Dollar-Positive Environment Likely to Emerge
Fed comments signal the central bank is “broadly comfortable” with stimulus reductions. Economic data in the Eurozone starts to show improvement. Stocks broadly under pressure, led by emerging markets. Gold prices break key 1340 level.
Last week, stock markets continued to show broad weakness with the S&P 500 hitting new near-term lows at 1630. But most of the declines have been seen in emerging markets, which have strongly underperformed this year as investors are less willing to take on exposure in risky equity markets. Most of this activity is coming as a response to renewed speculation that the US Federal Reserve is ready and willing to begin cutting back on its historic quantitative easing programs.
The latest evidence of this came last week as the meeting minutes from the July FOMC monetary policy were release, and ultimately suggested that a majority of the body’s voting membership is “broadly comfortable” reducing its monthly asset purchases. The primary effect a move like this will create is a stalling stock market (and declines in emerging markets), and a much stronger US Dollar in coming months. One of the most important reasons for these expected trends is the fact that no other major central bank is looking at a similar timeline. In fact, stimulus programs in the Eurozone, Japan, and China are still in relatively early phases, so there are clear differences at this stage when we look at global markets on a comparative basis.
The Week Ahead
In the week ahead, most of the market’s attention will be centered on the next round of Fed speeches, housing data, and consumer confidence reports. All of these events will be judged in terms of how they will effect expectations for the Fed’s quantitative easing programs. Overly upbeat results will have something of a negative effect on stocks, as it will largely confirm that the Fed will begin tapering, and possible by a bigger amount than markets are currently expecting. This would also lead to big declines in the EUR/USD if this is the result we see.
My Trading Ideas:
1. Last week’s trade in the EUR/USD fluctuated between gains and losses, despite being positively affected by the Fed minutes from the July meeting. Eurozone economic data has shown some improvement but I am still highly bearish on this pair going forward and into the end of the year. My central view, however, is for Dollar strength and I will look to use the USD/CHF as the main vehicle for this near term. This week, look to buy weekly CALL options in USD/CHF at the week’s open on Monday, which should come in near the 0.92 area.
2. For stock trades, I will be looking to capitalize on the expected weakness that stocks should experience as a whole. I would like to see a little bit more of a rally in the S&P 500 before selling, so instead I will look to one of the recent earnings misses (and there are many) as a basis for getting bearish again. For this, I will use Texas Industries, Inc. (TXI), which is a construction company that has shown one of the industry’s biggest slowdowns in both revenue and earnings growth. Buy monthly PUT options in TXI this week, but wait for a small rise back toward 61.80 to get in at a better position.
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