25/04/2022

WAR IN UKRAINE, INFLATION, AND LOCKDOWN IN CHINA: A TRIPTYCH OF MAJOR CONCERNS IN THE FINANCIAL MARKETS

General Comment

Last week passed with great concerns in the global financial markets and this was strongly reflected in the prices of most assets. The war in Ukraine continues without a visible future for a diplomatic solution. This situation intensifies concerns about the long-term consequences of the war in most of the world’s economies, especially in Europe. The new lockdown in China, in addition to fears of a new mutation being kept secret by Chinese authorities, also raises concerns about supply chain disruption as China is a major producer in the global economy. Finally, strong global inflationary pressures are raising further concerns as many analysts now argue that central bank measures may be overdue, inadequate, and inefficient.

In the United States, it is widely rumored that monetary policy will become very tight and that interest rates will rise several times in the current year. According to the CME FedWatch tool, the probability of raising interest rates by 0.50% at the Fed meeting on May 4, has now reached 100%. In Europe, the situation is very different. The European Central Bank, in the previous week’s meeting, left interest rates unchanged, with some promises of a possible interest rate hike by the end of the year. Inflation in the Eurozone in March was announced at 7.4%, slightly below 7.5% in February, and thus strengthened the scenarios that say that the European Central Bank will not move immediately and drastically.

Most stock markets fell sharply in this climate of concern, especially the US, resulting in a downtrend as it is the third consecutive week of correction. Gold and oil fell sharply while Bitcoin and other cryptocurrencies, despite rising at the beginning of the week, also performed corrections. Finally, it is worth emphasizing the continuing rally in bond markets, with the US 10-year opening at 2.84% and closing at 2.91%. Midweek prices had reached 3% which was the highest price since December 2018.

The week that has just begun is calmer regarding the economic announcements. GDP announcements for Germany, the Eurozone, and the United States, inflation in Germany and Australia, the announcement of interest rates in Japan, and the announcement of durable goods orders in the US stand out.

SP500

The US SP500 closed last week with sharply declining trends, at 4,251 points and losses of more than 3%. It was the third bearish week in a row for the index and so many analysts believe that a downward channel is beginning to form. The aggressive monetary policy of many central banks and especially the Fed, combined with the forthcoming interest rate hikes have created a negative sentiment for stock markets. The only lifeline is the results that many SP500 companies have announced so far. Most companies outperform analysts’ expectations and therefore the situation would be much worse without these positive results. This week we also expect the results of many companies, mainly technology, such as Microsoft and Apple. Given the problems and concerns for international markets due to the war in Ukraine and the lockdown in China, a continuing downtrend could bring the index close to the very important price range of 4,100 units, which is a low price of about a year so short positions is what we may open this week.

DAX30

The German index DAX40 moved lower last week, closing at 14,080 points, with losses of 0.20%. Germany did not have many economic announcements except for the PMIs, which had a mixed picture and therefore the climate was shaped by recent developments in the Ukraine war and the perception of investors about the behavior and policies of central banks. The war in Ukraine is likely to have long-term consequences, especially in economies such as Germany, which is heavily dependent on Russia for energy. However, the European Central Bank, although giving some signs of tighter monetary policy and possibly raising interest rates by the end of the year, is not as aggressive as other central banks such as the UK and US. This gives a window to some breath in the European stock markets and thus the fall of the indices in Europe is smaller. Early this week, however, the DAX40 futures are moving negatively, below 14,000 points, giving a tone of pessimism for the course of the index for this week as well so we may try short positions this week as well.

FTSE100

The British FTSE100 index was bearish last week, closing at 7.464 points and losses of over 1.30%. The negative climate of the war in Ukraine has also affected the British stock market, while the perception of the markets for the long-term tight monetary policy by the Bank of England and the forthcoming increase in interest rates, does not favor the index. The UK’s negative economic performance last week also played a key role, mainly in terms of retail sales and PMIs. The bad outlook continues this week with the FTSE100 futures already below 7,400 points and so the chances of a further drop are increased. We may try short positions for one more week.

Gold

Last week was corrective for gold, closing at $ 1,932 and losses close to 2.30%. The strong dollar was a determining factor in the downtrend of gold as we must not forget that gold is denominated in dollars and therefore has a negative correlation. The messages from the central banks, mainly from the Fed, are that there will be aggressively tight monetary policy and interest rate hikes to tackle inflation, which is already showing some signs of very slight de-escalation based on recent US and Eurozone announcements. This image of tackling inflation pushes some investors away from gold, which is also the key asset to offsetting inflationary risks. In addition, Bitcoin and cryptocurrencies are beginning to acquire similar characteristics and so gold has key competitors. A bearish breakout of $ 1,892 is crucial for the further course of the price because this will mean a break of the sideways channel that has been formed for about a month and a possible entry into a falling channel. We may try short positions this week.

US Oil

Last week had a strong correction for the oil with the futures of the next month closing at $ 101.68, performing losses that exceeded 4%. There are three main reasons for this downtrend in oil. The first has to do with the strong dollar since oil like most commodities is denominated in dollars. The second reason is the major downward growth revisions of major international organizations because this will have a direct impact on oil demand. Finally, the lockdown in China is creating a climate of concern because the supply chain has already been disrupted with thousands of inactive ships waiting in ports. Counterweight to all the above is the war in Ukraine and the energy crisis, especially on the European continent. The current week has started with strong pressures on oil prices, which have been found below $ 100. This situation puts the sellers in the target range of $ 92.90 which is the main next support but any consolidated upside reaction above $ 100 can restore the upside scenarios. We may try short positions this week.

EURUSD (Euro vs US Dollar)
The EURUSD closed slightly lower last week, opening at 1.0803 and closing at 1.0795. The pair could not hold the upward reaction until the middle of the week when it reached the price range of 1.0935 and fell due to the strength of the dollar. Information from the United States that after the almost certain increase in interest rates at the Fed meeting in May, they plan new increases in interest rates, has helped the dollar a lot. The negative climate that also prevails in the markets pushes investors to more confident solutions than the high-risk option that is the euro. The slight downturn of inflation in the Eurozone has made the euro even weaker because the need for action by the ECB is no longer so urgent and necessary. Support for EURUSD has formed near 1.0750, with the next one being at 1.0635 which is a low price of about five years. For any upward reaction to be continuous we must see values ​​above 1.10 but we’ll try sell positions for one more week.

GBPUSD (Great Britain Pound – US Dollar)

The previous week was sharply bearish for the GBPUSD, which opened at 1.3046 and closed at 1.2835. The strong dollar was the catalyst for this big drop, but Friday’s macroeconomic announcements for the United Kingdom also played a key role. More specifically, retail sales fell in March to strongly negative ground, and the PMIs were announced below market expectations. The pound was further weakened by the statements of Andrew Bailey who stressed that the Bank of England will pursue a tighter monetary policy, which can be changed if conditions change. The pair has already reached a low price of 18 months and if the same conditions continue, the next support at 1.2675 may be threatened. We may try sell positions this week.

USDJPY (US Dollar – Japanese Yen)

The uptrend rally for the USDJPY continued, for the seventh week in a row, with an opening price of 126.39 and a closing price of 128.55. All factors point to a rise in the pair: the dollar appears strong; bond yields have reached particularly high prices and the yen continues to weaken. The head of the Bank of Japan, Haruhiko Kuroda, said in a statement last week that even if inflation reached or exceeded 2%, there would be no concern and monetary policy would not change. The yen weakened even more after inflation, which was announced on Friday at 1.2%, was below market expectations. The USDJPY is already at a high price of 20 years and now many analysts are still talking about prices close to 130 so buy positions is our selection for the current week.

EURJPY (Euro – Japanese Yen)
Last week was significantly bullish for the EURJPY, which opened at 136.55 and closed at 138.80. The euro is not particularly strong as interest rates in the Eurozone remain unchanged and lower-than-expected inflation does not exacerbate the situation, but the weakness of the Japanese currency has brought the pair to a price range that we had not seen since the summer of 2015. If there is no strong change in data, the pair can reach up to 140 or even threaten the very strong resistance at 141.05. The announcement of interest rates in Japan next Thursday is not expected to hide any surprises so we may try buy positions for one more week.

EURGBP (Euro – Great Britain Pound)

Last week was bullish for the EURGBP which opened at 0.8273 and closed at 0.8409. The euro and sterling are both weak during this period, but the very poor macroeconomic results announced by the United Kingdom, combined with statements from the Bank of England where the tight monetary policy will be challenged to some extent, have done much weaker the British currency. Of course, the long-term downtrend has not changed yet and for there to be any hope of doing so we must see a bullish break out above 0.8515. The downtrend can return, even stronger below 0.83 but buy positions is our selection for this week.

USDCAD (US Dollar – Canadian Dollar)

Last week was bullish for the USDCAD (4th in a row), which opened at 1.2609 and closed at 1.2709. It becomes obvious that oil prices dominate the pair. We need to remind that oil is Canada’s main export commodity and the fall in its price last week, weakened the Canadian currency. All other factors were in Canada’s favor: Bank of Canada chief Tiff Macklem said a 50-basis point increase in interest rates was not ruled out after the recent 0.50% increase to 1% last week. Also, all the macroeconomic data reported for Canada was positive. Industrial production, retail sales, and foreign investment were announced above market expectations. Even inflation was announced in March at 5.5%, well above 4.8% in February but that does not seem to have benefited the Canadian currency. Under these conditions, the buyers are targeting the next resistance which is at 1.29 so buy positions is our selection too for the current week.

USDCHF (US Dollar – Swiss Franc)
The USDCHF had a strong uptrend last week, as the opening price was at 0.9418 and the closing price was at 0.9568. The pair managed to break out the very significant resistance at 0.9475 and was moved above 0.95. The US dollar dominates the pair, and its strengthening causes a corresponding rise. The relatively empty Swiss economic calendar reinforces this situation. We must not forget, however, that the Swiss currency is traditionally the choice of investors in times of crisis as it is strongly correlated with gold prices. The trend is bullish but due to the above analysis, some corrections cannot be ruled out, but we may try buy positions for one more week.

AUDUSD (Australian Dollar – US Dollar)

Last week was strongly bearish for the AUDUSD which opened at 0.7390 and closed at 0.7243. The US dollar strengthened on the prospect of a series of interest rate hikes by the Fed, but the Australian dollar also appears to have entered a period of weakness. Australia’s macroeconomic results were mixed, and the announcement of the Bank of Australia’s minutes shows a future rise in interest rates but on the one hand the fall in prices of some commodities such as gold and copper, combined with the negative sentiment that prevents investors from choosing high-risk investment solutions such as the Australian dollar, they converge on the weakness of the currency. In China, macroeconomic outcomes have been mixed but the recent lockdown in Shanghai has created nervousness in Australian markets as the two economies are strongly linked. Under these conditions, the decline could continue and intensify so we may try sell positions this week.

Bitcoin

Last week was slightly bearish for Bitcoin, which closed at $ 39,441 with marginal losses. Bitcoin was unable to consolidate its upward reaction during the week, which had brought it close to $ 43,000 because the appearance of the sellers that followed brought it back below $ 40,000. Many analysts believe that a correlation has developed between Bitcoin and many cryptocurrencies with stock markets and especially with technology stocks. The recent correction in the stock markets could therefore explain the correction in cryptocurrencies. Also, the perception of markets in raising interest rates by some central banks makes the fiat currency more attractive. However, the optimism in the circles of cryptocurrency investors has not been lost and any upward reaction above $ 40,000 can lead to a bigger rise. The corrections may intensify below $ 38,500 and as the price approaches $ 33,000. We may try long positions this week too.

IMPORTANT DISCLAIMER

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.

a-Quant is not responsible for your actions and recommends you contact a licensed financial advisor before acting on any information contained in this general information report.