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  • Trading Event: The US Non-Farm Payroll Data, June 2013

    There has been much anticipation of the release of June's employment situation report, by the Bureau of Labor Statistics, due to the recent market volatility after the Fed chairman Ben Bernanke, during last month's FOMC meeting, indicated that the central bank is considering, turning the tap off the on-going $85 billion a month, asset purchase program, at some point later this year. Ever since the QE3 stimulus program was initiated by the Federal Reserve, during last September, the investors have been on an aggressive stock buying spree, which continued through the majority of the first half of 2013, when the major indices reached record levels on May 22nd 2013; with Dow index touching 15542 points; while the S&P 500 at 1687. Since then the rumors of the Fed strategizing the stimulus exit, have created volatility in the market, which continued to gather strength, when the Fed eventually confirmed that it would indeed scale back the on-going stimulus, later this year. The investors reacted sharply to this shocker by the Fed, and most investors opted to take the profits and stayed out of the market, awaiting for the non-farm payroll figures for June and the unemployment percentage levels, in order to get further clarity on whether there is any possibility that the Fed would delay its tapering plans.

    The below are the consensus forecast for the employment situation for the month of June 2013.

    Non-farm payrolls: +165k
    (May +175k)

    Private payrolls: +175k
    (May +178k)

    Unemployment rate: 7.5%
    (May 7.6%)

    On Thursday, the much awaited policies of the two influential central banks, the Bank of England and the European Central Bank, eased investor nerves which saw the central banks maintained their current policies. Following the footsteps of the BoE governor, Mark Carney earlier in the day, the ECB president Mario Draghi, also embraced forward guidance policy, promising to "keep the interest rates low for an extended period of time" also assuring an accommodative monetary policy, for as long as necessary; to maintain balance between the inflation and the economic growth. The ECB made their intentions clear as to what is going to be their "two pillar strategy" oriented policy - achieving price stability, striking balance between the inflation and monetary dynamics. Given the recent political uncertainties in Europe, owing to fresh fears from the political uncertainties of Portugal and Egypt and mixed economic indicators out of the Eurozone and Britain, the ECB and the BoE monetary policy decisions are welcome and will be a great relief for the investors, as this will buy enough time for the member countries, to sort out their internal issues and seek continued assistance from the central banks in the months to come, keeping up on the gradual recovery phase. The easing measures undertaken by the Bank of Japan, over the past few months and the Peoples' Bank of China, who hinted on intervening, if the current credit crunch demanded so, further supports the global central banks' strategy in the months to come.

    Investors will hope for a similar thinking from the Federal Reserve on the monetary policy and will hope the Fed may review their statement on tapering, made during the previous FOMC meeting. The Fed will be keeping a close eye on Friday's job report, before they could provide further direction on the future monetary policy.

    So how to trade this event?

    There are mainly two possible outcomes investors should be prepared for in order profit from this event:

    1. NFP data comes well below the estimates, disappointing the market with unemployment rate unchanged at 7.6%:

    Any weakness in the NFP data below the consensus of 165k could potentially see the dollar move downwards and the EUR/USD and GBP/USD could find traction although upward momentum to the Euro and Sterling remains limited in the medium term, thanks to the forward guidance issued by the ECB and the BoE, during the central bank policy meetings on Thursday, promising to maintain lower interest rates as long as necessary, until the economy improves considerably. The US Stock market reaction is going to be a tricky affair. In a normal scenario, the reaction for any disappointing NFP reading, would be a total sell off. However, given the recent comment made by Bernanke on scaling back the stimulus later this year, the investors may feel this situation as something which could delay the Federal Reserves' stimulus unwinding strategy. Consequently, the stock markets may be on the upside with limited gains, and the VIX, settling down to the normal levels, as investors would likely bet that the Fed would follow the footsteps of the Bank of England and the European central bank and maintain low interest rates and an accommodative policy for an "extended period of time" as stressed by the ECB.

    2. Better than estimated Payroll data with unemployment rate falling to 7.5%:

    This scenario is going to be a disaster for the euro and sterling against the greenback as they will find intense sell off pressures from the investors. The stock markets likely to shoot up sharply, with investors ignoring Bernanke's stimulus scaling back comments last month, and likely to think that before making any decisions to unwind the $85 billion monthly stimulus, the Fed may want to confirm i) the consistency in the employment growth setting a target level, say below 7% and ii) until the US GDP, which disappointed in the first quarter (revising down to 1.8% from 2.4%), moves up quite considerably during at least the next couple of quarters, confirming any steps considered towards QE tapering, will depend largely on how the above two factors perform in the coming months.

    Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.

    Jul 05 10:46 AM | Link | Comment!
  • Gold Losing Its Sheen On Fed QE Tapering Fears And Chinese Credit Crunch

    Commodities Weekly Analysis - Gold

    FXStocksData | June 30, 2013

    Gold Prices Tumbled by 25%

    Gold has tumbled last week by a further 5.3% closing at $1223.70 an ounce on the Comex division of the New York Mercantile exchange. The slide began in April 2013 when the investors started worrying over the rumors on Fed tapering fears and led to a sharp decline after Bernanke confirmed that Fed may scale back the stimulus soon. Gold is down by 25% on the quarter and annual losses reach up to 27%, the biggest annual drop since 1981.

    Cheap money and QE Tapering Fears

    Ever since QE3 was announced in September last year, when Fed started purchasing assets worth $85 billion every month, gold prices have rocketed as investors started buying it as a safe haven against the weakening US dollar and hedge against a possible inflation.

    Fed chairman Ben Bernanke hinted during last week's FOMC policy meeting press conference on scaling back the $85 billion monthly asset purchase program later this year suggesting that the Fed believes the economy has grown considerably since the inception of the stimulus program and the time is nearing to scale it back. Bernanke added that Fed would start unwinding the stimulus slowly later this year and by mid 2014 it expects the program to come to an end. The confidence investors had with the Fed over the past many months has been shattered overnight and commodities especially gold has been the worst to react by sharp falls.

    And Chinese credit crunch added to more worries

    Before the investors could digest the Fed's statements the People's Bank of China on Monday suggested it would not step in and inject money to prevent a rise in the inter bank borrowing rates. The rates which banks borrow from each other in China have jumped sharply between 10% to 25% from a mere 3% a month ago, which raised concern about the impact it would make on the non-bank lenders. Nevertheless, the Chinese central bank assured that it would "contain financial risks with more solid actions" and "fine-tune policy when necessary." The tight money in China coupled with the announcement of gold import restrictions by India have prevented the buyers to step in aggressively.

    Investors remain cautious and so do the miners and so do the central banks around the world

    Major investment banks from Morgan Stanley to Goldman Sachs have cut their gold forecasts. According to these investment banks much of the current selling is coming from long-term investors who would have in any other scenario happily ignored the volatility in the precious metal's value. There is a considerable liquidation of the bullion occurring to cover margin calls and also to square off the end of the first half of 2013.

    Economists believe the gold miners would struggle in the months to come and may need to revise down their valuations with most of them already under pressure to remain in business.

    Central banks' gold reserves, according to a study by Banc De Binary, have been hit by $429 billion of theoretical losses due to the recent sell off. There remains a big concern whether they too will act on gold's tumbling prices and unwind their reserves. If they do that it will have lasting effects on the 'safe haven' status of the precious metal in the months to come. On the other hand the central banks could opt to seize the opportunity and increase their gold reserves, but thanks to the lower account balances in the emerging world, such an option remains highly unlikely.

    Buying Opportunity or Sell further - The US GDP factor and Fiscal concerns

    Investors remain muted on the plunging prices of gold and expect to see the prices stabilize before buying in. Over the past few weeks speculators selling the precious metal have far outweighed the buyers. Gold will undoubtedly remain under pressure and volatile in the short- term and for it to rebound the Fed should restore confidence by talking down the tapering fears which has rattled the markets. The economic data coming in from US has been mixed with US housing and consumer confidence at a five year high, and house prices jumping to a seven year high reinforcing Fed's statement that economic conditions have started improving and the scale back of the Fed's fiscal stimulus is imminent. The glimmer of hope being the worst first quarter US GDP figures which has been revised to 1.8% from the original 2.4%. Investors may take heart from that and would hope that the Fed cannot scale back the stimulus anytime soon until the GDP improves considerably.

    Irrespective of Fed's decision gold remains a best bet against the backdrop of fiscal concerns, inflation and political uncertainty which may encourage investors to go on the bargain hunt and any further statements from Fed alleviating the tapering fears will see the gold prices stabilize and a sharp rebound may be inevitable.

    Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.

    Jul 01 10:49 AM | Link | Comment!
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