05/09/2022

General Comment

The United States continues to have a strong macroeconomic picture that allows the Fed to continue its aggressive policy of raising interest rates and tight monetary policy to combat high inflation. The issue of high inflationary pressures has been raised by most central bankers in the US as the dominant problem to be addressed and of course, takes priority over the rest of the figures. The United States announced 315K new jobs in August, a figure slightly better than market expectations but not such as to allow super optimism and a market rally. In addition, the unemployment rate rose slightly to 3.7%, factory orders fell and the average price of hourly earnings decreased. The picture from the announcements of PMI indicators for manufacturing was positive. The US dollar, of course, strengthened for another week, but the main stock indices in the US continued to correct as the decrease in liquidity does not favor equity markets.

The lights of the markets are falling this week on the European Central Bank and the announcement of interest rates for the Eurozone next Thursday. Analysts have previously been cautious about a possible interest rate hike, but this picture has recently been reversed because the European currency has weakened too much. It is therefore not ruled out that we will see an increase in interest rates of even 0.75% on Thursday to combat high inflation but it will hurt growth in economies already affected by the energy crisis and other problems. Added to this is the G7’s decision on Friday to cap the price of oil from Russia. Most stock indices in the Eurozone and the United Kingdom have declined since nothing foreshadows an improvement in economic figures in these countries. Most commodities such as gold and oil also suffered losses, which is a common occurrence when growth slows or recessions are expected. Bitcoin and most cryptocurrencies that have recently been following the path of high-risk markets continue to be under pressure.

The week that has just begun in addition to the announcement of interest rates by the ECB on Thursday contains the very important speech of Jerome Powell (head of the Fed) on Wednesday and other important economic announcements such as GDP in the Eurozone, Japan, Canada and Switzerland, inflation in China, PMI indicators in the US and interest rates in Australia and Canada. An important event is also the OPEC meeting and the possible decisions that are expected to be taken.

SP500

The US SP500 index closed last week, with corrective trends at 3,932 points and losses above 2.70%. The index continued its downward course for the third week in a row as the main scenario is the continuation of tight monetary policy by the Fed, along with new big interest rate increases to de-escalate high inflation. This tight monetary policy is not conducive to equity markets that have been under pressure for a few weeks. There was no recovery even after the results of the US labor market on Friday (NFPs), there was rather a temporary upward reaction but, in a few hours, the downtrend returned. The Price/Earnings ratio (P/E) has fallen to its lowest price in two years but is still far from average. This suggests that the SP500 is overvalued but not as high as it was a while ago. The main factor shaping the trend for the next period will probably be the speculation of the markets about the behavior of the Fed until the end of 2023. If markets appreciate the Fed’s easing of its aggressive policy, we may see a bullish reaction by the end of the year. For now, the trend remains bearish and the price zone around 3,920 points is critical support. A solid breakout above 4,000 points is needed to revive hopes of recovery. We may try short positions this week.

DAX40

The German DAX40 index moved lower last week, closing at 12,678 points, with losses of 1.50%. Anxiety continues and intensifies in Germany and throughout the European continent regarding energy adequacy next winter. Given the sanctions on Russia and Russia’s intentions to push through the closure of the tap, there are increasing analyses and reports that Europe may be forced to adopt extreme solutions, such as energy rationing. Germany’s economic results, however, do not yet reflect the criticality of the situation. Inflation in August climbed to 8.8% (harmonized index of consumer prices), the unemployment rate rose slightly to 5.5%, and retail sales fell but less than markets expected but the country had a highly positive trade balance in July of 5.4 billion euros. Of great importance for the course of the DAX40 will be the decision on interest rates by the ECB on Thursday. Above 12,350 points there is strong support as we are talking about the lowest price since 2020. An approach of 13,000 points may give breaths of optimism. We prefer long positions this week.

FTSE100

The British FTSE100 index moved significantly lower last week, closing at 7,202 points, with losses of almost 2.70%. The UK economy has a very negative outlook, concerning inflation which is expected to rise further, and growth which is expected to move at negative prices, for quite a long time. FTSE100 was further hit by the de-escalation of energy prices we saw last week, on the one hand through the announcement of the European Commission’s intentions to cap the price of gas, and on the other hand through the fall in oil prices. The index has indexed shares, such as BP and Shell that reacted negatively to these developments. It is logical that as we get closer to the milestone value of 7,000 points, the climate will worsen and the downward trends will consolidate so we may try short positions this week.

Gold

Last week for gold was bearish, closing at $1,723 and losses close to 1.50%. The U.S. dollar, which has continued to strengthen, is a key reason for these losses. The Fed also, which, based on all the data so far, is going to make a new big increase in interest rates in September, is another reason that justifies the losses of gold since such moves are expected to de-escalate inflation. We saw a slight upward reaction on Friday with the NFPs in the US (up to $1,730) but quickly the downward trends returned. Prices could continue to fall until strong support, just above $1,678, if of course, the same picture continues so short positions is our selection for the current week.

US Oil

Last week’s oil futures closed at $87.06, with losses approaching 6.40%. Markets are anticipating a slowdown in growth or a recession in many major economies, which, if verified, will weigh heavily on oil demand. In a few hours, the meeting of OPEC members is taking place and of course, the investment community has turned its eyes there. According to the analysis and some statements by OPEC officials, the prevailing scenarios are that either production will remain unchanged or there will be a slight decrease due to the decline in prices that has been observed lately. In the electrifying atmosphere of the Russian oil embargo, however, a deal with Iran which is also under embargo due to its nuclear program has been under intense scrutiny lately. A return to the market, providing oil from Iran, would boost supply and likely de-escalate prices. Of course, such actions require time, diplomatic moves, and intense background but at the moment oil is close enough to the critical price of $85.70 which is the lowest price since the beginning of the year. Perhaps in this zone, there will be upward reactions but in case of its breakout, we may see a stronger de-escalation of prices. We prefer long positions this week.

EURUSD (Euro vs US Dollar)
Mildly bearish was the last week for EURUSD which opened at 0.9964 and closed at 0.9952. At the beginning of the week, there was an upward reaction for the exchange rate to around 1.0080 (on Wednesday), mainly due to the announcement of inflation in the Eurozone at 9.1%. That value was higher than July’s 8.9%, and analysts thought the ECB would have an extra incentive to raise interest rates, which boosted the euro. On Thursday, however, it showed how much EURUSD is vulnerable to the strengthening of the dollar after the positive announcement of PMI indices in the US, taking back the gains of the euro for the previous three days. On Friday, the situation was rather stabilizing with markets reacting to the news from the US labor market with high volatility and countervailing investor decisions. The unemployment rate in the eurozone remained unchanged at 6.6%, while the producer price index increased by 37.9% annually. As long as the rate remains below 1:1, the further fall scenario is dominant and the most important support is near 0.99. We may try sell positions this week.

GBPUSD (Great Britain Pound – US Dollar)

Last week the GBPUSD was bearish, as it opened at 1.1730 and closed at 1.1509. In a week when the economic announcements from the United Kingdom were absent, the US dollar and the bad psychology of the markets concerning the course of the British economy had an important role in the exchange rate. Most analyses and estimates of central bankers agree that inflation is set to rise further, well above the double-digit figure seen last month, and that the country will enter a recession that will last several quarters. This picture does not leave much room for the Bank of England to make new rate hikes, unlike the US and Fed which are expected to proceed aggressively. This fact weakens the sterling compared to the US dollar. GBPUSD had been found in March 2020 at the beginning of the pandemic, just above 1.14 and this is the most critical price area at this time for the exchange rate since a possible downward breakout can lead to an even greater fall. We’ll keep on favoring sell positions for one more week.

USDJPY (US Dollar – Japanese Yen)

USDJPY moved upward last week, opening at 137.63 and closing at 140.18. A major helping arm in the rise was the strengthening of the U.S. dollar but an even bigger role was played by bond yields that continued to strengthen, with the U.S. 10-year edging up to 3.20%. With these helpers, the USDJPY managed to exceed 140 for the first time in about 24 years. The yen, of course, has been extremely weak for a long time because the Bank of Japan continues to conduct a very loose monetary policy and has negative interest rates as long as the other central banks, especially the Fed, are moving in the opposite direction. Japan had positive signs in last week’s announcements with the unemployment rate remaining unchanged in August at 2.6%, industrial production announced above market expectations, consumer confidence improving, and PMI indicators positive. The Bank of Japan, however, believes that the country has not reached the desired results of the macroeconomic aggregates that will allow an increase in interest rates and so it is possible to see the upward course of the exchange rate continue. Based on this, we prefer buy positions for one more week.

EURJPY (Euro – Japanese Yen)
Last week was bullish for EURJPY which opened at 137.10 and closed at 139.60. The euro showed some signs of strengthening after high inflation announced in the Eurozone raises the likelihood of a major interest rate hike by the European Central Bank next Thursday. The Bank of Japan, on the other hand, does not seem willing to raise interest rates, even if Japan’s economic picture looks better. In July, the pair had been above 140 and if the picture we described continues, it is not excluded that this will happen again so we may try buy positions this week.

EURGBP (Euro – Great Britain Pound)

Strongly bullish was the last week for EURGBP which opened at 0.8489 and closed at 0.8644. The euro has shown some signs of life that have mainly to do with markets ‘ expectations of an interest rate hike by the European Central Bank, rather than the economic situation of Eurozone countries. The UK, on the other hand, is mired in the perception of very high inflation and a coming recession, and so sterling has fallen significantly relative to all the rest of the main currencies. Significant resistance to the continuation of the uptrend is the price zone of 0.8720 but there is always the possibility that markets will consider the sterling to be at oversold levels and this will be considered an investment opportunity. Such an eventuality would acquire a more significant value if the exchange rate is found close to 0.85. We may try sell positions this week.

USDCAD (US Dollar – Canadian Dollar)

Last week was bullish for USDCAD, which opened at 1.3031 and closed at 1.3125. The new strengthening of the US currency and the fall in oil prices, which have a big correlation to the Canadian dollar, were the main reasons for the continuation of the upward movement for the third week in a row. Added to all this was the bad picture presented by the Canadian economy last week through the economic announcements. Canada’s GDP for the second quarter of 2022 was expected to have grown by 4.4% but the 3.3% announced was far from that expectation. Unexpectedly, too, the PMI index for manufacturing was well below the critical price of 50. The exchange rate has been very close to the price zone of 1.3225 which is the highest price of the last two years or so and is expected to encounter difficulties in its further rise, but if the castle of this resistance falls, we may see it at several higher levels. We prefer buy positions this week as well.

USDCHF (US Dollar – Swiss Franc)
The USDCHF had an upward trend last week after the opening was at 0.9651 and the closing at 0.9804. The strengthening of the US dollar pushed the exchange rate into a sharp uptrend, closing three consecutive weeks of rising. In addition to the strong dollar and the news from the US economy, the week has also been quite important for the Swiss economy. Inflation in Switzerland for August was announced at 3.5%, slightly above July’s 3.4%, but this does not seem to lead analysts to conclude that the Swiss National Bank is going to raise interest rates again. Retail sales had a negative picture, while the KOF Economic Activity Index was significantly reduced. The USDCHF seems to have set a course for 1: 1 and it is not excluded that it will achieve it if, of course, the strengthening of the US currency continues. We may try buy positions this week.

AUDUSD (Australian Dollar – US Dollar)

Last week was bearish for AUDUSD, which opened at 0.6880 and closed at 0.6808. The week that has just begun is particularly important for Australia’s economy since a new interest rate hike, possibly 0.50%, is expected at the Australia’s Central Bank meeting on Tuesday. If this happens, interest rates in Australia will be at 2.35%, but it is still below US interest rates and it is not ruled out that this gap will open further if the Fed continues with new increases. Retail sales in Australia had a positive picture last month, while PMI indices in China had good results. The above helped the Australian dollar not to suffer as heavy losses to the US currency as other currencies, but the downtrend is evident and is quite likely to continue until 0.6680, which is the most important support in this region. We prefer sell positions for one more week.

Bitcoin

Bitcoin was slightly upward last week, as it closed at $20,007 with profits of 2.30%. This upward reaction, of course, is not capable of reversing the negative climate in the cryptocurrency investment community, after two sharply declining weeks and Bitcoin has been under intense pressure since the end of March. Most cryptocurrencies have been heavily aligned with other high-risk assets, and so the lack of liquidity expected through tight monetary policy conducted by many central banks has a negative impact. Any news such as the possible collaboration of Blackrock with the Kraken exchange or Robinhood with Cardano now passes into the background. Bitcoin early this week has already been below $20,000 again and it seems to be struggling with support at $19,500. A reset at first above $22,000 and then above $25,000 is the way to regain optimism in the cryptocurrency investment community but we’re keen to try short positions for one more week.

IMPORTANT DISCLAIMER

The information of this report is of a general nature only. It is not a piece of 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.