16/05/2022
IS THE UPCOMING RECESSION INEVITABLE?
General Comment
In the field of geopolitical developments, international tension remains and the war in Ukraine is well underway. The situation seems to be deteriorating since Sweden and Finland have applied for membership in NATO through a fast-track procedure and this has caused great irritation in Russia, which is threatening these two countries with economic and military means. Already the electricity supply from Russia to Finland has been cut off.
In the purely economic sphere, the big problem that goes by the name of inflation continues to preoccupy international markets, central banks, and governments. The United States reported inflation of 8.3% in April, which is well below the 8.5% reported in March but above the 8.1% that markets were forecasting. Jerome Powell, the head of the Fed, said in a radio interview that it is very likely in the next two Fed meetings that there will be 0.50% rate hikes. Investor sentiment is negative and this is once again reflected in the correction that US stock indices have had this week as well.
In Europe, the situation remains more or less unchanged with Christine Lagarde stating how after quantitative easing ends in the third quarter of 2022, there is a possibility of a rate hike. This delayed reaction from the European Central Bank is more in favor of European stock markets, outperforming US equity markets.
The dollar continues its frenetic rise having been at around 20-year highs after tight monetary policy, Fed rate hikes, and negative investor sentiment that favors the US currency. In contrast, currencies such as the euro and sterling are making big losses not only because of their central banks but also because of the greater impact that the war in Ukraine will have on their economies. Gold, dragged down by the great momentum of the dollar and continues to fall while oil has also moved slightly downwards this week. Notable is the big drop in most cryptocurrencies after the storm that prevailed in Luna and Terra, as we will see below. Finally, there was a slight pullback in bond yields, with the US 10-year retreating to 2.93%, having been well above 3% midweek.
The big issue of inflation will continue to occupy the markets this week, with the Eurozone inflation rate announcement. Inflation for April will also be announced by the United Kingdom and Canada, while GDP releases in the Eurozone and retail sales in the United States and China are also considered important.
SP500
The US SP500 index closed last week with a downtrend, at 4,014 points and losses approaching 2.40%. For six consecutive weeks, the index has posted losses after investing sentiment was hit by the war in Ukraine and by strong intervention by the Fed to fight inflation through tight monetary policy and interest rate hikes, developments that are not favorable to equity markets. Only on Friday the index took some breathers and recovered above 4,000 points but early this week, SP500 futures opened strongly negative, based on the negative economic results of China released earlier: in April industrial production fell by 2.9%, and retail sales by 11.1% in China. As a result, the SP500 is again below 4,000 points and as the sentiment deteriorates, it will move closer to 3,855 points which was the last week’s low price. We prefer short positions for one more week.
DAX40
The German DAX40 index moved upwards in the last week, closing at 14,042 points and gaining more than 2.60%. The DAX40 like most European equity indices continues to outperform the US indices at this time because there is a divergence in central bank behavior: the Fed has already raised rates and is stating in every direction that it will do so again in 2022 while there are only some statements from the ECB about the first possible rate hike after July. The threat of a recession due to the war in Ukraine is likely to prevent the ECB from making as tight a monetary policy as it would like to combat high inflation in the Eurozone. 14,320 points which is a three-week high price is the next resistance for the index but if it drops below 14,000 is probably showing signs of fatigue in its upward reaction. We may try short positions this week.
FTSE100
The British FTSE100 index was bullish last week closing at 7,408 points, with gains of just over 0.30%. Almost all of these gains came from Thursday onwards when the economic results for the UK were announced. Markets felt that the Bank of England will be forced to some extent to stop its tight monetary policy and repeated rate hikes as a recession in 2022 have a high probability of occurring. GDP, manufacturing, and industrial production in April were very much below the market expectations. However, the index has been on a downward slope since mid-April that has yet to change and if it is below 7,300 points, the downtrend will likely intensify so short positions is our selection for one more week.
Gold
Last week was a sharply bearish week for gold, closing near $1,810 and losing close to 4%. The economic environment of rising interest rates and high bond yields is putting great pressure on gold prices, with the situation further exacerbated by the image of a strong dollar, which as we have repeatedly reported, is what gold is denominated. The weekly decline was one of the largest we have seen this year and would be even larger if gold was not a safe-haven investment option and a hedge against inflationary income losses by many investors. The next price supports in a possible continuation of the downtrend are at $1,750 and $1,720 and we’re keen to go after them, by opening short positions this week.
US Oil
Last week was slightly bearish for oil with next month’s futures closing at $110.08, performing losses that approached 0.40%. The mixed picture in the oil market is creating these stabilizing trends. On the one hand, there is the fear of a hit to supply due to the situation in Russia and sanctions from Western countries. On the other hand, however, the Chinese lockdown and concerns that continued interest rate hikes and tight monetary policy by many central banks may cause a recession and thus less demand are balancing the situation. As the International Energy Agency (IEA) reports, the US and Middle Eastern countries may be able to balance the output gap from the sanctions on Russia through a corresponding increase in their production. However, concerns may intensify in the immediate future because the summer months require more energy due to air conditioning and increased transport needs. Above $111.30, strong bullish scenarios may resume but as prices move downwards away from $110, the corrective scenario may have a better chance of prevailing. For the current week, we prefer the 2nd scenario and we’ll try short positions.
EURUSD (Euro vs US Dollar)
Last week was a sharply bearish week for the EURUSD which opened at 1.0535 and closed at 1.0406. Most of this decline occurred on Thursday after the US inflation announcement because the markets perceived it as an additional factor that will force the Fed into tight monetary policy and continuous interest rate hikes. Some lackluster commitments from the European Central Bank to raise rates after July was not enough to reverse the sentiment. Nor did sentiment turn positive for the euro after the announcement of inflation in Germany at an excessively high 7.8% for April. The euro found some support on Friday after the release of the industrial production in the eurozone where the result was relatively better than expected and thus EURUSD was able to close above 1.04. The pair has found a barrier to further decline at the key support at 1.0340 – 1.0350 but if the dollar continues to strengthen, there will probably be a downside breakout. The upside reaction will start to gain more substance above 1.0640 and maybe we can try some buy positions this week.
GBPUSD (Great Britain Pound – US Dollar)
Last week was a bearish week for GBPUSD, as it opened at 1.2342 and closed at 1.2259. In addition to the strength of the dollar being a key contributor to the downtrend in the pair over the past four weeks, the pound has been facing a lot of problems mainly due to the poor macroeconomic picture the UK has been presenting lately. The Bank of England has already made four interest rate hikes in recent months and may make more in the near future but the economic results of the country are far from encouraging. Last week, GDP for the first quarter of 2022, industrial production, manufacturing, the trade balance, and some other economic measures were announced, which almost in their entirety all came in below market estimates. It seems that the UK economy is being hit much harder by the war than originally predicted and this is strongly reflected in the exchange rate of sterling against the US dollar. On Friday we saw a mild recovery which for it to continue we need to see prices above 1.24 but if the same pattern continues then the last barrier on the way to 1.20 is the support at 1.2075. We may try sell positions this week.
USDJPY (US Dollar – Japanese Yen)
The USDJPY moved down last week, after nine consecutive bullish weeks, opening at 130.49 and closing at 129.25. The US dollar continued its uptrend but the pair was visibly affected by the de-escalation in bond yields as the US 10-year dropped below 3%. Moreover, based on the recent inflation report in Japan, which was found to be relatively high, the Bank of Japan may take a turn from the very loose monetary policy and negative interest rates it has maintained for a long time. Macroeconomic results in Japan were just a few during the last week but were seen as positive by markets. Also, the Japanese currency is considered a safe-haven investment solution and may take on such characteristics shortly. As long as the pair holds below 130 the correction scenario gains more points but any solid bullish break of this level will probably make last week’s correction a small parenthesis. We may try buy positions this week.
EURJPY (Euro – Japanese Yen)
Last week was a sharply bearish week for the EURJPY which opened at 137.56 and closed at 134.51. In addition to the strengthening of the Japanese currency due to its safe-haven characteristics, bond yields played a big role. This pair is mainly influenced by European bond yields and the German 10-year last week fell to 0.94%, having opened at 1.19%. This is a drop of 25%, fully justifying the strong downward pressure on EURJPY. If this trend continues, the next hurdle is at the 133.50 support while there is no significant resistance until 138.30 so we may open sell positions this week too.
EURGBP (Euro – Great Britain Pound)
Last week was bearish for the EURGBP which opened at 0.8532 and closed at 0.8488. The paradox is that the pair had an uptrend until Thursday when a series of negative economic results for the UK were announced but the pound against the euro strengthened quite a bit. It seems to be the markets’ belief that the European economy will be affected far more than any other because of the war in Ukraine. EURGBP closed very close to the week’s lows, very close to the important support at 0.8465. On Tuesday, the UK unemployment rate is released and on Wednesday inflation in the Eurozone and the UK is released a few hours apart, so the trend and volatility will be mainly determined on these days. The milestone price at 0.85 remains important. We may try buy positions this week.
USDCAD (US Dollar – Canadian Dollar)
Last week was a stabilizing week for the USDCAD, which opened and closed in the price area just above 1.29. There was a clear uptrend until Thursday but strong downward pressure was applied from early Friday. These pressures were mainly due to a combination of the rising oil price which usually favors the Canadian currency and the pressure on the US currency due to the upward reaction of US stock indices. Canada’s economic calendar was empty last week and so there were no macroeconomic factors to influence the pair but this week Canada’s inflation rate is announced and depending on the rate, the country’s dollar may gain a certain trend. An obvious short-term target for USDCAD buyers remains the 1.30 milestone price and buy positions is our selection for the current week.
USDCHF (US Dollar – Swiss Franc)
The USDCHF was strongly bullish last week, opening at 0.9863 and closing at 1.0021. After six consecutive bullish weeks, the USDCHF managed to get back above the 1:1 parity after December 2019. The very strong US dollar with the tight monetary policy being developed and the continuous interest rate hikes does not leave much room for other developments as Switzerland, due to relatively low inflation, sticks to negative interest rates of -0.75%. Another aggravating factor for the Swiss franc is certainly the strong pressure on gold prices, as gold is strongly correlated with the Swiss currency. The trend is bullish and it makes sense that the next target for buyers is near the resistance of 1.0240. Following the trend, we’re keen to try buy positions for one more week.
AUDUSD (Australian Dollar – US Dollar)
Last week was bearish for the AUDUSD, as it opened at 0.7065 and closed at 0.6937. At the beginning of the year, the pair was again below 0.70 but this time the fall is considered stronger because the week’s low was at 0.6828 which is the lowest price in the last two years. The AUDUSD could not recover even because of the recent interest rate hike by the Reserve Bank of Australia as the strength of the US currency and the Fed’s determination to fight inflation leaves no room for recovery. Inflation in China was announced for April at 2.1%, a figure that does not seem to change the Chinese plans for their monetary policy. Australia’s monetary policy minutes are released on Tuesday and the unemployment rate is released on Thursday. If there is a reaction above 0.70 there are hopes of further recovery, otherwise, the downtrend is expected to continue so we may try sell positions for one more week.
Bitcoin
Last week was bearish for Bitcoin, which closed at $31,295 with losses of more than 8%. The loss through the week was much larger, with prices for Bitcoin even falling close to $25,000 but at these oversold levels, some investors provided support and so the price recovered above $30,000. Bitcoin, most cryptocurrencies, and especially stablecoins suffered last week one of the biggest blows in their history so far. LUNA and its associated stablecoin Terra, suffered real precipitation. LUNA almost went to zero while Terra, which as a stablecoin should maintain a stable exchange rate of about 1:1 with the US dollar, went as low as 13 cents. The upheaval in the crypto fans and investors was huge. Several analysts, however, argue that cryptocurrencies and the decentralized economy (DeFi) in general is a development that will exist in the future, even if there are such setbacks. Matt Levine of Bloomberg, famously said that “even if most cryptocurrencies reset their price to zero in the next five years, there will be continued integration into the real economy, more companies will be large and important and will partner with other companies.” Technically speaking, there is an opportunity for further recovery above $31,500 but below $30,000 and especially below $28,800, the sentiment is negative. Being optimistic at this time, we prefer long positions.
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.
