Trading Opportunities For The Week Ahead – 12/12/2016

Financial markets are at a crossroads. For several years, the global economy has been subjected to near-zero interest rates. This has sharply inhibited economic growth. One of the consequences of historically low interest rates has been complete immersion in equities markets. In a matter of weeks, the Dow Jones Industrial Average has hit record highs and is now trading at well over 19,000. Several important trends have been taking place in the US economy, not least of which is rising consumer sentiment. However, another measure has gained prominence in recent weeks and that is the CEO confidence index. This index has spiked sharply since the election of Donald Trump to the Oval Office. Executive-level confidence has been bolstered, thanks to multiple economic indicators including the job market and the housing market.

The volatility index – a measure of uncertainty in the financial markets is currently at 11.75, down 0.89 points or 7.04%. That volatility is sharply lower than its 52-week high (32.09) is extremely important as a gauge of market sentiment in the US economy. This index measures the implied volatility for stock options on the S&P 500 index. It focuses on the S&P 500 index over a 30-day period. Some of the indices and exchange traded funds included in the VIX are the Nasdaq 100, EUR currency trust, gold SPDR and the US oil fund. The correlation between the VIX and the performance of the S&P 500 is clear: As the index rises, so the VIX plunges. We are now seeing the lowest level of the VIX since the summer of 2016. The historic average of the VIX is 20, and the current figure of 11.75 is extremely low.

The Fed Rate Hike is Looming Large

On Wednesday, 14 December 2016, the Fed will announce its decision on interest rates. The current rate of interest is 0.25% – 0.50%. There is a 94.9% likelihood of rates rising 25-basis points to 0.50% – 0.75%. If we look at the futures price for rate hikes, it is at 99.4675, and this indicates tremendous bullishness for the 30-day Fed fund futures. The prospect of a rate hike has largely been priced into global markets, particularly Wall Street bourses. As this is the final opportunity for the Fed to raise rates in 2016, all signs are pointing in the direction of a rate hike. For 2017, various reserve bank governors are anticipating at least 2 rate hikes. There is significant interest in how the current economic climate will play out in the political arena. This is one of the first times in years that the GOP has controlled the Oval Office, the Senate, and the House. Many of Donald Trump’s election promises now have a real shot at being passed. The executive director of UBS securities US equity and derivatives, Julian Emanuel had this to say about the current political climate in the US: