Federal Reserve Bank Chairman, Janet Yellen has been hinting that the Fed FOMC is on the cusp of increasing interest rates once again. This will be the second time in 8 years (the first being in December 2016), that the Fed has raised rates. Among the reasons cited for the increasing likelihood of a rate hike is the desire not to see the US economy overheating. An economy ‘overheats’ when there is too much money chasing goods and services and aggregate supply cannot keep up. When growth occurs at an unsustainable rate, this boom can cause the economy to overheat. One way to taper an overheating economy is monetary tightening in the form of rate hikes.

Why are Stock Markets Improving if Rates are Rising?

Typically, stock markets react negatively to rate hikes. The reason being, interest rate increases make it more expensive to borrow money. This eats into a company’s profitability and costs get passed on to consumers in the form of higher prices. But in the case of gradual interest rate hikes, there is an entirely different dynamic taking place. Given that the US economy is robust and flourishing, interest rate hikes are perceived as a bullish sign for investors. An increase in the FFR is necessary for demand and supply to balance out. Investors take kindly to this by flooding Wall Street equities markets with fresh injections of capital. Additionally, the actual rate hike number (25-basis points) is minimal, given the historical lows of US interest rates. This does not adversely affect Wall Street bourses. In short, analysts, traders, investors, and policymakers believe that economic growth in the US has long-term viability.

Trading Opportunity #1 – S&P 500 Index Roaring and a Definite Bullish Option

The S&P 500 index officially celebrated its 60th birthday on Saturday, 4 March 2017. Despite recording negative movements last week, the index also reported its sixth successive week of gains. On Wednesday, 1 March 2017, the S&P 500 index, the Nasdaq composite index, and the Dow Jones all reached record highs, and the trend is set to continue. The S&P 500 index is one of the most highly capitalized indices in the world with an estimated $2.4 trillion indexed to it. This premier index is weighted according to market cap.

The bigger companies have a bigger weighting in the S&P 500 index. Since exchange traded funds dominate global trading, indexes that have a market capitalization weighting such as the S&P 500 index are leading the world. With 6 decades in the game, and a rampant US economy, the S&P 500 index has notched up multiple successive sessions of gains and is likely to continue on this current trajectory.

Trading Opportunity #2 – Deutsche Bank a Buy?

Deutsche Bank AG (DB) stock is currently trading at $19.35 on the New York Stock Exchange. The stock is down 4.26%, or $0.86. DB has been the subject of intense scrutiny in recent months, given huge fines by regulatory agencies in the US and Europe. It is also being monitored for its association with Donald Trump and potential corruption on the part of Russian government officials. Presently, the company has a market capitalization of $26.78 billion and negative performance expectations.

The price/earnings ratio is -15.15 and the earnings-per-share is $-1.28. The 52-week trading range of the stock is $11.19 on the low end and $20.94 on the high-end. However, there are big deals in the pipeline and Deutsche Bank could benefit immeasurably. After many years of corporate restructuring, Deutsche Bank is seeking to make significant funds available for strategic investments.

To do so, it will increase its capital by approximately $8.5 billion. The statement was announced by the bank on Friday, 3 March 2017, and it may even consider an IPO for its asset management enterprise. Of course, any moves on the IPO are dependent on approval by the supervisory and management boards of Deutsche Bank. If the sale of the asset management business happens, it’ll take place within the next three weeks.

The board will be meeting two days after the Fed meeting this month. In Q4 2016, Deutsche Bank performed dismally with a net loss of €1.9 billion, largely the result of improper conduct on the part of the bank. Deutsche Bank is one of the worst performing big banks on Wall Street, which is surprising given that interest rate hikes and investor confidence in the US are at an all-time high. As a binary options trader, the capital injection should be viewed as a positive sign.

Trading Opportunity #3 – USD/JPY Currency Pair Gaining Momentum?

The USD/JPY currency pair is trading at 114.005, down 0.33% or ¥0 .38. The yen recently dropped to a low of 118.2410 on 16 December, shortly after the rate hike on December 14. However, the Japanese currency has gained ground since then and consolidated around the 114 level. The yen has been particularly sensitive to US politics, weakening from 103.3780 prior to the US presidential election to 118 barely a month later. Now, with the Federal Reserve Bank likely to increase rates by 25-basis points on Wednesday next week, we can expect the USD to reverse its current trajectory and start to climb against the JPY. As a binary options trader, it doesn’t matter how great the movement is. All that’s required is direction of movement and that is all but assured on Wednesday next week.

Trading opportunity #4 – Gold Bullion Slips and Traders call it with Put Options

The performance of gold bullion is inversely related to the performance of equities markets. When Janet Yellen and her vice chairman, Stanley Fischer indicated that the federal funds rate would likely increase in March, the price of gold tanked. The above graphic represents how closely correlated gold is with sentiment at the Fed, and the performance of Wall Street indices. We have seen record levels being set on the Nasdaq, Dow Jones and S&P 500 index. Every time bourses hit new highs and endure multiple successive sessions of gains, gold takes a hit. Gold is a commodity that fares well when geopolitical uncertainty is rampant.

We are seeing too many stabilizing factors in the US economy such as multi-decade low jobless claims, minimal unemployment (currently holding below 5%), rising inflation, and bullish sentiment across the board. But the biggest driver of gold’s performance is the Fed. Since gold is a dollar-denominated asset, a firm dollar is a gold killer. As a binary options trader, you need only look towards Fed policy to determine whether you should buy or sell gold as a trader. The good news is that you can profit both ways as a trader and investor.