London 24/01/2022
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The information of this report is of a general nature only. It is not a personal financial advice. It does not take into account your objectives, financial situation and personal needs.
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INFLATION, POLITICAL CRISIS AND PANDEMIC: MANY CONCERNS
Weekly Report: Indices, Commodities, Currencies, and Cryptos
General Comment
Inflationary pressures continue with undiminished intensity in almost all economies of the world. After 7% in the US, inflation followed last week in the UK at 5.4%, in Germany at 5.7%, in Canada at 4%, in the eurozone at 5%, all rates unprecedentedly high. The only exception to low inflation was Japan with 0.8% which is not finally that low, compared to the historic rates. The United States has already announced several interest rates hikes during the year and now the probability of the first increase at the Fed meeting on March 16, according to the CME tool FedWatch, has risen to 88.7%.
Europe has lower inflation but is hit by a severe energy crisis as the clouds of war between Russia and Ukraine thicken and no one knows what it might mean if a conflict breaks out. Analysts, however, predict that Russia will not turn off the gas to the West for two main reasons: it will lose its credibility as a supplier and its economy will be hurt, as gas is one of its main exports.
In all of this, the Omicron mutation pandemic is still rampant, and even though there are not many serious illnesses and deaths, the number of absent workers & employees raises economic issues.
US stocks fell significantly due to the expected rise in interest rates, high bond yields, and the recently announced poor results of some companies. European stock indices also corrected, but with a smaller decline. The dollar strengthened, while the euro weakened. Gold and oil continued to rise, but last week’s highlights should be the big drop in Bitcoin and most cryptocurrencies.
This week is dominated by the announcement of the Fed’s minutes next Wednesday (FOMC). Second in line is GDP announcements in the United States and Germany, PMIs in most major economies, durable goods orders in the United States, inflation in Australia, and interest rates in Canada.
SP500
The US SP500 index was strongly bearish last week, closing at 4,385 points and losses approaching 6%. It is worth noting that all days of the week were purely declining, with increasing intensity. The Fed’s tight monetary policy to deal with inflation, expected interest rate hikes and rising bond yields have pushed stock indices. In addition, there is a sense of risk aversion in most investors that do not favor markets. Netflix results were released on Friday, below expectations, and this has raised concerns about the results of many companies announced this week (indicatively: IBM Monday – Microsoft Tuesday – Intel Wednesday, Tesla, Apple Thursday, Mastercard, McDonald’s – Friday Colgate-Palmolive, Caterpillar). Technically, the index broke the critical price zone at 4,490 points, with the next support being at 4,260 points so short positions is what we’ll try this week.
DAX30
The German index DAX40 moved lower last week, closing at 15,460 points, with losses close to 3%. The problems of high inflation are also plaguing the European stock markets, but the European continent is experiencing a stronger sense of risk aversion due to the events in Ukraine. This week will start with the announcements of the PMI indicators and will close with the German GDP for the 4th quarter of 2021. Last week’s correction was the biggest after that at the end of November and the beginning of the Omicron mutation and it took six weeks to bring the market back to where it started. The immediate target of buyers remains the price range at 16,000 units but if the correction expands, below 15,400 the concerns will intensify. We may try short positions this week.
FTSE100
The British FTSE100 index dropped last week, closing at 7,378 points and losing more than 1.60%. It is a fact that the UK stock markets are affected less than the European and much less the US ones. The unemployment rate fell to 4.1% in November in the UK but retail sales announced on Friday fell sharply and the day was particularly down. PMIs are expected this Monday, with some interest as there are doubts as to whether the recent rise in interest rates in the country was the appropriate move concerning the growth and other macroeconomic variables after the pandemic. Below last week’s lows of 7,365, the correction will raise new concerns but the uptrend of the index has not yet been affected. Trusting the corrective scenario more, we may try short positions this week.
Gold
Last week was bullish for gold (2nd in a row), closing at $ 1,835 and performing profits like 1%. Global inflationary pressures are pushing a large proportion of investors to solutions that are hedging for inflation and safe havens amid negative sentiment of risk aversion. It is noteworthy that the rise of gold was accompanied by a rise of the dollar while there is usually a negative correlation since gold is denominated in US dollars. A slight decline in bond yields from Wednesday onwards gave a new impetus to gold. Markets are expecting the Fed to announce its minutes on Wednesday, and it is not ruled out that many buyers will target the seven-month high, close to $ 1,880. Long positions is our selection for the current week.
US Oil
Last week was bullish for oil with next month’s futures closing at $ 84.81, with profits of 0.60%. Oil has been on a strong uptrend since early December when markets realized that the Omicron mutation was not a strong threat to recovery and demand. Fears of a war between Russia and Ukraine and the general crisis in the energy market are factors that have intensified the rally despite OPEC’s increasing production. Given that oil prices are moving at levels that we have not seen since the autumn of 2014, there have been and will be several investors who make a profit by selling but many analysts see prices at $ 90 or even $ 100, very soon so long positions is what we may open this week.
EURUSD (Euro vs US Dollar)
The EURUSD closed lower last week, opening at 1.1412 and closing at 1.1343. The dollar is benefiting from the latest rising in bond yields and the expected hike in interest rates next March. The euro, on the other hand, despite showing signs of recovery at the beginning of the year and although the ECB’s quantitative easing program will end in March, is beginning to weaken as there is still no sign of rising interest rates in the eurozone. A serious aggravating factor for the euro is also the energy crisis and the threatening conflict between Russia and Ukraine, which could make things worse. The bullish reaction of the last few weeks needs a break above 1.15 to be able to continue, while a return below the support of 1.1220, will probably restore the pair to the long-term downtrend that started last May. We may try sell positions this week.
GBPUSD (Great Britain Pound – US Dollar)
The previous week was bearish for the GBPUSD, which opened at 1.3669 and closed at 1.3553. The strong dollar played an important role in this downward movement, but the sterling also had important reasons for weakening. Inflation was announced above market expectations, but retail sales for December were particularly negative, falling by 3.7%. A favorable factor was the slight decrease in unemployment to 4.1%. The sharp drop in retail sales has led many analysts to be skeptical about whether the recent hike in interest rates in the UK was the right thing to do. A mini-political crisis in the country is also exacerbating things with Boris Johnson’s future uncertain. The pair fell for the first time in four weeks and if the conditions that imposed it continue, we can see prices well below 1.35 so sell positions is what we may open this week.
USDJPY (US Dollar – Japanese Yen)
The USDJPY moved lower last week, opening at 114.12 and closing at 113.68. The dollar may have strengthened, but the general sentiment for investors, who avoid the risk due to the pandemics and the war sirens in Ukraine, favors safe havens such as the yen. Also, the increased inflation of December in Japan raises some expectations for tighter monetary policy. A critical area for the continuation of the corrective course is the price range at 112.50, but if the uptrend returns, it is possible that there will be a re-approach of 115. The announcement of the Fed’s practices on Wednesday is crucial. We may try buy positions this week.
EURJPY (Euro – Japanese Yen)
Last week was bearish for the EURJPY which opened at 130.28 and closed at 128.94. The euro is not particularly weak but the Japanese currency has strengthened considerably as a safe haven asset in times of risk aversion, such as the one we are experiencing. Also, the rise in inflation announced in Japan raises some hopes that the Bank of Japan will tighten its monetary policy. The strengthened yen and the negative investment sentiment could push the pair towards the support of 127.40 but if the perception prevails that the ECB will move faster in terms of monetary policy and interest rates, we may see upward reactions so buy positions is what we may try.
EURGBP (Euro – Great Britain Pound)
Last week was bullish for the EURGBP which opened at 0.8345 and closed at 0.8368. The pair reacted upwards after six consecutive weeks of decline, with the euro showing stronger than sterling as there are doubts about the immediate continuation of tight monetary policy and a new rise in interest rates by the Bank of England. The EURGBP was close to multi-year lows and it was logical to have buying reactions. Any continuation of the bullish reaction of the past week should be accompanied by values above 0.84 and we may try buy positions this week.
USDCAD (US Dollar – Canadian Dollar)
Last week was bullish for the USDCAD, which opened at 1.2535 and closed at 1.2575. The strong US currency has been able to overcome the continuing rise in oil prices that has traditionally favored the Canadian dollar. Another favorable factor for Canada’s currency was December inflation (4% versus 3.5% expectations) as it may mean tighter monetary policy but poor labor market and retail sales show that there is still a long way to go that must be covered. If the strong US dollar prevails again, we will probably see prices above 1.26, maybe even at 1.27 so buy positions is our selection this week.
USDCHF (US Dollar – Swiss Franc)
The USDCHF had a slight downtrend last week, as the opening was at 0.9125 and the closing at 0.9118. The US dollar was strong but the choice of many investors in the Swiss currency as a safe haven asset when the investment sentiment is negative caused a slight drop in the pair. The USDCHF has formed a double bottom at the price range of 0.9085 – 0.9090 and needs a clear break out below these levels to continue the downtrend that began in November. Otherwise, and in case of a possible strengthening of the dollar, we will see upward reactions to 0.92 so we may try buy positions this week.
AUDUSD (Australian Dollar – US Dollar)
Last week was bearish for the AUDUSD which opened at 0.7212 and closed at 0.7173. China’s economic results were mixed (increased GDP – declining retail sales) while on Thursday there was a cut in interest rates from 3.8% to 3.7% by the Bank of China (recall that China is the main export destination for its products Australia). Australia’s results were satisfactory, with the unemployment rate falling to 4.2% (from 4.6% last month) justifying expectations for solid growth. The strong US currency, however, is overcoming these developments and has pushed the pair lower. If this continues to exist, then support at 0.7130 is the main obstacle to a possible move towards 0.70 and we may try sell positions this week.
Bitcoin
Last week was significantly bearish for Bitcoin, which closed at $ 36,293 and losses close to 16%. Bitcoin and cryptocurrencies have been suffering since last November when we saw the all-time highs of $ 69,000. Since then, there is a strong downward movement with total losses approaching 50%. Bitcoin’s competitors, such as gold and bond yields, are moving upwards, pushing some investors there. In addition, the perception that Bitcoin and cryptocurrencies are a high-risk option has prevailed and so in times of negative investment sentiment, investing in these asset classes is discouraged. The most important support at $ 28,800 is now starting to be visible, which if broken down, no one knows how uncontrollable the fall can become. We may try short positions this week.
