunities that exist in the financial markets.

Trading Opportunity #1: Gold is Bullish

Gold is currently trading at $1,350.85 per ounce, up 0.14% or $1.85. The precious metal has appreciated by 1.90% over the past 30 days (up $25.10). The six-month performance of gold is up 20.83% or $232.60 per ounce. Over the course of 1-year gold has appreciated by 23.46% or $256.30. With the uncertainty ahead of the interest-rate decision in the UK, markets will feel a sense of volatility. This naturally lends itself to an improved price for the precious metal. However, a weakening of the interest-rate will be beneficial to stock markets such as the FTSE 100 index. The GBP will weaken and this will allow exports to strengthen for listed companies. A rally on the FTSE 100 index indicates more money flowing into the index, possibly from safe-haven assets like gold. Nonetheless, the relative uncertainty prior to the decision lends itself to a higher gold price.

Trading Opportunity #2: JPMorgan Chase & Company (JPM) Looks Like a Buy

JPMorgan Chase & Company (NYSE: JPM) is currently trading at $63.97 per share, down 0.20% or $0.13. The stock has a year-to-date depreciation of 3.12%, after having started at $66.03. However, over the past 3 months the stock has staged a mini-recovery after plunging to a June 27 low of $57.61 and subsequently climbing over $6.30. The 1-month performance of the stock has shown an appreciation of 2.94%, and over the past 5 trading days it has retreated somewhat by 0.20%. Nonetheless, the stock is regarded as a buy by analysts. The company has a market capitalisation of 234.39 billion dollars with an earnings per share of $6 and a price/earnings ratio of 10.86.

In terms of financials, the company’s total assets in 2015 were measured at $2.35 trillion with total liabilities of $2.10 trillion and total equity of $247.57 billion. The latter figure is the highest in over 4 years. But it was the stronger than expected revenues and EPS that have allowed the stock to soar in recent days. According to analysts, the mean recommendation this week is 1.9 on a rating scale of 1.0 (strong buy) to 5.0 (sell). Analysts have placed a price target of $52 on the low end and $79 on the high end. The average is currently $70.04 per share. While the upgrades and downgrades history has largely been negative in 2016, there is room for newfound optimism with the latest earnings history. On 29 June 2016 the company reported an EPS of $1.55 whereas the estimate was $1.43. The 8.40% earnings surprise was the biggest in three quarters since December 30, 2015.

Trading Opportunity #3: The USD/JPY Currency Pair

The USD/JPY currency pair is on an unmistakable downward trend. If you are going long on the greenback, this is not the currency pair that you should be trading since this pair is particularly bearish. Upcoming economic indicators in Japan are boosting the prospects for the Japanese economy, especially since Prime Minister Shinzo Abe announced fresh stimulus measures worth 28 trillion Japanese yen. On Tuesday, 2 August, Japan will announce its consumer confidence report numbers for July, followed by the Monetary Policy Meeting minutes and the Nikkei Services PMI. On Friday, 5 August 2016, the leading economic index preliminary report for June will be released, followed by the coincident index preliminary report for June. On Saturday, 7 August 2016, details of the Japanese current account for June will be released with a consensus forecast of 1700 billion Japanese yen.

Currently, the outlook for the USD/JPY pair is bearish with a 20% short-sell position. In terms of the speculative sentiment index, the current reading is 3.9643, up significantly from the prior reading at 1.11. In terms of support and resistance levels for this currency pair, S1 is 104.46, S2 is 104.09 and S3 is 98.77. When it comes to resistance levels, the first is R3 at 106.55, R2 at 106.35 and R1 at 105.50. On Friday, 29 July 2016, this currency pair came under pressure ahead of the US non-farm payrolls report. Several factors are weighing heavily on the USD/JPY, notably the decreasing likelihood of a rate hike by the Fed in 2016. Growth in the US economy has slowed substantially with just 1.2% being reported for Q2 2016. Analysts were expecting growth to increase by 2.5% at the very least. This naturally bodes poorly for the USD/JPY pair.

Trading Opportunity #4: The Nikkei 225 Index

One of the most striking relationships is that between the Nikkei 225 index and the JPY. When the Japanese yen is strengthening, Japan’s premier index – the Nikkei 225 index typically weakens. However, this week we are seeing an anomaly taking place in the form of a strengthening Japanese Yen and a rising Nikkei 225 index. Recall that fresh stimulus measures in the form of fiscal spending and monetary stimulus are driving the premier Japanese index higher. That the US economy is growing at a sluggish rate and the USD is waning is helping to drive the USD/JPY currency pair lower. Presently, the Nikkei 225 index is trading at 16,569.27, up 0.56% or 92.43 points. For the year-to-date the index is down 12.95%, but over the past 3 months it is up 2.61%. Over the past 5 trading days the Nikkei 225 shed 0.66%.