Markets Prepare for Increased Volatility
NFPs miss but stocks manage to close for the week. Syria still causing problems for stock valuations. RBA removes dovish bias. Aussie Dollar looks like a long term buy.
Stock markets had trouble finding direction last week, as the opening sessions were influenced by holiday-thinned trading activity. Through the middle of the week we had five — yes five — important central bank meetings, and all of this came to a conclusion on Friday as markets were forced to react to the monthly Non Farm Payrolls number out of the US. Stock markets did manage to close positive for the week, with some particularly uncommon strength in emerging markets. Emerging markets have been punished so far this year (in stark contrast to the broad strength that has been seen in developed economies), so the rallies seen last week were something of a surprise.
The most important outcome in last weeks series of central bank meetings came from Australia, where the RBA made no changes in interest rates but did remove the dovish language that was previously a part of the general narrative. This led to some significant short term rallies in the currency (which did face headwinds after the weaker than expected Non Farm Payrolls number). This signals a long term low for the currency, as we are likely to only move upward at this point from the easing cycle and interest rates that are now at historical lows (at 2.5%). The Australian Dollar is highly sensitive to changes in risk sentiment and does not always move in conjunction with economic data that is directly tied to the economy.
There are various reasons for this, and some key event risks in the next few weeks could lead to volatility and some short term losses but for those with a conservative outlook and a long term outlook, bullish positions in the Australian Dollar are a virtual lock, given the extreme declines we have seen this year. The US and Australian Dollars will likely be my preferred currencies for the next six months, so it makes sense to play these from the long side but not against each other as there are weaker alternatives to choose.
Non Farm Payrolls
Stocks were higher for the week, despite the Non Farm Payrolls miss and the continuing problems with Syria. Monthly payrolls figures in the US rose by 169,000 for the month of August (180,000 was expected) and this complicates the outlook for potential tapering changes from the US Federal Reserve. On the positive side, the Unemployment Rate dropped to 7.3%, which is the lowest level the end of 2008. The Unemployment Rate is the Fed’s preferred metric but the headline numbers from the previous months were revised lower. The contradictory outlook means one things for options traders: Renewed volatility. Expect this to continue through the month of September.
My Trading Ideas:
1. Increased volatility means trading will be more difficult for the month of September. This means there is nothing wrong with staying on the sidelines or taking longer term positions that ride through the less predictable market activity. This week I will look to play against the negative Non Farm Payrolls reaction in the USD/JPY, and buy weekly CALL options in USD/JPY at the week’s open on Monday, which should come in near the 98.50 area.
2. For stock trades, I will be looking to play markets from the long side (relatively rare for me) and work from the recent earnings performance at Goodyear Tire (GT). Fundamentals show that the stock is trading below its intrinsic value and at a lower P/E relative to the rest of the industry. Buy monthly CALL options in GT at the weekly open, which should come in near 20.85.
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