23/05/2022
RECESSION OR INFLATION? MAYBE BOTH
General Comment
Investment sentiment in the major markets continues to be particularly negative as most factors do not support anything better. The war in Ukraine seems to have a long way to go and its consequences are expected to hit most economies and mostly the European ones. The issue of inflation continues to burn, even if most major central banks are already taking and will take several actions in the near future to curb it. There is also a great chance of a recession as tighter monetary policy and interest rate increases constrain economic activities and exert recessionary pressures. All the recent reports for the United States, Europe, and the United Kingdom show that the recession has a high probability and this is already reflected in the large correction of most stock indices that continued in the past week.
The US dollar also had corrective trends last week, losing a small part of its profile as a safe-haven investment, which it had in all previous months. The weakness of the dollar may have occurred through a very large rise in the previous period, leading it to overbought levels and some statements by officials from the European Central Bank, who emphasize that the need for an increase in interest rates is now very large. These statements helped the euro partially recover and most of the time, the euro acts as a counterweight to the dollar.
Regarding the macroeconomic figures announced, the most important one was the announcement of inflation in the eurozone at 7.4% in April, the announcement of inflation in the UK for the same month at 9%, and retail sales in the US, which are a barometer of the state of the US economy, which had a positive sign.
Most commodities, including gold and oil, rose while a slight downturn in bond yields was seen, halting the upward rally, with the U.S. 10-year closing the week at 2.79%, falling from the 2.95% at which it had opened. Bitcoin and most cryptocurrencies continued their downward spiral, showing that they still cannot recover after the recent shock that hit stable coins and Luna.
The week that has just started, is relatively calm in terms of economic results announcements. The Eurogroup meeting, the US and German GDP, and the announcement of the Fed’s minutes stand out. War, central banks, and inflation are again expected to steal the show.
SP500
The US SP500 index closed last week with downward trends, at 3,901 points and losses that exceeded 2.80%. For seven consecutive weeks, the index has been under pressure, with investment sentiment in negative territory and investors showing a risk-aversion behavior. Fears of a new recession in the economy even before it recovers from the adventure of the pandemic, high inflation, assurances from the Fed for new interest rate hikes this year, and the war in Ukraine, have formed a heavily negative picture. Many funds are heading to safer investment destinations, such as bonds that now have fairly competitive yields. In the week that has just begun, PMI indicators and the announcement of the Fed’s minutes on Wednesday will be among the catalysts in shaping the weekly trend of the index, along of course with wartime developments and any statements from central bankers. If the SP500 falls below 3,800 points, it will also be its lowest price since March 2021 and the losses may widen. An upward split of 4,000 points, however, will feed the market with positive psychology. We may try long positions this week.
DAX40
The German DAX40 index moved slightly lower in the previous week, closing at 14,018 points, with small losses of 0.20%. On Wednesday, with the announcement of inflation in the Eurozone, the index came under intense pressure, as a result of which it was close to 13,670 points, but on Thursday and Friday, the picture changed and so the close price of the week was above the milestone of 14,000 points. The ECB’s different view of interest rates and monetary policy, relative to other central banks (such as the US and England), make European equities more attractive and so their losses are not in the order of US equities. Germany is facing a severe energy problem and very high inflation and so the climate is not positive and we may see a strong reset below 14,000 units again. Above 14,320, the situation will look quite improved and by trusting more with the uptrend scenario, we may try long positions this week.
FTSE100
The British FTSE100 index declined last week, closing at 7,377 points, with losses of more than 0.40%. The trend of most stock indexes worldwide has been bearish for several weeks, and the FTSE100 is no exception, even if it does not show such strong losses (at the moment), compared to its US counterparts. The UK maintains a good economic picture, with results in the unemployment rate and retail sales judged positive. Of course, inflation is very high (9% announced for April) and this is a big thorn for the country’s economy and for the Bank of England, which is under pressure to raise interest rates further, even if it causes a recession. An upward reaction above 7,520 points will increase the chances of recovery but below 7,300 points, the psychology is quite negative. Long positions is our selection for the current week.
Gold
Gold was bullish last week, closing at $1,845 and gaining close to 2%. This rise in gold also showed the dependence / negative correlation it has with the US dollar, because it appeared when the dollar weakened, given the pressures that gold had while the dollar was heavily rising. Gold had lost about 8.4% of its value within four weeks, a drop that is quite large considering its low volatility, and thus found itself at oversold levels. The correction in bond yields is something that also helped the recovery since both of these products (gold and bonds) are largely competitive as safe-haven assets. The upward reaction may have continuity since there is no apparent critical resistance until $1,920, but if there is a correction towards $1,800, we will probably have returned to the strong downtrend. We prefer long positions this week.
US Oil
Last week was bullish for oil with next month’s futures closing at $110.26, performing gains approaching 1.70%. The opposing forces continue to exist. On the one hand, a possible European Union embargo on Russian oil may lead to a shortage of oil to raise prices, but on the other hand, fears of a recession, reinforced by tight monetary policy and interest rate hikes by central banks, may cause demand to fall and prices to be depressed. There is therefore stabilization of around $110, with investors looking for new developments to decide on. Technically, two-month highs at $113.20 are a significant resistance that if broken down, may give room for a new price rise while the corresponding downward support is close to $103.20. Considering the bullish scenario more possible, we may try long positions this week.
EURUSD (Euro vs US Dollar)
Bullish was the last week for EURUSD which opened at 1.0404 and closed at 1.0548. It was the first serious upward reaction for the pair after six weeks, thus managing to establish a relative safety distance from the strong support of 1.0350, at which it was found last week and which is the lowest price in about 5.5 years. The US currency showed signs of fatigue and weakness in contrast to the euro, which strengthened because high inflation in the eurozone will probably force the ECB to take more drastic measures to address it. This fact is also confirmed by European officials with relevant statements. It is noteworthy that the German producer price index for April increased by 33.5% compared to the previous year, which is the largest annual increase since 1949. Tight monetary policy and rising interest rates may be a one-way street now. The continuation of the upward reaction goes through the breakdown of the resistance at 1.0640 but in case we see prices below 1.0460 again, the downward trend will probably have returned. We’re keen to try buy positions this week.
GBPUSD (Great Britain Pound – US Dollar)
Bullish was the last week for GBPUSD, which opened at 1.2237 and closed at 1.2490. The US currency fell, giving the pair an upward breath, but the sterling also had some reasons this week to strengthen. According to journalists and British officials, the Bank of England is expected to tighten monetary policy further, even if this entails recessionary pressures on the country’s economy. It seems that the problem of inflation and the high cost of living concerns most and above all the counterparties and executives of the central bank and the government. The UK has had a series of positive economic announcements this week: the unemployment rate in April fell to 3.7% and retail sales rose 1.4% over the same month. Inflation at 9% is likely to force the Bank of England to tighten monetary policy further. If the rate manages to top 1.2640, it may have higher hopes for further recovery. On the contrary, below 1.24 and even more below 1.2330, the probability of values close to 1.20, appears again enhanced. We may try buy positions this week.
USDJPY (US Dollar – Japanese Yen)
USDJPY moved lower last week, for the second week in a row, with an opening at 129.22 and a closing at 127.92. The factors that had led the pair to a high price of about 20 years, began to present an opposite picture. The U.S. dollar fell while we see a de-escalation in bond yields. On the other hand, Japan combines two factors at this time that strengthen its currency. On the one hand, inflation announcements (Producer Price Index and Consumer Price Index were both above market expectations), and on the other hand, the country’s good macroeconomic picture (GDP and industrial production) are factors that boost Japan’s currency. Technically speaking, the downtrend could accelerate below the support of 127 while as parity approaches 130 again, the uptrend scenario is back on track. We prefer sell positions this week.
EURJPY (Euro – Japanese Yen)
Last week was bullish for EURJPY which opened at 134.44 and closed at 135.05. Both the euro and the yen were strengthened, but it appears that markets ‘ perception that the European Central Bank will eventually be forced to tighten monetary policy and raise interest rates gave the euro a few extra points. Inflation in the eurozone was announced at 7.4% while in Japan at just 2.5% and the European Central Bank seems closer to taking action than the Bank of Japan. The price range of 136.70 which is last week’s high price is the first direct obstacle to EURJPY’s further upward reaction. Downward, the most critical support for this era stands at 132.65. We may try buy positions for one more week.
EURGBP (Euro – Great Britain Pound)
Last week was bearish for EURGBP which opened at 0.8490 and closed at 0.8450. Sterling’s performance was impressive and was able to outpace the relative strength of last week’s euro. The European Central Bank and the Bank of England are expected to take action shortly to fight the high inflationary pressures, but the UK economy has had a better macroeconomic picture lately. The equilibrium situation between the two currencies is not excluded to restore parity towards the 0.85 area so buy positions is our selection for the current week.
USDCAD (US Dollar – Canadian Dollar)
Last week was bearish for USDCAD, which opened at 1.2916 and closed at 1.2836. Inflation in Canada was announced for April at 6.8%, which is the highest value for at least three decades. Many analysts believe that the Bank of Canada may be forced to raise interest rates by 0.75% in the near future instead of the 0.50% expected. This approach helped Canada’s currency recover after 7 weeks of a strong downtrend. Rising oil prices, which are almost always positively correlated with the Canadian dollar, were also a contributing factor. If the US currency manages to recover, the pair will again be in the price range of 1.30 but if the picture of the previous week continues, an acceleration of the fall below 1.2775 is expected. We may try sell positions this week.
USDCHF (US Dollar – Swiss Franc)
The USDCHF had a sharply downward course last week as the opening was at 1.0010 and the closing at 0.9746. The USDCHF lost the 1:1 parity it had won with six consecutive and intense weeks of rising. The weakness of the dollar and the character of the Swiss franc as a safe-haven asset for investment drove the pair lower. Gold prices have strengthened, so Switzerland’s currency, which is strongly related to gold, has found another support. But there was also a statement from the head of the Swiss bank Thomas Jordan that restrained the further fall. Thomas Jordan said Switzerland has an autonomous monetary policy focused on stability and that the central bank remains ready to intervene if necessary. If the price of the USDCHF falls below 0.97, this correction will probably not be transient but if there is an approach of 0.9870, the upward trend may return. We may try sell positions this week.
AUDUSD (Australian Dollar – US Dollar)
Last week was stabilizing for AUDUSD, which opened and closed in the price range of 0.7040-0.7045. Markets ‘ belief that the Bank of Australia will raise interest rates in June has particularly helped the country’s dollar. In combination with the temporary weakness shown by the US currency last week, the pair was able to recover upward from the strong downtrend that has begun at the beginning of April. The situation in China with the lockdown remains stable while at the recent meeting of the people’s Bank of China, interest rates remained unchanged at 3.7%. The unemployment rate in Australia was stable in April with a value of 3.9%. The US dollar and its course will judge a lot about the trend of the pair in the next period and if the price returns below 0.70, it is not excluded that the downward trend will return more sharply. We may try sell positions this week.
Bitcoin
Last week, Bitcoin closed at $30,265 with losses of around 3.30%. Bitcoin had a stabilizing trend this week, trying to recover from the recent shock of Luna and Terra that shook the cryptocurrency markets for good and in particular stable coins. Christine Lagarde said on Saturday that cryptocurrencies are based on nothing “there are no underlying assets that will act as a security anchor” and that there should be regulatory interventions to discourage people from speculating with their life savings. A precursor to the market, the put/call ratio, which measures the put options market ratio relative to the call options market, was at 0.72 at the end of last week, indicating that investors ‘ intentions are in the downward direction. Supports are at $28,800 and $25,400. We prefer short positions this week.
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.
