Best of the Week
Most Popular
1. The Trump Stock Market Trap May Be Triggered - Barry_M_Ferguson
2.Why are Central Banks Buying Gold and Dumping Dollars? - Richard_Mills
3.US China War - Thucydides Trap and gold - Richard_Mills
4.Gold Price Trend Forcast to End September 2019 - Nadeem_Walayat
5.Money Saving Kids Gardening Growing Giant Sunflowers Summer Fun - Anika_Walayat
6.US Dollar Breakdown Begins, Gold Price to Bolt Higher - Jim_Willie_CB
7.INTEL (INTC) Stock Investing to Profit From AI Machine Learning Boom - Nadeem_Walayat
8.Will Google AI Kill Us? Man vs Machine Intelligence - N_Walayat
9.US Prepares for Currency War with China - Richard_Mills
10.Gold Price Epochal Breakout Will Not Be Negated by a Correction - Clive Maund
Last 7 days
Gold Price Trend Validation - 22nd Aug 19
Economist Lays Out the Next Step to Wonderland for the Fed - 22nd Aug 19
GCSE Exam Results Day Shock! How to Get 9 A*'s Grade 9's in England and Maths - 22nd Aug 19
KEY WEEK FOR US MARKETS, GOLD, AND OIL - Audio Analysis - 22nd Aug 19
USD/JPY, USD/CHF, GBP/USD Currency Pairs to Watch Prior to FOMC Minutes and Jackson Hole - 22nd Aug 19
Fed Too Late To Prevent US Real Estate Market Crash? - 22nd Aug 19
Retail Sector Isn’t Dead. It’s Growing and Pays 6%+ Dividends - 22nd Aug 19
FREE Access EWI's Financial Market Forecasting Service - 22nd Aug 19
Benefits of Acrobits Softphone - 22nd Aug 19
How to Protect Your Site from Bots & Spam? - 21st Aug 19
Fed Too Late To Prevent A US Housing Market Crash? - 21st Aug 19
Gold and the Cracks in the U.S., Japan and Germany’s Economic Data - 21st Aug 19
The Gold Rush of 2019 - 21st Aug 19
How to Play Interest Rates in US Real Estate - 21st Aug 19
Stocks Likely to Breakout Instead of Gold - 21st Aug 19
Top 6 Tips to Attract Followers On SoundCloud - 21st Aug 19
WAYS TO SECURE YOUR FINANCIAL FUTURE - 21st Aug 19
Holiday Nightmares - Your Caravan is Missing! - 21st Aug 19
UK House Building and House Prices Trend Forecast - 20th Aug 19
The Next Stock Market Breakdown And The Setup - 20th Aug 19
5 Ways to Save by Using a Mortgage Broker - 20th Aug 19
Is This Time Different? Predictive Power of the Yield Curve and Gold - 19th Aug 19
New Dawn for the iGaming Industry in the United States - 19th Aug 19
Gold Set to Correct but Internals Remain Bullish - 19th Aug 19
Stock Market Correction Continues - 19th Aug 19
The Number One Gold Stock Of 2019 - 19th Aug 19
The State of the Financial Union - 18th Aug 19
The Nuts and Bolts: Yield Inversion Says Recession is Coming But it May take 24 months - 18th Aug 19
Markets August 19 Turn Date is Tomorrow – Are You Ready? - 18th Aug 19
JOHNSON AND JOHNSON - JNJ for Life Extension Pharma Stocks Investing - 17th Aug 19
Negative Bond Market Yields Tell A Story Of Shifting Economic Stock Market Leadership - 17th Aug 19
Is Stock Market About to Crash? Three Charts That Suggest It’s Possible - 17th Aug 19
It’s Time For Colombia To Dump The Peso - 17th Aug 19
Gold & Silver Stand Strong amid Stock Volatility & Falling Rates - 16th Aug 19
Gold Mining Stocks Q2’19 Fundamentals - 16th Aug 19
Silver, Transports, and Dow Jones Index At Targets – What Direct Next? - 16th Aug 19
When the US Bond Market Bubble Blows Up! - 16th Aug 19
Dark days are closing in on Apple - 16th Aug 19
Precious Metals Gone Wild! Reaching Initial Targets – Now What’s Next - 16th Aug 19
US Government Is Beholden To The Fed; And Vice-Versa - 15th Aug 19
GBP vs USD Forex Pair Swings Into Focus Amid Brexit Chaos - 15th Aug 19
US Negative Interest Rates Go Mainstream - With Some Glaring Omissions - 15th Aug 19
GOLD BULL RUN TREND ANALYSIS - 15th Aug 19
US Stock Market Could Fall 12% to 25% - 15th Aug 19
A Level Exam Results School Live Reaction Shock 2019! - 15th Aug 19
It's Time to Get Serious about Silver - 15th Aug 19
The EagleFX Beginners Guide – Financial Markets - 15th Aug 19

Market Oracle FREE Newsletter

The No 1 Gold Stock for 2019

Why Markets Ignored Weaker Payrolls

Stock-Markets / Financial Markets 2015 Apr 13, 2015 - 07:13 PM GMT

By: Sam_Kirtley

Stock-Markets

For so many years markets have been used to focusing overwhelmingly on US employment, with the Fed emphasizing that return to full employment was key to their monetary policy plans. However, with employment data printing strongly for some time now the focus has shifted away from employment, meaning that the monthly NFP print that traders had been living and dying by is no longer as relevant. The disinflationary impact of lower energy prices and the lack of wage inflation is now the main focus for the Fed, and therefore those factors have replaced NFP as the key metrics that set market tone.


What Payrolls?

Last week we noted with some concern that the lowest NFP print since December 2013 was a warning shot to Fed hawks and could see a future hikes delayed. However the initial (expected) reaction to the data was swiftly reversed and it now appears the market is happy to look through the weaker print.

Oil has been a big driver of this. The spike towards $55 made the market nervous about inflationary pressures increasing and coupled with a few timely Fed speeches has led the market to think that Yellen may look through the latest print.

As we discussed last week, the Fed is focused on the medium term picture and therefore a one off data print will not change their plan of action, just as a $5 swing in the oil price will not alter the course either. The key is the medium term trend of the data as this will drive monetary policy and the major moves in markets.

Lower oil prices have had a disinflationary impact. The move from $100 to $50 no doubt has reduced the Fed’s eagerness to hike, particularly with the ripple effects on the US economy from the energy sector slowdown. However oil prices have stabilized and therefore the trend is no longer down, it is simply range bound. A break up above $55 and a sustained move to $60 would see that range bound trend turn into an upwards trend. This would reignite inflation expectations and provide some much needed relief to struggling high cost energy companies.

The Fed can handle one or two weak payrolls prints. After all, although this was the lowest print since December 2013, let us not forget that following that December 2013 print the Fed proceeded to taper QE purchases through 2014 and continue to signal that hikes were coming in 2015. We believe that this is still the Fed’s game plan. Policy normalization will begin this year, with September the most likely starting point.

June, July, Sep, does it matter?

At the margin the decrease in likelihood of a June hike out to later this year does impact markets, but from a macro viewpoint this is a tactical shift in the trades we will make, not a strategic one. Whether the Fed hike in June, July or September impacts the timing and entry levels of the trades we are looking at, but does not alter the way we want our portfolio to be positioned.

A shift in the start of tightening until 2016 would have a meaningful impact though. This would reignite the case of loose monetary policy trades such as buying gold. However given that this would take a serious shift in the economic landscape we will for now focus on our preferred trading strategy for a Fed lift off this year.

Gold To Triple Digits

As a function of monetary policy, gold prices will face significant downside pressure with the Fed hiking rates. At the height of QE gold prices reached over $1900 and although at $1200 it may look as though they have fallen far enough, we note that prior to QE2 gold prices were around $1000, which is where we see them returning too.

At $1200 we see the next $200 move as lower and therefore favour core short positions. As we approach the seasonally weak period for the yellow metal beginning with “Sell in May and Go Away”, we have a preference for selling out of the money call spreads which give positive theta over the summer doldrums. The time will come to buy high gamma downside options, but we think one will get a better opportunity to do enter these trades. As discussed above, the June/Sep timing issue is important tactically but the overall strategy remains the same.

Equities Biased Higher With Volatility Contained

There are numerous arguments that the beginning of the Fed’s tightening cycle will send stocks lower, since they have only rallied on loose monetary policy and the massive amount of financial stimulus in recent years. We disagree for two main reasons.

Firstly the Fed has taken great care to stress that policy normalization will be cautious, patient and data dependant. If the economic data turns sour they will not be hiking and thus they are unlikely to raise rates whilst stocks are falling. Secondly the world has changed since the global financial crisis and global central banks act much more swiftly to deliver accommodative policy conditions than they have in the past. Volatility will be contained during the hiking cycle, potentially even more than it has been in the past.

Therefore another trade we like is selling medium term downside protection on the S&P 500. We would add to such positions with any spike in the VIX towards 17 and are comfortable with reasonably aggressive positions in this area, more so than our positions selling topside protection in gold. 

Opportunities Yet To Come        

With the first quarter of 2015 behind us, we think that the major moves this year are yet to get underway. Therefore there are many trading opportunities ahead and the key will be identifying and positioning ones portfolio for them. The recent market reaction to non-farm payrolls reinforces the need to look beyond the headline prints, and dig below the surface of how markets appear to the underlying currents likely to shape major trends in 2015. We have discussed our preference for selling downside protection on the S&P 500 and topside on gold; however for more details on what trades we are making and when, please visit www.skoptionstrading.com to subscribe. 

Disclaimer:

www.skoptionstrading.com

SK Options Trading makes no guarantee or warranty on the accuracy or completeness of the data provided. Nothing contained herein is intended or shall be deemed to be investment advice, implied or otherwise. This letter represents our views and replicates trades that we are making but nothing more than that. Always consult your registered advisor to assist you with your investments. We accept no liability for any loss arising from the use of the data contained on this letter. Options contain a high level of risk that may result in the loss of part or all invested capital and therefore are suitable for experienced and professional investors and traders only. One should be familiar with the risks involved in options trading and we recommend consulting a financial adviser and/or viewing the SEC Options page if you feel you do not understand the risks involved in options: http://www.sec.gov/answers/options.htm

© 2005-2019 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in

6 Critical Money Making Rules