30/05/2022

THE PSYCHOLOGY OF THE MARKETS HAS IMPROVED BUT THE PROBLEMS REMAIN

General Comment

A positive sign for most markets has been the week that has passed since, in both Europe and America, stock indices performed remarkable gains. It is worth mentioning that this happened without any substantial improvement or positive news either on the side of the war in Ukraine or on the side of the view on the course of the largest economies. Most analysts continue to predict that many economies will go into recession in 2022 and combined with high inflationary pressures may create an explosive image.

On central bank policy, the Fed has a very high chance of raising interest rates by 0.50% at each of its next two meetings. This is more or less expected by the markets and so we would say that it has already been incorporated into the prices of stock indices, currencies, commodities, and many other financial assets. The European Central Bank, through statements by leading officials, continues to spread that there will be an interest rate increase in the third quarter of 2022, but Europe does not have the comfort of pursuing a tough and tight monetary policy as the United States has, since its economy is vulnerable from the war in Ukraine and the energy crisis, so the specter of recession seems threatening.

The macroeconomic results announced in the United States were far from encouraging since both GDP and durable goods orders were below expectations. The personal consumption expenditure price index had a slight decline and this was seen by the markets as a precursor to a slight decrease in inflation. PMI indicators for all major economies were announced below market expectations, indicating that the next period will probably be quite difficult.

The dollar continued to be depressed in contrast to the euro and sterling which continued upward based on the improved sentiment that has formed. Gold and oil also continued upward while bond yields de-escalated for the third consecutive week with the U.S. 10-year closing at 2.74%, having opened the week at 2.81%. Finally, for the second consecutive week Bitcoin and most cryptocurrencies continued to move in a sideways trend, looking for a fuel that will give direction.

The week that has just begun is full of important economic announcements. In the foreground is the announcement of inflation in the Eurozone next Tuesday and the announcement of the Non-Farm Payrolls in the United States on Friday (NFPs). In the background are the announcements of PMI indicators in the world’s largest economies, retail sales, unemployment rate, and inflation in Germany due to the major energy crisis and the OPEC meeting on Thursday.

SP500

The US SP500 index had strong upward trends last week, closing at 4,167 points and profits that exceeded 6.80%. It was a strong bullish reaction after seven downward weeks that had led the index to an overall loss of about 14%. Several factors underpinned last week’s rise: investment sentiment improving, the avoidance of surprise from statements coming from the Fed about greater than 0.50% rate hikes, and falling bond yields are some of them. An additional factor is the stabilization of the situation in China and the optimism that the restrictive measures will be lifted sooner. Also optimistic is the element of the return of the index above 4,000 points and now most investors are waiting for the announcement of the US labor market, which will show what state the US economy is in. If the wind of optimism continues, the SP500 could threaten the next resistance at 4,300 points while the gloom will return in the event of a return below 4,000 points. We may try long positions this week.

DAX40

The German DAX40 index moved upward in the previous week, closing at 14,485 points, with gains like 3.30%. The positive investment sentiment that dominated, also favorably affected European equity markets, which have been performing better in recent times than their American stock indices. The main reason is the divergence in the actions of the central banks: the Fed has already applied increases in interest rates and will probably make two more by July, while the ECB has simply announced an increase or increases for the 3rd quarter of 2022. On top of that, Germany’s economic announcements were in positive territory as the business climate index improved, and the country’s GDP strengthened by 3.8% in Q1 2022 while it was one of the few major economies that had PMI indicators above market expectations. The main target of buyers is 15,000 points while below 14,250 points, the scenario of 14,000 points is strengthened. Long positions is our selection for the current week.

FTSE100

The British FTSE100 index was bullish last week, closing at 7,571 points, gaining more than 2.60%. The index followed the course of most major indices but with clearly smaller profits because it did not have such a sharp decline in the recent past (especially compared to the US indices) but also because the signals from the UK are not so auspicious. In addition to the week’s negative economic results (Government borrowing and PMI indicators) and recession forecasts, there were statements by Andrew Bailey (Bank of England) about tight monetary policy and new interest rate hikes that left no room for further gains in the index. Nevertheless, there has been an approach to the price range of 7,650 points and any bullish break out will bring the FTSE100 to a high of about 4 years. Of course, the corrective scenario also has chances, especially with a solid drop in the index below 7,520 points but we prefer long positions for one more week.

Gold

Gold was bullish last week, closing at $1,850 with profits close to 0.30%. Gold for the second week in a row showed signs of an upward reaction after the strong fall that had preceded and had led to losses of about 8.50% which are very large if one considers the low volatility it has in general. The weakening of the US dollar is a decisive factor that contributed to the recovery, while the improvement of the investment sentiment has also a strong role, as it has pushed many investors away from safe investment options, such as gold. This week’s announcements (see above General Comment) will be of high importance, especially inflation in the Eurozone and the American labor market, and above $1,880 it is possible to see a new wave of buyers. If fears and concerns return more sharply to markets, gold may move back into the $1,800 price range. We may try long positions this week too.

US Oil

Last week was bullish for oil with next month’s futures closing at $114.99, performing profits that approached 4.30%. The main reason for the rise is that the European Union is even closer to imposing an embargo on Russian oil (a solution to Hungary’s objections is the last issue) and this will bring a reduction in available oil. In combination with the increased demand due to the summer seasonality, a condition of rising oil prices is created. The current week has started continuing the upward trend given the increase in demand observed in the US from the high consumption of gasoline in the summer months, but the large rise in prices that has taken place recently, the significant resistance to $116.60 (high price of about 2.5 months) and the absorption by the markets of the long-expected embargo on Russian oil, may lead to a correction in the price so we may try short positions this week.

EURUSD (Euro vs US Dollar)
Bullish was the last week for EURUSD which opened at 1.0560 and closed at 1.0732. For the second consecutive week, the dollar is weakening, while the euro seems to find support based on market expectations for an increase in interest rates by the ECB, in the third quarter of this year. Euro area PMI indicators were well below market expectations, but this hardly affected the euro’s course. There is a significant divergence between the monetary and interest rate policies of the European Central Bank and the Fed, but this has already led to a large increase in the dollar, which now seems to be weakening. Of course, it does not mean that the problems in Europe do not remain, especially the problems that have to do with the energy crisis and high inflation. The announcement of inflation in the Eurozone is of great importance because any increased rates may lead the ECB to faster and more active decisions. The announcement of the employment and the unemployment rate in the United States is also important because it will show the state of the American economy. Above 1.08, the upward reaction is expected to strengthen while the pair will have a better chance of returning to its long-term downward trend, below 1.0640 support. We may try buy positions this week.

GBPUSD (Great Britain Pound – US Dollar)

Bullish was the last week for GBPUSD, which opened at 1.2472 and closed at 1.2627. Economic announcements from the UK last week were not positive with government borrowing at very high levels and PMI indicators falling significantly compared to what markets expected. In addition to the dollar’s weakness last week, the sterling was supported by Andrew Bailey, Head of the Bank of England, who said that the bank is ready to make new rate hikes to fight high inflation. Sterling was also boosted by Boris Johnson’s statements that the UK could avoid a recession even with an inflation rate approaching double figures. The pair tried to break the significant resistance upward at 1.2640 but for the moment it has not succeeded. Any approach or even fall below the levels of 1.25, will bring back concerns about the continuation of the rise. We may try buy positions for one more week.

USDJPY (US Dollar – Japanese Yen)

USDJPY moved lower last week, for the third week in a row, with an opening price at 127.86 and a closing price at 127.11. The weakness of the US dollar over the past two weeks and the de-escalation of bond yields have created a mini-downtrend for the pair and have moved it well away from the milestone price of 130. From Japan, what stood out last week, was the announcement of inflation for May at 2.4%, a rate below the previous month’s 2.5% and more below the 2.7% that markets expected. This rate of inflation should normally weaken the Japanese currency because it is a signal that the Bank of Japan’s loose monetary policy does not bring high inflationary pressures. Haruhiko Kuroda’s statements that inflation could stay at 2% levels throughout 2022 are also in the direction of maintaining loose monetary policy and negative interest rates. The fall in the pair could continue with greater intensity below 126.35 while it is almost a given that any approach to the price range of 130, restores the feeling of uptrend in the market so we may try buy positions this week.

EURJPY (Euro – Japanese Yen)
Last week was bullish for EURJPY which opened at 135.05 and closed at 136.42. The euro and the Japanese currency have been strong, but the shared currency appears to be gaining more points in recent times due to a few statements that have been made about raising interest rates in the coming months by the European Central Bank. The strength of the yen was relatively halted due to lower inflation announced by Japan, thus allowing the country’s central bank to continue its loose monetary policy. If the rise continues above 138.30 then buyers will cheer up and look again for the target at 140 so buy positions is our selection for the current week.

EURGBP (Euro – Great Britain Pound)

Last week was bullish for EURGBP which opened at 0.8457 and closed at 0.8495. The great strength of the euro was able to override the relative strength of sterling and thus the pair returned to the price range of 0.85, after two falling weeks. This price range appears to be a neutral point for the two currencies, being the average price of the pair for several months. A bullish breakout above 0.8620 is needed to start forming an uptrend while below 0.83 the scenario of the downward movement is strengthened. We may try buy positions this week too.

USDCAD (US Dollar – Canadian Dollar)

Last week was bearish for USDCAD, as it opened at 1.2837 and closed at 1.2718. It is obvious that the weakness of the US dollar also affected this pair, and combined with the increase in oil prices that almost always favor the Canadian currency, created those downward pressures. Retail sales in Canada were announced at 0% over the previous month and were clearly below what markets expected. Interest rates in Canada are announced next Wednesday and analysts are talking about a 0.5% increase which normally may strengthen the CAD. If the same situation continues, it is not ruled out that we will see the pair heading towards the area of 1.25. However, in the event of a strengthening of the US dollar, an upward break out above 1.2880 will bring the 1.30 scenario back to the fore. We may try sell positions this week.

USDCHF (US Dollar – Swiss Franc)
The USDCHF had a sharply downward course last week as the opening price was at 0.9742 and the closing price at 0.9573. For the second consecutive week, the pair is pressed downwards, after the 1: 1 parity, caught on May 12. The dollar was very depressed and the USDCHF lost about 450 pips during this time, following the exact reverse course it had from April to mid-May. The announcement of the Swiss GDP on Tuesday will contribute to the announcements that will come from the US and that will set the tone of the current week. If the fall continues, the next serious obstacle is the support near 0.9460 but it is also not ruled out that the dollar will return to its strength and we will see the USDCHF heading for higher prices. We prefer buy positions this week.

AUDUSD (Australian Dollar – US Dollar)

Bullish was the last week for AUDUSD, which opened at 0.7049 and closed at 0.7158. The economic results in Australia were judged to be positive, concerning PMI indicators, retail sales, and private spending, and thus the pair, taking advantage of the weakness of the US currency, was able to move higher. In the week that has just begun, the results for Australia’s GDP and trade balance will be announced and will complete a powerful puzzle along with the US announcements that will probably create high volatility in the pair. The situation with restrictions seems to be normalizing in China, and this is another reason for optimism about the Australian dollar, which could even exceed 0.73. In the event of a renewed strengthening of the US currency, the pair will hardly avoid 0.70 again. Buy positions is our selection for the current week.

Bitcoin

Last week, Bitcoin closed at $29,449 with losses of around 2.70%. For nine consecutive weeks, Bitcoin has been bearish, having technically created a downward channel and all this is accompanied by a big drop in trading volume. Many analysts and technical indicators of cryptocurrencies predict a further decline, and it is no coincidence that for several days, Bitcoin has been oscillating around the psychological threshold of $30,000 looking for apparently good reasons to format a new direction. Terra launched Luna 2.0 to regain confidence after the zeroing of Luna 1.0. The shock suffered by cryptocurrencies and in particular stable coins will not heal easily, however. Many eyes are on the significant support of Bitcoin at $28,800 because a bearish breakout can open the door to much lower prices. The smiles on Bitcoin investors’ faces will return above $31,500, which is the highest price in about 20 days. We may try long 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.