Binary bets of the week: Taper Tantrum or Reality Check?

4 mins. to read

by Dave Evans of

Thursday saw the biggest sell off on stock markets since April, followed by some expected volatility on Friday’s Non Farm Payroll day.

S&P 500

We have a pick of catalysts to point to for the sell off, with the leading explanation being that markets performed a so called ‘taper tantrum’ on Thursday. With the Fed tapering or reducing its money purchase operations and looking to start a higher interest rate cycle, markets threw their toys out of the pram in the only way they know how – by selling off. It’s certainly worked in the past, as evidenced by the way that world authorities are tip toeing around the issue of turning off the tops.

The question is whether this time, markets have a point. Markets and world economies have been on life support longer than any other time in the past, but the other side of this is a big unknown. If world governments do stop the medicine too soon, it could cause irreparable damage.

The argument was hardened on Friday when Non Farm Payrolls came in well below estimates, with the unemployment rate sneaking higher to 6.2%. Not only this, average earnings and personal spending both dropped more than anticipated.

Ironically, this didn’t lead to sustained follow on selling – partly because below par economic data, so soon after the Fed meeting, could force officials to stave off their plans to taper further and raise interest rates. In this case bad news really could be good news for markets, at least in the short term.

There is no doubting that markets were running hot, but Thursday’s sell off may not automatically become a selling rout. The other catalysts for Thursday’s sell off were in themselves less worrying.

Portugal’s Banco Espirito Santo dropped over 40% when it resumed trading, spooking out many of the market, especially as the shares are now down 80% since is highs earlier in the year. Still, most market traders firmly believe that this is an isolated bad apple and not an indication of widespread problems across Portugal or indeed across the Eurozone periphery.

The other ‘risk’ event on Thursday was the bankruptcy of Argentina by ratings agencies. Argentina defaulted for the second time since 2001 and has never really recovered since. While its officials are raging against the US, markets themselves seem little surprised.

So while Thursday’s sell off was much needed, it seems markets may have made their point, especially with Friday’s economic data potentially weakening the argument for more aggressive tapering from the Fed. There’s no denying that markets are still on the expensive side, but in the short term, we could see some buyers step in here.

A good way to play this is a LOWER trade on the S&P 500, predicting that the market will close above 1,950 in 7 days time, which could return 122%. Or put another way – betting that the S&P 500 will be above 1,950 at the close on August 8th could return a payout of £22.42 from a £10 stake.

Not So Sterling

The British pound sank heavily on Friday after UK manufacturing dropped unexpectedly. This came on the back of Spanish and Italian manufacturing also missing expectations.

Similar to the US economy, Britain is starting to look to the end of its money purchase program and start a cycle of interest rate hikes. The pound had been pushing higher on expectations of an earlier than expected hike, but this data reversed many positions and predictions.

That said, UK manufacturing has hardly been achieving parabolic growth in the last few months. Slow and steady has been more the pattern. While this month’s figures are unwelcome, there is an argument that Friday’s reaction is a little overdone, or at least leaves room for a short term rebound.

The GBP/ JPY is sitting right on support and with the main yen pairs showing no sign of turning due to dollar strength, there’s potential for upside here.

A HIGHER trade predicting that the GBP/ JPY will close above 173.25 in 5 days time could return 125% if successful. Or put another way, betting that the GBP/ JPY will be above 173.25 at the close on the 6th of August could return £22.94 from a £10 stake.

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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