by Dave Evans of binary.com
US and Europe On Different Orbits
If there was ever a day that highlighted the different trajectories of Europe and the US, yesterday was that day.
The ECB rate decision came in unchanged on Thursday and the accompanying press conference offered few suprises. What it did do was to underline that the the European Central Bank is firmly in ‘accomodation’ mode. Interest rates are more likely to go down than to rise, while ECB President Draghi is keeping the door open to further measures, including an asset backed security purchase program.
Although a rate hike remains some way off for the US, the Fed is already tapering its own security purchase program, paving the way for rates to lift off their record lows at some point in the future. Underling this trajectory, US non-farm payrolls came in well above forecstss, at +288k, versus expectations of +212k. In addition, the unemployment rate dropped to 6.1% against expectations for these to come in unchanged.
To highlight the challenges facing Europe – these stellar US figures followed Spanish services PMI that dropped significantly more than expected.
In the chart above, the dollar index sharply reversed its downtrend, closing above its short term moving average for the first time since the 18th of June. However, it’s worth noting that the Dollar index has not exactly been in a strong trend over the medium term and yesterday’s spike merely brings the dollar to its average level since the beginning of the year.
The euro has been in a gradual decline since the start of May and this roughly coincides with the dollar’s strength over the same period. Mid to late June saw a reversal of this trend, but the recent economic data has only gone to underline where the medium term path lies for the EUR/ USD. With the ECB still in critical care mode and the US up on its feet, there could be more downside to come for the EUR/ USD over the next few months.
A good way to play this a LOWER trade predicting that the EUR/ USD will close below 1.3600 on the 28th of August 2014 for a potential return of 113% – or put another way, £21.31 won for every £10 staked.
The start of July has seen the S&P 500 rise for its sixth straight month, with various valuation metrics putting the market at overbought levels to put it mildly. So far markets have shown no signs of reversing course, especially as the Federal Reserve has been very measured in its plans for withdrawing its asset purchase plan.
In effect, the doctor is very slowly easing the patient back to reality, mindful of the fact that financial markets can act like an unruly toddler when they receive news they don’t like.
According market statistician Doug Short from www.dshort.com financial markets have sky high P/E ratios at the same time as 10 year treasuries yielding less than 2.5% – well below long term averages. The closest analogy to this period was late 1936 to April 1937. The market plunged by nearly 50% over the next 15 months from the February high.
Could we see something similar here? We are certainly in uncharted territory right now, so betting on a large decline is at least worth a small punt.
In addition to this, the summer months tend to be weaker than their winter counterparts, especially in the days following the mid-summer peak around Independence Day. August and September have been poor months for stock markets historically. If there is going to be a drop, there are fair odds of it starting in the Summer. These months can see some extreme volatility, with one reason being that many senior traders are away on holiday, leaving the less experienced and more reactive juniors in charge.
A good way to play this is a ONE TOUCH trade predicting that the S&P 500 will TOUCH 1500 at some point in the next 364 days for a potential return of 432%. In other words, betting on a large decline in the next year could return £53.16 for every £10 staked.