May 21 Weekly Market Analysis
Weekly Market Analysis by OptionRally
Financial Market Overview
After a torrid week, the global markets suffered another bad day last Friday which resulted in their gains for this entire year being totally obliterated. This development resulted from anxious traders seeking safer-havens for their investments in order to counter the ever-increasing problems arising from European debt contagion. For example, the markets were taken aback when Moody’s downgraded the credit ratings of sixteen Spanish banks last Friday. Investors will now be apprehensive that Greece will default on servicing its current bailout plan and will subsequently fail to receive the next tranche of ECB funds which is vital to prevent national bankruptcy. The ominous threat of the dreaded domino effect was also evident last week after Greek banks were swamped by frantic clients desperately withdrawing their savings. The news of this event quickly spread to Spain where its citizens commenced a similar operation of shifting their savings from Spain’s main national Bank, Bankia to other safer financial institutions.
The USA is also not out of the woods by a long chalk after FOMC minutes published last week stressed that further stimulus measures were still a valid option and following a series of disappointing releases of important economic indicators. As such, if any data posted this week from the USA is inadequate then investors will need to re-assess future Fed action once again. European leaders will try to identify more growth oriented policies this week to prevent any further deterioration in the European debt crisis mainly because of the plight of Spanish banking problems rather than Greek political concerns. This is because the entire Eurozone would be in danger of collapsing should Spain ever require bailout facilities.. In addition, analysts will eagerly await key economic indicators scheduled to be released from the Eurozone this week in order to evaluate how deep the currency bloc has entered a recession.
After hitting a four month low at 1.2650 last Friday, the pair rallied sharply to close at 1.2782 as investors protected their positions ahead of the G8’s weekend meeting. However, as most analysts expect the EURUSD to now renew its descent because of the intense pressure emulating from the European debt crisis, the next important support to monitor resides at 1.2623, which is this year’s low. A sustained break of this figure is the gateway to 1.2000 with hardly any meaningful supports in the way. Alternately, if the G8 meeting can conjure up some valid growth-oriented policies, then an ensuring rally will bring the key resistance level at 1.2860 into focus. With a strong bearish sentiment still prevalent, consider selling the pair if price plunges below 1.2623.
The British pound took a hammering from the USD last week by dropping almost 260 pips to close at 1.5824. This result was despite the fact that most of the UK economic indicators published last week exceeded market expectations. This week, the UK will post 10 releases including CPI figures on Tuesday and Gross Domestic Product on Thursday. The GBP has suffered badly during May mainly because anxious investors have been seeking safer-haven assets, such as the USD, because of the political uncertainties in Greece, the trouble Spanish banking sector and the ever-growing spectra of a European recession. Some respite may help the GBPUSD if the Fed were to advance its plans to instigate further stimulus measures as such an action would devalue the USD. Falling that, a strong bearish sentiment will dominant the directional price movements of this pair over coming weeks. Consequently, look to open a new put option with this pair as the underlying asset if price can sustain a clear break below 1.5805.
The AUD plunged last week against the dollar with the AUD/USD falling about 180 pips through its parity level to a weekly close at 0.9842. The Australian dollar has had a tough time competing with the USD after its national bank surprised the markets a few weeks ago when it sliced its interest rates by a larger cut in order to stimulate the faltering Australian economy. In addition, with problems continuously arising from the Eurozone and China, the AUDUSD looks set to decline even further over the coming weeks. This is because the growing chaos in Europe will most likely cause investors to flee the AUD, which is a high risk commodity currency, to safer-haven assets, such as the USD. As such, look to open a new PUT currency option with the AUDUSD as its underlying asset, if price plummets below 0.9780.
USD/CHF proceeded to climb unrelentingly last week hitting a hit of 0.9499 before a late rally by the CHF on Friday produced a closing price of 0.9387. The Swiss Franc is suffering at the hands of the USD presently because of the disappointing quality of recent economic indicators from Switzerland as well as its close proximity to the chaos of Greece and Spain. The USDCHF has been on a non-stoppable surge higher throughout the entire month of May so far. This trend is very likely to continue because of the chaos in European spreading out-of-control as well as the USA economy faring better than that of Switzerland at present. With such a bullish sentiment in position, consider buying this pair if price can achieve a sustained break above 0.9410.
Gold appreciated in excess of 1% last Friday enabling it to achieve its largest two day gain since October. The primary drivers behind this movement were the strong EURUSD rally late Friday and investor consolidation ahead of the G8’s weekend meeting. Confidence in gold trading took a boost in confidence following this second consecutive daily climb after it had been faltering badly during last week. However, with investors excessively anxious about further trouble brewing in Europe, this commodity is presently subjected to a strong bearish sentiment. Consequently, look to sell gold if its price is able to achieve a definitive break below $1,587.80 per oz.
Analysts reported that Greek political uncertainties were the principle reasons for the further decline in oil prices last Friday. With such a strong bearish sentiment present, consider selling oil if its price plummets below $90.93 per barrel.
The first trading day Facebook on the stock markets last Friday resulted in disappointment after its shares closed near their offered price at $38. Analysts identified the overall decline in the Stock Markets as well as the huge quantity of Facebook shares made available as the primary reasons for this upset. In addition, they cited oversubscription of the IPO as a major contributing factor despite serious concerns about Facebook including its disappointing Q1performance, mobile advertising restrictions and the dominating control of Mark Zuckerberg. The firm, which has about 900 million customers, set its IPO share price towards the top of its range enabling it to attain a valuation of over $100 billion.
The Facebook launch on Friday created difficulties for other companies trading in the social media sector as investors utilize their shares to hedge their Facebook bets. For instance, Zynga, which provides many of the social games used on Facebook, saw its shares plummet by nearly 14% to a low of $7.08 during Friday’s trading. Other similar companies that were victims included Groupon, Yelp and LinkedIn whose shares plunged in excess of 5%.
With the stocks markets suffering from the stress emulating from Europe, a prominent bearish sentiment dominates. As such, despite Apple shares recording a rise in value last Friday, still consider opening a PUT option using them as the underlying assets if price drops below $530.10. Similarly, look to sell Google if its share price plunges below $597.00.