Binary bets of the week – Deflation: The theme of 2015

2 mins. to read

by Dave Evans of

This Friday, US Non Farm Payrolls came in above estimate estimates for the second month in a row, showing that over 200,000 new jobs had been added for the fourth month in a row.

So why didn’t stock markets and the dollar rocket higher on the news? Certainly the terrible events in France are a concern for the markets, but so far these atrocities have had limited financial impact. Sadly financial markets take no account of the human impact of global events such as this.

Of greater concern for stock and risk markets in the longer term is the prospect of deflation in the world’s major economies.

US Non Farm Payrolls may have impressed, but beneath the headlines, wage inflation started to slip. Average hourly earnings dropped by 0.2% against expectations for a rise of 0.2%. It’s a similar story in the UK where slow wage growth has gone some way to explain why tax receipts are lagging projections despite an expanding economy. People are in work and unemployment is now, but the money being generated by those individuals is stagnant on average.

Across the Eurozone, there is a similar problem, but here the headline inflation figures themselves are a concern, with the European CPI flash estimate turning negative for the first time since 2009. This is no isolated dip either as CPI has been steadily dropping since the turn of 2012.

European CPI flash estimate Y/Y

Stock markets dropped on Friday after rallying valiantly off their 100 day moving averages. The 100 period moving average has acted as support throughout much of these recent rally, with the 10 period moving average acting as something of a magnet. This target was hit on Thursday, allowing the profit takers to step in on Friday.

S&P 500 chart with 10 period, 100 period and 200 period moving average:

Longer term S&P 500 chart with 10 period, 100 period and 200 period moving average:

In this latter chart, we can see how reliable the 100 period moving average has been for the S&P 500 since 2012. And if the 100 period average breaks, the 200 period has acted as a useful backstop.

Still, the deflation fears are very real, especially with oil prices remaining at subdued levels. Markets also remain overbought by historical standards. According to the average of four valuation indicators is now at its highest level, 2nd only to the tech bubble. This has been the case for some time though, so a collapse may not be on the cards, but upside may certainly be limited.

A rangebound trading channel could therefore be on the cards and a good way to play this is’s IN/ OUT trades.

An IN/ OUT trade predicting that the S&P 500 ends BETWEEN a high of 2075 and a low of 1950 in 81 days time could return 217% if successful. Or put another way, betting that the S&P 500 will close between 2075 and 1950 on the 31st of March could return £31.65 from every £10 put at risk.

Disclaimer: This financial market report is intended for educational and information purposes only. It should not be construed as investment or financial advice and you should not rely on any of its content to make or refrain from making any investment decisions. accepts no liability whatsoever for any losses incurred by users in their trading. Fixed odds trading may incur losses as well as gains.

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