11/07/2022

 

FEARS OF RECESSION DOMINATE FINANCIAL MARKETS

General Comment

The two main events that dominated financial markets last week were the announcement of the Fed’s minutes on Wednesday and the announcement of new jobs (NFPs) in the United States for June. From the Fed minutes, we learned that the central bank continues to tighten monetary policy and raise interest rates, with a possible 0.50% – 0.75% increase at the end of the month aimed at combating inflation that has reached its highest levels in 40 years. There was also a sense of concern about growth without, however, mentioning a recession. The new jobs in the United States in June gave another optimistic note to the situation, after being announced at 372K, well above the 268K expected by the markets. The unemployment rate was unchanged at 3.6%.

In Europe, we have not become wiser, since the announcement of the minutes of the European Central Bank showed that the probability of a 0.25% increase in interest rates in the current month remains strong, and beyond that nothing significant occurred. The world, however, was shocked by two other news stories that are not purely economic: the resignation of Boris Johnson’s government in the United Kingdom and the assassination of former prime minister Shinzo Abe in Japan. Also, the most likely scenario, according to many analysts and Goldman Sachs, is to completely stop the supply of natural gas from Russia to Europe, through the Nord Stream 1 pipeline, which could create severe recessionary pressures in many European countries.

The fact is, however, that the general perception that prevails converges on a strong probability of recession in the world economies and this is reflected in the movements of investors in the various categories of stock assets as well as in other economic phenomena that show fears and concerns. The rare inverted yield phenomenon between the ten-year bond and the two-year bond in the United States therefore occurred. The first one closed the week with a yield of 3.08% while the second one with a yield of almost 3.11%. The US dollar, as a safe investment option, continued its upward rally and drove many currency pairs to multi-year outliers as we will see below. Restrained statements by central banks that almost ruled out interest rate hikes beyond expectations, avoiding talk of a recession, helped in part most equity markets recover with their respective indices performing remarkable gains. By contrast, most commodities suffered losses with gold being the negative protagonist and oil following. Finally, last week we saw an anemic attempt at an upward reaction for Bitcoin and most cryptocurrencies.

The arguably most important event of the week that has just begun, is the announcement of inflation United States for June, with an expected value of 8.7%. Any up-or-down surprises can change markets ‘ view of the Fed’s action in the near future and thus affect both the dollar and U.S. equity markets. The regular news is followed by the announcement of retail sales in the US and China, the announcement of China’s GDP, and the speeches of central bankers in the UK and Japan.

 

SP500

The US SP500 index closed last week with upward trends, at 3,905 points and gains that exceeded 2%. The SP500 like most U.S. indices partially regained a tone of optimism, based on the Fed’s minutes announced Wednesday and based on the positive macroeconomic results the U.S. has recently shown. More specifically, the Fed minutes spoke of a new increase in interest rates towards the end of the month from 0.50% to 0.75%, so the surprise of a 1% increase is practically avoided, which would greatly worry the markets. It also avoids mentioning the word “recession”, which markets also received positively. In the macroeconomic landscape, factory orders, major PMI services, and new jobs were doing better than the markets estimated, and so the prevailing perception was that the U.S. economy is on a solid footing. This week, in addition to the announcement of inflation in the US, the quarterly results of several companies are announced, including JP Morgan, Morgan Stanley, Citigroup, and Wells Fargo from the banking sector and PepsiCo, United Health Group, and Delta Air Lines from the other sectors. If there is a bullish breakout of 3,950 points or even more, above 4,000 points, the climate will improve further. But if we see a return below 3,740 points, then the downward trends will probably prevail. We prefer short positions this week.

 

DAX40

The German index DAX40 moved slightly upward in the previous week, closing at 12,953 points, with gains of 0.40%. The sentiment in equity markets was generally positive and this sentiment was followed by most European equity markets, including the DAX40. Of course, the European indices underperformed compared to the American ones as there is a widespread feeling that European economies are being hit and will be hit more by the energy crisis, with the probability of recession being increased. If the estimates for the interruption of the gas supply from Russia are finally valid, then perhaps the energy shock will be great and the recessionary pressures intense. Last Monday, Germany announced a negative trade balance for the first time in several years, while the rest of the economic announcements did not satisfy. Last week’s weak upward reaction needs a clean break of 13,000 points to continue, otherwise, pressures are expected to prevail again, so we may try short positions this week.

 

FTSE100

The British FTSE100 index declined last week, closing at 7,125 points, with losses of more than 0.70%. The UK is beset by a government crisis that began with the resignations of Cabinet members and ended with the resignation of the government itself. Until the election of Boris Johnson’s replacement, there will be a period of uncertainty, although many analysts see his government’s resignation as a positive development. The downturn in the commodities market provided some support to the index, which was one of the few main stock indices to close the week with a negative sign. The UK, except for PMI indices, has had no other major economic announcements but this week markets are awaiting the speech of Bank of England chief Andrew Bailey to get a better sense of the bank’s future actions. If the indicator falls below 7,000 points, the downward channel becomes more pronounced and we will try short positions this week.

 

Gold

The previous week was sharply bearish for gold, closing at $1,740.5 and losses close to 4%. Markets seem to be anticipating that the problem of high inflation is slowly turning into a problem of slowing growth or even recession, which is not conducive to gold. Also, the big strengthening of the US dollar, in which gold is denominated, is strongly pushing prices down. The feeling in the markets is that the Fed will continue its aggressive policy of raising interest rates and tightening monetary policy, and so the downtrend that started in early March has strengthened further in recent weeks. The announcement of inflation in the US on Wednesday will have an important role in the movements of gold in the coming period and if the support of $1,720 breaks down, we may see prices close to $1,670. An upward move above $1,785 may calm and balance things out somewhat but we will insist on short positions for one more week.

 

US Oil

Last week’s oil futures closed at $104.80 per barrel and losses of about 3.30%. The fall until Wednesday was much bigger with the price touching even $95 but very quickly returned above $100. Many investors see a strong possibility of a recession in the global economy, which will sharply limit oil demand and thus lower its price. On the other hand, the war in Ukraine, the embargoes, and sanctions on all sides make up a crucial puzzle concerning the production and supply of oil, especially in European countries. The result of both these perceptions is high price volatility and sharp short-term changes in trends. Inventories in the US were announced at an 8.2M barrels higher level, which shows the tendency of refineries to have reduced production. If there is a re-approach to prices like $101.50 and $100, then we may see a further decline but as the price approaches $110, the upward scenario dominates. We may try long positions this week, having trust more in the second scenario.

EURUSD (Euro vs US Dollar)
Last week, EURUSD was bearish, opened at 1.0416 and closed at 1.0184. During the week, the pair touched the price of 1.0070, but the upward reaction on Friday helped to limit the losses. The great strength of the US dollar is catalytic and dragged the EURUSD to around 20-year lows, easily breaking the important support to 1.0350. Investors believe that the European economy is much more affected by the economic and energy crisis than its American counterpart and that the Central Bank of the United States (Fed) will continue its aggressive policy of raising interest rates to a much greater extent than the ECB. In addition, the United States had a positive sign in announcements on new jobs and PMI indicators, while Europe reported retail sales well below market estimates. The speeches of central bank executives and the sense/perception of the markets for their actions, largely mark the course of the pair and if the same conditions continue to prevail, then it is possible to see the famous 1:1 for EURUSD. Continuing Friday’s upward reaction to being sustainable will go through the upward break in the price range of 1.0350 but trusting more the bearish scenario, we’re keen to open sell positions this week.

 

GBPUSD (Great Britain Pound – US Dollar)

Last week was bearish for GBPUSD, which opened at 1.2102 and closed at 1.2028. The government crisis in the United Kingdom with the resignation of many ministers that resulted in the resignation of Boris Johnson’s government dominated the news. However, there has been a mixed market reaction to this news and many analysts believe that this has been a positive development in the uncertainty that has developed recently. Of course, the upward rally of the US dollar also affected this pair, leading the midweek to 1.1875, which is the lowest price since March 2020, when the planet was entering the beginning of the crisis of the coronavirus pandemic. Markets are seeing a strong recession in the UK, which will prevent the Bank of England from continuing with aggressive interest rate hikes. This thinking weakens the sterling and so the pair is fully in line with the sharp downward trend that has been going on for a year or so. A re-loss of the landmark price to 1.20 will likely plunge the parity into a new downward channel and an upward split above 1.22 is needed for there to be any hopes of recovery. Sell positions is our selection for the current week.

 

USDJPY (US DollarJapanese Yen)

USDJPY moved upward last week, opening at 135.29 and closing at 136.08. The strong US dollar leaves no room to challenge the uptrend. Let’s not forget that the pair completed six consecutive bullish weeks. The Fed’s determination and the strong macroeconomic picture displayed by the United States give too many points to the U.S. currency. By contrast, Japan’s continued loose monetary policy and negative interest rates are weakening its currency. The cold-blooded murder of the former Japanese prime minister also creates an upset, reinforcing the country’s destabilizing image, since such phenomena are rare. The rise in the USDJPY might have been larger in scope had it not been for a brake on bond yields although the US 10-year showed strong upward trends towards the end of the week, crossing the 3% threshold again. The big bet for the pair is the 137 bullish breakout that is seen by many technical analysts as the last obstacle to conquering the 140-price range. It is not excluded, however, that there will be liquidations to secure profits in the short term and thus we will see corrections for the pair in particular below 134.25. We prefer buy positions for one more week.

 

EURJPY (EuroJapanese Yen)
Last week the EURJPY was bearish as it opened at 140.93 and closed at 138.58. It was the second week in a row with downward trends for the pair that was accompanied by a loss of the important milestone price of 140. Europe’s problems concerning the energy crisis and the strong possibility of recession are reflected in the losses of the euro. The yen has no particular reason to strengthen, given the continued loose monetary policy by the Bank of Japan, but it appears that the euro’s weakness is dominating the pair. It is not excluded that we will see balancing trends towards 140 but in the event of a fall below 136.80, the downward trend will begin to consolidate. We prefer buy positions this week.

 

EURGBP (Euro – Great Britain Pound)

Last week was bearish for EURGBP which opened at 0.8604 and closed at 0.8462. With a sharp downward move, the pair took back several weeks of profits as it needed about two months to break away from 0.85 and exceed 0.86. The climate has deteriorated sharply for the euro as there is a strong possibility of a recession in Europe, with the ECB showing no mood for strong actions. Sterling is not in much better shape but the Bank of England has already shown evidence of determination and may do the same in the future. The target of many sellers is first the price band close to 0.8360 and then to 0.8250 so we may try sell positions this week.

 

USDCAD (US Dollar – Canadian Dollar)

Last week we saw an uptrend for USDCAD, which opened at 1.2874 and closed at 1.2936. The biggest rise took place last Tuesday when we saw the sharp drop in oil prices (about 10%) and then we had stabilizing and slightly corrective trends. The strong US currency did not let the Canadian dollar take the reins, although oil prices rebounded afterward. So, we arrived on Friday, with the announcement of the labor market for both countries and while in the USA the picture was positive, in Canada the unemployment rate fell from 5.1% to 4.9% but new jobs had a sharply negative balance (-43K). If the pair manages to be above 1.30, of course, the upward scenario will have strengthened considerably. Below 1.2820, however, the pair will find itself at a low price of about a month and new pressures may follow. Buy positions is our selection for the current week.

 

USDCHF (US DollarSwiss Franc)
The USDCHF had an uptrend last week after opening at 0.9598 and closing at 0.9766. The dollar has strengthened strongly and so the recent and unexpected increase in interest rates by the Bank of Switzerland of 0.50% is slowly beginning to be digested by the markets. Inflation in Switzerland was announced for June at 3.4%, a value that is particularly high compared to 2.9% in May and it is not ruled out that the Bank of Switzerland will take new actions. The unemployment rate was unchanged at 2.2%, showing a good picture at the macroeconomic level. An uptrend has begun to develop since the beginning of July but it is not excluded that we will see a new turn downwards, in particular below 0.9680. We may try buy positions this week.

 

AUDUSD (Australian Dollar – US Dollar)

Bullish was the last week for AUDUSD, which opened at 0.6808 and closed at 0.6855. It was an attempt at an upward reaction after a period of sharp decline that brought the pair below the significant threshold of 0.70 and the critical support of 0.6830. It is important that this upward reaction took place as the US dollar strengthened significantly. There were reasons for this to happen, most notably the rise in interest rates by the Reserve Bank of Australia last Tuesday, from 0.85% to 1.35%. Australia’s economic results were also encouraging, with the trade balance showing a strongly positive sign while China had a similarly positive picture with the Caixin PMI index announced at 54.5 against 41.4 in May. Inflation in China also declined from 6.4% to 6.1%. If the rate can exceed 0.6850 and can approach 0.70 then the upward reaction may have a continuation but if the US dollar strengthens, we are probably going for new year lows, below 0.6760 so we prefer sell positions this week.

Bitcoin

Bitcoin closed at $20,856 last week with gains close to 8%. Bitcoin has managed to exceed $20,000 showing a reaction after its recent collapse, but this is by no means a change in the trend or psychology of investors, at least for the time being. The questioning of the world of cryptocurrencies after the recent issues of Luna and Terra remains while the rumors of a regulatory framework that can target many companies operating in the field are intensifying. A recent Bloomberg survey found that 60% of investors thought $10,000 for Bitcoin was more likely, while only 40% thought $30,000 was more likely. The supports for an eventual drop are at $19,000 and $17,500 and we’re keen to go after them with 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.

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