26/09/2022

General Comment

Last week was a very important one for international financial markets. Many categories of assets, as we will see below, broke multi-year price records, which shows how much the times we live in are “interesting”. The Federal Reserve announced a new 0.75% rate hike on Wednesday, and interest rates in the United States are now at 3.25%. In addition, Fed chief Jerome Powell reiterated that the main goal remains to combat high inflation and that this goal will be achieved even if it comes at the expense of growth and other macroeconomic features such as the unemployment rate.

These statements were interpreted by the markets as new large rate hikes at the upcoming US central bank meetings and brought about chain reactions in the markets. Most equity markets suffered heavy losses in Europe and America. Commodities such as gold and oil suffered a big price drop too. The dollar strengthened significantly while higher-risk currencies and commodity-linked currencies suffered very heavy losses. Bond yields in most countries skyrocketed while Bitcoin and most cryptocurrencies followed the path of equity indices and had strong corrective moves.

In this electrifying environment with outliers and multi-year records being broken, there is also Europe which continues to face major problems and big concerns about even bigger problems next winter. The energy crisis continues, inflation keeps on growing and fears of non-energy adequacy are amplified. The markets consider another aggravating factor for Europe and the looming victory of Giorgia Meloni in the Italian elections, due to her positions and the confrontation of her party with Brussels. Ursula von der Leyen’s statement, days before the election, was indicative: “The European Union has the tools in case the situation becomes difficult in Italy.”

In addition to the Fed, the central banks of the UK, Japan, and Switzerland also had meetings on interest rate decisions, as we will see in detail below. The PMI indicators announced on Friday in the world’s largest economies showed the wide divergence in market psychology between the United States and other economies, since only in the US the results were above the expectations of the markets. A piece of very important news came from Japan, where for the first time in several years we saw government intervention concerning the currency exchange rates of the yen, which has been extremely weak lately. This intervention had to do with selling dollars and buying yen and was done in complete contradiction with the decisions of the Bank of Japan that had preceded. Many concerns amongst the markers were created after this development.

The week that has just begun also has a series of important announcements like previous weeks but is also dominated by speeches by Christine Lagarde, Jerome Powell, and other prominent bankers. Markets will try to interpret their statements, about their plans. Major announcements for the United States are GDP for the third quarter of 2022 and durable goods orders. Europe will be dominated by announcements of inflation in the Eurozone and retail sales and inflation in Germany. In the rest of the world, PMI indicators in China and GDP in the UK are considered to be major announcements.

SP500

The US SP500 index closed with strong downward trends last week, at 3,710 points, and losses that touched 5%. The decline continued with particular intensity, with the index losing more than 13% of its value since mid-August. After the announcement of high inflation in the US, came the response of the Fed, which raised interest rates for the third consecutive time in a few months, by 0.75%. The persistence of high inflation forces the Fed to move aggressively, raising money costs and limiting liquidity. This, of course, does not favor equity markets which are also affected by the negative investing sentiment that prevails in the markets, which pushes many investors to lower-risk options, such as government bonds. The US 10-year bond yield is at a high price of about ten years, above 3.70%, and gathers investor preferences, instead of equity markets that involve a large amount of risk. Close to 3,635 points, is the significant support that is a low price of about 2 years and below these levels, the downtrend may become more intense. If there is no rapid approach to 4,000 points, the climate will probably remain negative so we prefer short positions for one more week.

DAX40

The German DAX40 index moved sharply lower last week, closing at 12,325 points, with losses of 3.70%. Europe and Germany were visibly affected by the big drop in U.S. indices, although the European continent has important reasons to be pessimistic, in addition to U.S. interest rate hikes. Chancellor Scholz has made a series of contacts in the Middle East to find a solution to the huge energy issue facing his country. The German Chancellor has signed an agreement with Abu Dhabi’s ADNOC company, which will not solve the problem since the quantities of liquefied natural gas it secures are small but at least gives a psychological uplift that solutions can be found outside Russia. The macroeconomic figures announced in Germany continue to disappoint. The producer price index rose in August (at an annualized level), by an unreal 45.8%. Protests against high prices have already begun in Germany as prices rise rapidly on many basic products and services. Also, the PMI indices were announced as a whole below market expectations and well below the value of 50 which is the threshold of economic improvement. Support of 12,365 points has been broken out and there is much room for a bigger drop. A quick rise above that support may put the DAX40 back in safer price zones but we prefer short positions this week as well.

FTSE100

The British FTSE100 index moved significantly lower last week, closing at 7,030 points, with losses of almost 3.30%. The decline began on Wednesday after the Fed announced the new interest rates but peaked on Friday, following negative economic announcements in the UK. Consumer confidence was in sharply negative territory, while all PMI indicators were below 50. The Bank of England raised interest rates by 0.50% (from 1.75% to 2.25%) and the outlook for the country’s economy remains negative, with estimates referring to double-digit inflation that will persist and many continued quarters of recession. UK GDP announced next Friday will give a first taste of the situation although it is expected to move into slightly negative territory. The government is trying to provide solutions, with Finance Chancellor Kwasi Kwarteng announcing measures to combat high energy costs, cutting tax rates and other tax breaks. The FTSE100 early this week reacts upward with gains of 0.26% but it remains to be seen whether these measures are capable of reversing the situation. As long as the index is kept above 7,000 points, the climate seems to improve. Below 7,000 points, new corrective pressures may be triggered but we may try long positions this week.

Gold

Last week for gold was bearish, closing at $1,651 and losses close to 2%. The very strong US dollar, in which gold is denominated, is pushing prices down. Money is becoming less and more expensive based on the attitude of most central banks worldwide, and this situation is not conducive to investment solutions to inflationary pressures, such as gold. Moreover, a looming recession that traditionally hit commodity prices, which is particularly likely in Europe and is already looming in the US. Global economic announcements have a negative connotation for macroeconomic figures and growth, while the US is already measuring two-quarters of negative growth. Gold is at its lowest price since April 2020 and it seems that technically at least, there is plenty of room for a further decline. A possible recovery will start to emerge if we see established prices above $1,678 but short positions is our selection for the current week.

US Oil

Last week’s oil futures closed at $79.25, with losses approaching 6.70%. Fears that rising interest rates in the world’s main economies could trigger a major recession, and hence a significant drop in oil demand, is the main reason for the downward rally that started in mid-June. A contributing factor to the fall is the powerful dollar, which is at its highest price in about 20 years. The situation is worse in Europe, with the recession already knocking on its door while China is showing reduced demand, due to the lockdowns. Investors are looking to the meeting of OPEC member countries on October 5 and whether to announce a cut in production to stop the big drop in prices. At the previous meeting, OPEC announced a reduction in production by 100K barrels per day, a movement more symbolic than essential. There is no apparent price support and so the fall is apt to continue further. A reset above $80, can bring new balances. We may try short positions this week.

EURUSD (Euro vs US Dollar)
Sharply downward was last week for EURUSD which opened at 1.0008 and closed at 0.9689. The downtrend in the exchange rate accelerated from Wednesday onwards, with the announcement of a rate hike by the Fed. At a press conference, Fed chief Jerome Powell said that the aggressive policy of raising interest rates and tight monetary policy will continue until inflation is tamed. These actions and statements resulted in a large strengthening of the US dollar that brought the exchange rate to low price areas that are a new record for twenty years. Christine Lagarde reiterated in a speech that the ECB’s goal remains to fight high inflation in the Eurozone, but markets believe that Europe does not have the corresponding margins and tools that the US has to implement this, since the specter of recession and the energy crisis affect European economies to a greater extent. Economic results in Europe continue to disappoint: consumer confidence is at its nadir and PMI indicators in the Eurozone, Germany and other European countries are consistently below 50 and below market estimates. The deterioration of the European Union’s relations with Russia, the mobilization of President Putin, and the ongoing military operations in Ukraine are also aggravating factors for the euro. Since there is no more technical supports, the exchange rate could continue its downtrend based on the possible continued strengthening of the dollar. However, the very low levels that the euro has found may be an investment opportunity for some buyers and so we will see upward reactions. We may try sell positions for one more week.

GBPUSD (Great Britain Pound – US Dollar)

The previous week was sharply downward for GBPUSD, which opened at 1.1413 and closed at 1.0845. It was one of the sharpest falling weeks we have seen for sterling in recent years. It’s not just the rate hike from the Fed and the strong dollar. Almost a climate of panic with sterling sales was brought about by the new mini-budget of the new minister of Finance Kwasi Kwarteng which reduces taxes and is expected to lead to a further increase in the already large deficits of the British economy. A big risk move that received strong criticism from across the political spectrum and many investment funds. GBPUSD is now close to its all-time low (1.0520 in 1985) and many analysts predict that these levels can be broken out. But a climate is beginning to form that the Bank of England will be forced at its next meeting in November to raise interest rates by 0.75% or even 1%, and as we get closer to that date, if these rumors strengthen, they can provoke a temporary reaction of sterling, although the problems will remain. We may try sell positions for one more week.

USDJPY (US Dollar – Japanese Yen)

USDJPY moved upward last week, opening at 142.88 and closing at 143.33. The events that occurred concerning the Japanese currency are very significant. Taking things from the very beginning, Japan’s inflation rate was announced on Wednesday at 3% for August, a value significantly higher than July’s 2.6%. This development gave rise to some rumors that the Bank of Japan could end the very loose monetary policy and negative interest rates. The next day the Bank of Japan kept interest rates unchanged at -0.1% and based on the statements that followed, it will maintain a very loose monetary policy as well. A few hours later, however, we saw a violent fall in the USDJPY due to intervention by the Government of Japan, which sold US dollars and bought yen to support the domestic currency. This intervention, however, proved insufficient since the exchange rate quickly regained its former value but volatility skyrocketed after statements by Japanese officials spoke that there may be similar interventions in the future at any time, in any way even on holidays. Technically speaking, the uptrend has not changed and the buyers ‘ goal remains to break the all-time record at 147.68 but the very low levels of the yen may be an investment opportunity and on the other hand, the possible new government interventions create an environment of high volatility in which no safe estimates can be made. We’ll keep on having buy positions for one more week.

EURJPY (Euro – Japanese Yen)
Last week was bearish for EURJPY which opened at 143.12 and closed at 138.93. The euro is sinking based on the consequences of the Ukrainian war that will probably create an energy problem in many countries of Europe and an intense recession. On the other hand, the intervention of the Japanese government significantly strengthened the yen, and this strengthening was particularly evident in exchange rates with weak currencies such as the euro. If the downtrend that begins to take shape, continues in the current week then below 138.40, there is room for the exchange rate to move even in the price range of 135 but we believe that there will be a bullish reaction so we may try buy positions this week.

EURGBP (Euro – Great Britain Pound)

Last week was bullish for EURGBP which opened at 0.8757 and closed at 0.8931. It was the eighth consecutive upward week for the exchange rate that has held a rally that has yielded a rise of about 550 pips, which is particularly large for EURGBP measures. The euro and sterling are weak at the moment but it seems that the biggest problem exists in the British currency which is collapsing relative to all the major currencies. High inflation in the UK, the high likelihood of a multi-quarter recession and the small intervention of the Bank of England (a 0.50% rise in interest rates last week) are major reasons for this. The mini-budget from the UK Government with the expected fiscal expansion boosted the losses for the sterling. The obvious resistance is at the psychological threshold of 0.90 and above this level, there may be a new upward rally based on upward psychology but the sterling, which is at several decades of lows, could be seen by many investors as a unique opportunity. We prefer sell positions this week.

USDCAD (US Dollar – Canadian Dollar)

Sharply upward was the previous week for USDCAD, which opened at 1.3261 and closed at 1.3589. At these price levels, the exchange rate had not been found since July 2020 and there are specific reasons that brought about this result. The main reason is undoubtedly the strengthening of the US dollar, following the new increase in interest rates by the Fed. The decline in oil prices, which is Canada’s main export commodity, is also pushing up the country’s currency. Last Tuesday, Canadian inflation was announced at 5.8% in August, a figure significantly lower than July’s 6.1% and the 6% estimated by markets. Reduced inflation increases market confidence that the Bank of Canada will take tepid action in the near future, in contrast to the Fed, which is expected to continue aggressively. This belief is also reinforced by the negative macroeconomic results of Canada that we have seen lately. More specifically, retail sales fell 2.5% in August. But a rise of 800 pips in a month creates overbought conditions for the exchange rate and so any reactions to the strengthening of the Canadian dollar cannot be ruled out. We may try sell positions this week.

USDCHF (US Dollar – Swiss Franc)
The USDCHF had an uptrend last week after opening at 0.9627 and closing at 0.9811. The Swiss National Bank last Thursday raised interest rates by 0.75%, which now stand at 0.50%. We need to remind you that a few months ago interest rates in Switzerland were -0.75% and found themselves in positive territory after two consecutive increases. This was not enough to strengthen the Swiss franc against the dollar though. The dollar has strengthened since it is not only the recent increase in interest rates in the US but also the expectation of new increases in the next two meetings by the end of the year and perhaps in 2023. Thomas Jordan, Head of the Swiss National Bank, said new increases could not be ruled out, but the divergence with the Fed is a given: 3.25% compared to 0.50%. The next resistance to the upward course of the exchange rate is close to 0.9870 but corrective movements cannot be ruled out since the rise was large and steep. We may try sell positions this week.

AUDUSD (Australian Dollar – US Dollar)

Significantly bearish was the last week for AUDUSD, which opened at 0.6712 and closed at 0.6526. The strengthening of the US dollar after the increase in interest rates in the US was a given without the Australian dollar being able to resist since, in the announcement of the minutes of the Reserve Bank of Australia last Tuesday, we did not learn anything new about monetary policy and interest rates and this was rather interpreted by the markets as a mild attitude. China on the same day, at the meeting of the People’s Bank of China, left interest rates unchanged at 3.65%, so from there, there was no sign of a strengthening of the Australian dollar. The week just started does not contain any major announcements about Australia and China, and so the exchange rate will move again concerning the perception of the markets about the actions of the central banks and the news from the United States. The break out of significant support at 0.6680, has driven the exchange rate to an approximate 2.5-year low. It is not excluded that the downtrend will continue without apparent support in this price range, but such low levels of the exchange rate may lead investors to markets, through the belief that this is an investment opportunity so we may try buy positions this week.

Bitcoin

Last week, Bitcoin closed at $18,810 with losses exceeding 3%. Bitcoin was visibly affected by the Fed’s interest rate rise and followed the downtrend of other high-risk assets, especially from the technology sector. The fall was modest, however, because the price of Bitcoin is very close to the significant support of $17,600, a price that is considered a milestone for many analysts, who believe that a break in these levels could lead to a much larger drop. U.S. regulators are planning to take steps to protect investors following the recent Luna collapse, planning to block some stablecoins that are likely to collapse due to inherent weaknesses in their algorithmic part. A judge in New York, demands evidence that Tether (the most popular and largest capitalized stablecoin) is indeed backed by corresponding dollars. This is negative news for the world of cryptocurrencies that, combined with the impending recession and reduced liquidity in the market, do not let Bitcoin easily lift a head above $20,000 so we prefer sell 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.