Us Stock Indices And Gold React To Jobs Data
After a dire Thursday in which U.S. stock indices such as the S&P 500 and the Dow Jones Industrial Average slid almost 2%, some better news from the Bureau of Labor Statistics might put a floor under investor sentiment on Friday
Friday, August 1, 2014 - 00:00
And it couldn’t come at a better time, as that slide wiped out all of the Dow Jones' year-to-date gains for 2014.
The key piece of information was the total nonfarm payroll employment count, which rose by 209,000 in July. The national U3 unemployment rate remained basically steady at 6.2%, according to the BLS. Other representative figures, such as the 2.2 million workers marginally attached to the labor force and the 741,000 discouraged workers, also dropped. These two data points declined by 236,000 and 247,000 people, respectively, since July 2013.
Fed remains critical
These figures represented poorer results than those forecast in a survey of economists by Bloomberg. However, weaker results might actually represent a positive outcome for some investors - the Federal Reserve is committed to maintaining its cheap access to credit as long as wages and jobs remain below targets.
Mohammed El-Erian, Allianz's chief economic advisor, told Reuters that "it's a goldilocks report for an economy that is steadily expanding but not lifting off. It will reinforce for now the Federal Reserve's commitment to a gradualist policy approach."
Gold, equities and binary options
On Friday morning, the markets didn't appear to have fully processed the news and moved firmly in any given direction. Just after 10:00 a.m., the Dow Jones Industrial Average slipped 0.23% to 16,525.38, while the S&P 500 stood more or less even at 1,930.77 points.
The prospect of continued cheap money helped reinforce gold and silver prices, with NYMEX September contracts for the former up $11.70 to $1,294.30 per ounce and the latter climbing $0.118 to $20.53 per ounce. Precious metals futures tend to rise when investors suspect continued inflation.
The turmoil in the market over the last three days represented a perfect opportunity to employ binary options hedging. Before Thursday, the stock market had taken a fairly bullish approach to earnings season. A confluence of geopolitical turmoil, major debt defaults in Argentina and poor earnings from key industries helped hammer the major indices, which could wipe out a strongly bullish position in equities.
Offestting capital losses
To help offset these kind of losses, investors may employ binary options to hedge their risks. If their portfolio is heavily biased toward stocks, they might sell Nadex binary options which pay out if the market stands at or below a fixed level at a certain time.
In the commodities space, an equity-heavy portfolio could benefit from buying Nadex gold options tied to the underlying NYMEX/COMEX gold futures. If those futures stand above the designated point upon expiration, the investor will receive a profit equal to the difference between each option's purchase price and $100.
Using Nadex binary options could be an ideal hedging strategy because of their simple, regulated trading mechanics, transparent and segregated funding sources, and a fixed downside risk. Using a binary option hedge for each day of trading might result in small losses on four out of five days, but may be incredibly helpful if they cushion the impact of a major slide like yesterday's rout on the NYSE.
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