08/08/2022

POSITIVE NEWS ABOUT THE U.S. ECONOMY HAS IMPROVED THE FINANCIAL CLIMATE

General Comment

Fears of a recession in the global economy continue to prevail in financial markets, which are always trying to glimpse the situation several months later. A typical example of this perception is the big drop in oil prices last week. The United States though had a barrage of positive news that created a new climate of optimism, at least for the American continent. A key pillar of this news was the announcement of new jobs for July that quite surprised the markets, reaching 528K against 250K as most analysts estimated. Since the beginning of the week, PMI (manufacturing and services) indicators for the US economy had also been announced well above market expectations. These data give enough space and comfort to the Federal Reserve (Fed) to proceed with a more aggressive policy of raising interest rates without considering the consequences that this causes since the country’s macroeconomic picture allows it. Of course, there is always the geopolitical risk that increased sharply last week with Nancy Pelosi’s visit to Taiwan and the verbal recriminations between the US and China that followed.

In Europe, the situation is not at all the same, and fears of a recession are greater and are based on a more solid basis. Retail sales in the Eurozone in June fell by 3.7% while in Germany in particular they fell by 8.8%. The situation in the supply of energy on the European continent is of greater concern as there are strong doubts whether next winter there will be sufficiency for households and businesses. If there is no adequacy, the result will be catastrophic and many countries will enter a strongly recessionary landscape. Given these facts, the ECB does not have the same comfort that the Fed has in raising interest rates as inflation is rising on the European continent and somehow needs to be addressed.

This week’s news story also included the significant rate hike by 0.50% from the Bank of England last Thursday. For the rest, the improved climate in the USA helped the main stock indexes recover even slightly. We saw a continuation of the recovery for gold, while as we said above, oil had a significant price correction. Finally, Bitcoin and most cryptocurrencies had stabilizing trends with low volatility.

Having entered the heart of the summer, it is logical that trading volumes in many markets will decrease, but interest remains undiminished in investment circles that expect the announcement of inflation in the US and China this week. Other interesting announcements are second-quarter GDP in the UK and industrial production in the Eurozone.

SP500

With slightly upward trends, the US SP500 index closed last week, at 4,141 points and gains a little over 0.20%. Many conflicting factors have led to this sideways-to-upward trend. The high tension between the US and China due to Pelosi’s visit to Taiwan has been an aggravating factor for markets. The two giants of geopolitics and the global economy have developed tension between them that is enough to cause a partial upset. However, the climate for the US economy is positive after the recent announcements of the labor market and PMI indicators and so there is room for aggressive interest rate policy from the Fed. This is also confirmed by statements from bankers such as Mary Daly, president, and CEO of the San Francisco Fed, who said the bank still had a lot of work to do before bringing inflation under control, leaving open the possibility of new big interest rate hikes. A decisive factor is also the yields of bonds that, with the increase they had last week, removed capital from the equity markets. The index failed to exceed the 4,200-point resistance and if the dollar continues to strengthen it may correct and head towards 4,000 points so we may try short positions this week.

DAX40

The German DAX40 index moved upward in the week that left, closing at 13,618 points, with gains of 0.60%. The index was favored by the generally positive climate and continued for the third week in a row to be profitable. Of course, this does not mean that the problems in the Eurozone and Germany have ceased to exist, but the biggest fears of recession, mainly through the energy crisis, may put the ECB on hold by large increases in interest rates and tight monetary policy and thus continue to offer liquidity in the market. The results in Germany were mixed last week: a huge 8.8% drop in retail sales and 9% in factory orders but PMI indicators were above estimates and the trade balance returned to a positive sign, at 6.4 billion euros in June. As we approach winter, however, the energy problem will intensify and we may see corrective trends for DAX40 so short positions is our selection for the current week.

FTSE100

The British FTSE100 index moved upward last week, closing at 7,411 points, gaining close to 0.20%. The worsening geopolitical climate worldwide following the recent U.S. – China tension is one-factor causing jitters in equity markets. FTSE100, however, was supported by the results of the companies for the 2nd quarter of 2022, with BP as the main protagonist, which reported a profit of 9.3 billion, in contrast to the losses of 20.4 billion it had performed in the 1st quarter, while at the same time it announced a 10% increase in the dividend. The Bank of England’s recent 0.50% interest rate rise also provided support for the index, because markets were not ruling out a surprise bigger increase. The bank’s report, however, for the rest of 2022 and 2023 is gloomy: a recession is forecast for several quarters and inflation is expected to top 13% towards the end of this year. With this data, a corrective course of the index cannot be ruled out, with the next support being close to 7,320 points so we prefer short positions this week.

Gold

The previous week was bullish for gold (the 3rd in a row), closing at $1,791 and gains close to 0.50%. The geopolitical crisis between the US and China has raised many concerns, and this climate favors safe havens of investment, such as gold. Another factor that significantly affects gold prices is the US dollar, usually with an inversely proportional relationship but last week we saw the paradox of strengthening both of these assets. The price, however, returned below $1,800, from week highs to $1,811, following the announcement of NFPs in the US on Friday after strong macroeconomics left room for the Fed to fight inflation with aggressive interest rate hikes. The rise in bond yields is also putting pressure on gold, and if the dollar continues to strengthen, especially after the announcement of US inflation on Wednesday, gold’s mini-upward rally may end, especially if there is a correction below $1,770. We may try short positions this week.

US Oil

Last week’s oil futures closed at $88.43, with losses approaching 10%. The main reason for this sharp downward movement is the feeling of the markets that the global economy will not avoid recession. In such a case, logically, the oil demand will decrease and this perception is valued by the markets with the big drop in prices. A slight upward reaction we saw on Friday after positive U.S. labor market announcements improved the climate somewhat. The recent meeting of OPEC, however, with the decision to increase production, by just 100K barrels per day did not change anything since practically the production remains unchanged. But there is strong speculation of a much larger increase, perhaps up to 2.8 million barrels per day from Saudi Arabia and the United Arab Emirates next winter, to supplement the loss of Russian oil under embargo. Verifying such a reputation could further push prices down, with subsequent supports at $87 and $81.90. On the contrary, an upward split above $90.50 may give a new upward breath to oil prices. We may try short positions this week.

EURUSD (Euro vs US Dollar)
Slightly bearish was last week for EURUSD which opened at 1.0214 and closed at 1.0180. The announcement of the labor market in the United States at the end of the week showed that the US economy has the basis and the comfort to allow the Fed new interest rate hikes. There was a balance between the dollar and the euro before. The dollar had lost much of its momentum due to last week’s Fed meeting while the euro continues to be weak due to the poor economic situation in many eurozone countries and pessimism over the energy crisis. The key event this week is the announcement of inflation in the United States, with markets expecting a slight de-escalation compared to the previous month. Given the weakness of the euro, if the conditions strengthen the US dollar, we may see the downtrend dominate again, while if there is a break of 1.01 then the 1:1 pair will have a good chance of repeating itself. We prefer sell positions this week.

GBPUSD (Great Britain Pound – US Dollar)

Last week the GBPUSD was bearish, as it opened at 1.2165 and closed at 1.2066. In addition to the US dollar strengthening due to positive macroeconomic announcements in the United States, the British sterling was weak. On Thursday, the Bank of England met on interest rates and monetary policy in the UK and decided to raise interest rates by 0.50%, but this did not help the sterling because it had already been prescribed by the markets, several weeks ago. It was the largest rate hike on the Island since 1994, with interest rates now standing at 1.75%. But the financial report that followed the press conference of the head of the Bank of England Andrew Bailey, describes a gloomier picture for the British economy with a high probability of recession and inflation that may even exceed 13%. If the announcement of inflation in the United States next Wednesday does not change this picture much, it is not ruled out that the pair will be in the region of 1.20 while a solid break in this price zone may threaten even the main support at 1.1760 so we may try sell positions this week.

USDJPY (US Dollar – Japanese Yen)

USDJPY moved upward last week, opening at 133.23 and closing at 134.99. The Japanese economy has not had any major announcements, so the yen continues to move at the pace of the Bank of Japan’s latest news, according to which loose monetary policy and negative interest rates will continue until the country’s economy is fully stabilized. So, the rise we have seen is mainly due to the recovery of the US dollar but more to the upward reaction of bond yields that we have seen in recent days. Bond yields have been the most decisive factor influencing the parity for some time and the U.S. 10-year, which opened at 2.65% and closed Friday at 2.83%, helped the USDJPY recover after two sharply falling weeks. The main target of the buyers of the exchange rate is the price range of 137 which is technically the last main obstacle before 140 so we prefer buy positions this week.

EURJPY (Euro – Japanese Yen)
Bullish was last week for EURJPY which opened at 136.11 and closed at 137.47. The week had upward trends from the beginning but on Friday and after the NFPs in the US, the rise intensified leading the pair above the critical level of 137. Given the continued loose monetary policy by the Bank of Japan that weakens the yen, any recovery in the euro helps the EURJPY move upward. A big role, as we have repeated, is played by bond yields and so the German 10-year, which opened at 0.82% and closed on Friday at 0.96%, helped significantly in the rise. Europe, however, continues to have significant problems and a high probability of recession, so a possible weakening of the euro may stem last week’s upward reaction. We prefer sell positions this week.

EURGBP (Euro – Great Britain Pound)

Last week was bullish for EURGBP which opened at 0.8382 and closed at 0.8431. The main cause was the markets ‘ perception of the possible behaviors of the two central banks, the ECB and the Bank of England. The Bank of England raised interest rates by 0.50% on Thursday but reporting on the economy in the UK is doubtful whether it will allow new increases. On the contrary, Europe has more room for new increases since it already has only one increase in the past of 0.50%, in contrast to the UK which has made several since the end of 2021. A weak euro, however, is not ruled out to push the exchange rate again to the price range of 0.8340, which is a low price of about 3.5 months so we may try sell positions this week.

USDCAD (US Dollar – Canadian Dollar)

Last week was bullish for USDCAD, which opened at 1.2799 and closed at 1.2936. The sharp fall in oil prices has significantly weakened Canada’s currency, which, due to the nature of the country’s economy, is strongly linked to oil. Along with the announcement of the US labor market on Friday that strengthened the US currency, came the announcement of the Canadian labor market, which did not have an equally positive image. The markets expected 20K new jobs to have been created in July but instead, a loss of 30K jobs was announced. There is therefore a problem for the Canadian economy and so the exchange rate may again exceed 1.30. The announcement of inflation in the US on Wednesday, of course, may radically change the picture but we prefer buy positions this week.

USDCHF (US Dollar – Swiss Franc)
The USDCHF had an upward trend last week after opening at 0.9514 and closing at 0.9617. The strengthening of the US dollar following the positive US announcements, helped the exchange rate recover after three in a row of falling weeks. The Swiss franc weakened beyond the dollar’s recovery, after Switzerland announced inflation for July, at 3.4%, below the 3.5% estimated by markets. This means that inflation is controllable and that the Swiss bank has no good reason to raise interest rates. Of course, the surprise increase of 0.50% a few weeks ago does not allow safe estimates, but a new strengthening of the dollar may lead the exchange rate to higher levels than the current ones. On Wednesday with the announcement of inflation in the US, an increase in volatility is expected. We prefer buy positions for one more week.

AUDUSD (Australian Dollar – US Dollar)

Last week was bearish for AUDUSD, which opened at 0.6975 and closed at 0.6911. The Bank of Australia raised interest rates by 0.50%, from 1.35% to 1.85%, as expected by markets, and so this development did not particularly help the country’s currency. The Bank of Australia’s monetary policy statement said inflation would continue to be high until at least 2024, and that new interest rate hikes were planned to combat it. The rest of the economic announcements were positive for Australia: PMIs had satisfactory prices, retail sales were up 1.4%, while June had an impressive trade balance of more than 17 billion AUD. Nevertheless, the strong strengthening of the US dollar after the NFPs dragged the exchange rate into a downtrend, which if continued may move it further from 0.70. In the event of an upward breakout of 0.70, the further climb scenario, earns more points but we prefer sell positions for one more week.

Bitcoin

The previous week was slightly down for Bitcoin, which closed at $23,188 with marginal losses close to 0.60%. The news of BlackRock’s entry into the cryptocurrency space through cooperation with the Coinbase exchange is considered very important. However, Bitcoin’s reaction was not as expected and it seems that there is an inability to develop an upward trend as well as exceed the critical resistance near $25,500. Tighter monetary policy now applied by many central banks and the decline in the risk appetite of many investors do not allow a solid recovery of cryptocurrencies and Bitcoin, and as long as this situation persists, we may see corrections prevail and push Bitcoin towards $20,000 again so we may try 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.