US Non Farm Payrolls Damage Market Sentiment into Close of the Week; Looking to Buy Call Options in S&P 500 on Weakness

Equity markets and high yielding currencies sold off at the close of last week as trading sentiment was negatively affected by the disappointing employment data out of the US on Friday.  The US Non Farm Payrolls figures (NFP) for the month of April showed that the world’s largest economy added fewer jobs than expected at 115,000, which is the third consecutive monthly decline.  This was somewhat balance by the drop in the unemployment rate (to 8.1 percent) but markets were still focuses on the headline jobs figure and this brought some intense selling pressure to the S&P 500.

Investors have been pushing up prices in equity markets recently, on the assumption that the jobs market is recovering.  The employment report from March shows that the economy added 154,000 jobs during the month of March, but this latest figure is throwing some of those previous assumptions into question.  The consensus estimate for April was 130,000 jobs, according to the latest Bloomberg survey and the downside surprise also brought selling pressure into the high yielding currencies such as the Australian and New Zealand Dollar.

Private sector payrolls saw an increase of 130,000 for April (from 166,000 the previous month), with the manufacturing sector seeing the biggest decline, creating only 16,000 jobs (from 41,000 previously).  In total, gains were seen in retail trade, health care and business services, while declines were seen in the transportation and warehousing industries.  On the positive side, the unemployment rate did manage fall to the lowest level we have seen since the beginning of this year, dropping from 8.2 percent to 8.1 percent for the month.  But markets were less than excited about this, as it came mostly from a reduction in the participation rate, as fewer job seekers are recorded.

Next Week’s Reaction

Looking forward, the main question will be how this report in interpreted by markets.  Looking at the initial reaction in the US Dollar, we can see that markets first viewed the currency unfavorably but toward the end of the session, major gains were seen against most of the Dollar’s main counterparts.  With this in mind, establishing currency trades next week will be riskier than stock positions, as we could easily see two way trading activity once again.  Poor jobs data is a much clearer negative for equity markets so we will see next week whether the latest bear move can sustain itself.

My Trading Recommendation in 50 words:

The latest down move in equity markets has pushed prices into some significant medium term support levels that are likely to contain prices for most of next week.  Because of this, I am looking to buy a one week call option in the S&P 500 at 1355.  This is a contrarian play, however, and the momentum is clearly on the downside at the moment.  But the move so far has been extreme, and I am looking for a bounce at some point next week back into the 1390 region.