31/10/2022

General Comment

Two were the main events around which the interest of the international markets revolved in the week that passed. Taking things from the beginning, the start of the week followed the previous course with a strengthening of the main stock market indices and pressure on the US dollar. Markets ‘ belief that the Fed would relax its aggressive policy of raising interest rates was the main reason for this. The main news until Thursday was poor and only the PMI indicators that had been announced gave a lighter negative tone to the mood of investors. Thursday, however, was crucial since that day the specific announcements mentioned above came out.

US GDP was announced in the third quarter of 2022 at a rate of 2.6%, which was not only above market expectations but also enough to offset the negative growth rates of the previous two quarters. This news caused euphoria in the investment world and bond yields fell sharply with the US 10-year falling below 4% for the first time in about two weeks. But quickly this positive climate changed because the results of several US companies that were announced were disappointing, especially for companies coming from the technology space. Amazon’s stock was down 20% and most of the stock indices had corrective trends while the U.S. dollar strengthened. On Friday the mood changed again with U.S. equity markets performing a strong rally and closing the week at around 1.5-month high prices. The price index on personal consumption expenditures, which was announced to be shrinking, reinforced the perception that inflation is starting to de-escalate.

The second big news came from Europe and the European Central Bank. At Thursday’s meeting, the bank decided to raise interest rates by 0.75% but this action hardly affected European markets because it was something to be expected. ECB head Christine Lagarde, at the press conference that followed, avoided explicitly committing to new interest rate hikes but stressed that inflation remains high and that price stabilization continues to be the top priority.

Having a full review of the week, equity indices strengthened significantly, the dollar weakened while strengthening other currencies such as the euro and sterling. Mixed was the picture in the commodity market with oil performing gains and gold losing. We saw a mild strengthening in the world of cryptocurrencies, but not anything special.

Financial markets have been on a Fed trajectory since the decision on interest rates in the United States will be announced on Wednesday. The most likely scenario is to see a new 0.75% increase, but markets are optimistic that after this increase there could be an easing of aggressive policy by the Fed, especially if there are other signs that inflation is starting to subside. This week, however, has many other important news and developments. The announcement of the labor market by the United States (NFPs) on Friday remains important news that radiates the American economy. Interest rate decisions will also be made in the UK and Australia. Important announcements for Europe: European GDP for the third quarter of 2022, inflation in the Eurozone, and the unemployment rate and retail sales in Germany are announced. PMI indicators for the world’s strongest economies are also important announcements.

SP500

The US SP500 index closed last week with strong upward trends, at 3,923 points and gains that touched 4%. The whole week was upward except for Thursday, where the announcement of the results of major companies, created corrective pressures. Amazon’s disappointing results have brought concern to the markets, especially in relation to its future earnings projections. In this heavy climate followed Microsoft, Alphabet, and Meta with problems for different reasons. Shares of those companies had their worst performance in the year on Thursday. The only exception was Apple, whose stock grew marginally. On Friday, however, the climate changed completely and the indices had a strong rise, with the SP500 closing very close to the week’s high price. Market expectations of a de-escalation of inflation that will soften the Fed concerning the next decisions on interest rates brought a breath of optimism. The index has begun to peek at 4,000 points but of course, it is too early to talk about a reversal of the trend, especially when we are in a week that contains critical decisions and announcements: a decision to raise interest rates on Wednesday and an announcement of new jobs (NFPs) in the US. We may try short positions this week.

DAX40

The German DAX40 index moved up sharply last week, closing at 13,368 points, with gains of 4%. It was the fourth consecutive bullish week for the index, which seems to be gaining upward momentum, with a total positive performance of about 12.50% in that period. The problems in Germany and many other European countries remain, especially when it comes to price stability and energy. The ECB, raising interest rates by 0.75% last Thursday, did not cause any particular jitters in the markets because it was an event that had been discounted. Although inflation in Germany keeps on rising, reaching 11.6% in September (harmonized index of consumer prices), the rest of the results gave reason to break pessimism. German GDP strengthened by 1.1% in the third quarter of 2022, far surpassing estimates. Also, the business climate and PMI indicators had decent results. The area of 13,600 points is the next resistance up to 14,000 points, in case of continuation of the rise but below 13,000 points the negative climate probably returns. We prefer short positions this week.

FTSE100

The British FTSE100 index moved upward last week, closing at 7,079 points, gaining almost 1.20%. The index failed to compete in performance with the other main stock indexes in Europe and the US, which had a much higher rise. Some disappointing results of British companies being announced, especially by the banking industry, have raised some concerns. However, there was a trade-off from the energy sector (mainly from Shell and BP) and so the index managed to stay above 7,000 points for the first time in 1.5 months. The political situation in the United Kingdom seems to be stabilizing with the announcements of the new government sounding friendlier and more reasonable in the markets. The only major announcements last week were PMI indices that were in negative territory but interest is picking up this week, mainly due to the decision to raise interest rates on Wednesday. Above the 7,115 points, the positive climate will be further consolidated but in case of loss of the 7,000 points milestone, the downward scenario gains points. Short positions is our decision for the current week.

Gold

The previous week for gold was bearish, closing at $1,647.50 and losses close to 0.90%. It was a rare week in relation to gold’s behavior since its losses were accompanied by a weakening of the US dollar. The biggest losses occurred on Friday, when we saw a strong strengthening of equity markets and a rebound in bond yields, although there was a decline on a weekly basis. The next few days will be crucial. The forthcoming announcement of a rate hike by the Fed and the press conference that will follow and the information concerning the bank’s future moves are important events. If we take into account the announcement of the unemployment rate in the US, inflation, and GDP in the Eurozone and the decision on interest rates in the UK, then an increase in volatility and possible swings in trend is expected. Gold needs to get above $ 1,680 to develop more upward momentum while below the $1,620 price range which is particularly critical because it is about 2.5 years of support. We prefer short positions this week.

US Oil

Last week was bullish for oil with next month’s futures closing at $88.35, with gains exceeding 3.80%. Since Thursday, however, there have been downward trends for oil, from the news that came from China. The Chinese government announced new restrictions in many provinces by locking entire areas and sealing large buildings, in order to control the expansion of COVID. On the same page was the announcement of the IMF, which predicts a contraction in demand in Asia due to the war in Ukraine and the measures in China. However, a counterweight in the Asian picture was the European and American picture as the large GDP increases for the third quarter in the US and Germany, rekindled expectations for more demand for oil. Rumors, articles, and statements that the Fed will soften its stance on the next interest rate decisions are also beneficial to rise oil prices because such a development will not hurt growth to the extent that markets expected. As we enter November and OPEC’s recent decision to cut daily production will begin, the most important resistance to any continuation of the price rise is at $90. In the event of a downward turn, $85 is a critical price band and we may try short positions this week.

EURUSD (Euro vs US Dollar)
Bullish was the last week for EURUSD which opened at 0.9873 and closed at 0.9965. In the middle of the week, the exchange rate had even been in the price range of 1.01 but the strengthening of the dollar from Thursday onwards brought it back below parity. A 0.75% rate hike by the European Central Bank was something to be expected from markets, and so EURUSD failed to strengthen beyond the dollar weakness. U.S. GDP strengthened significantly in the third quarter of this year, showing how the U.S. economy is doing much better than the European one. The first signs of de-escalation of inflation in the United States build a view in many investment circles that the Fed will not continue with new large rate hikes after the expected 0.75% increase next Wednesday. This fact has been weakening the dollar for a few days. The many important announcements about the European and American economies this week (see General Comment) are also important and are expected to increase volatility and affect the pair for the next period. If EURUSD manages to be above 1: 1 again or even more if it breaks out at 1.01 then the development of an uptrend gains more credits. We may try sell positions this week.

GBPUSD (Great Britain Pound – US Dollar)

Bullish was the last week for GBPUSD, which opened at 1.1390 and closed at 1.1612. In addition to the latest weakness in the US dollar caused by markets ‘ belief that the Fed will not aggressively raise interest rates after the expected November 2 increase, sterling also appears to have reasons for strengthening. The new government of Sunak with the Minister of Finance Jeremy Hunt shows that it is more friendly to the markets because the announcements of increasing tax rates and spending cuts are causing a positive reaction so far. From the all-time lows for the pair recorded at the end of September to now, there has been quite a significant upward rally but the current week with its many important announcements may change things. The announcement of interest rates in the United States and the United Kingdom will show whether the interest difference between the two economies will open or close. While in the US the increase is expected to be 0.75%, in the UK voices are saying that the increase could be less, possibly of the order of 0.50%. If this happens, the exchange rate could move lower, but otherwise, resistance in the price range of 1.1740 would be threatened. We prefer sell positions this week.

USDJPY (US Dollar – Japanese Yen)

The previous week was slightly bearish for the USDJPY, opening at 147.66 and closing at 147.45. On Thursday the pair even touched 145 but Friday’s rise limited losses. The dollar weakened and bond yields de-escalated but the yen was unable to benefit significantly and so the drop was imperceptible. The key reason for this was the Bank of Japan’s decision last Friday to leave interest rates unchanged at -0.1%. The press conference of Bank chief Haruhiko Kuroda that followed, pushed the yen into a new vortex of pressure. More specifically, the central banker said that an increase in interest rates and a change in monetary policy are not foreseen in the coming period. It is obvious that if there are no statements in the opposite direction or if there is no new government intervention in the foreign exchange market, the yen will continue to be in a weak position. This could lead to a rise in the exchange rate even if the dollar does not strengthen significantly. But if there is a new decline in bond yields and a big weakness in the dollar, we may see the exchange rate approaching 145 again. We prefer buy positions this week.

EURJPY (Euro – Japanese Yen)
Bullish was the last week for EURJPY which opened at 145.71 and closed at 146.92. This rise was mainly due to the strong weakness of the yen, following the maintenance of negative interest rates and expectations of a continuation of very loose monetary policy by the Bank of Japan, rather than the strengthening of the euro. The European Central Bank raised interest rates by 0.75% but this had been heralded for some time and so was largely digested by the price of the euro. The announcements of inflation and GDP in the Eurozone along with the announcement of the monetary policy minutes by the Bank of Japan will set the tone for the week that has just begun. A possible obstacle to its further rise is the significant resistance to 148.80, which is also a high price for many years. The corrective scenario will gain greater chances if we see the parity below 143.70. By trusting more, the bullish case, we may try buy positions this week.

EURGBP (Euro – Great Britain Pound)

Last week was bearish for EURGBP which opened at 0.8662 and closed at 0.8579. The euro strengthened slightly after the ECB raised interest rates last Thursday, but the sterling strengthened more after the end of the political crisis and the finalization of a new government that seems to be friendlier to the markets. The Bank of England’s decision on interest rates next Thursday is particularly important for the pair. An increase of 0.75% could boost the sterling and lead to a further fall in the exchange rate. If the increase is less then we may see EURGBP strengthening towards the price range of 0.8780 which is also near resistance. We may try buy positions this week.

USDCAD (US Dollar – Canadian Dollar)

Last week was bearish for USDCAD, which opened at 1.3629 and closed at 1.3604. The fall could be much bigger for the exchange rate because the US dollar weakened as well as the rise in oil prices (which usually favor Canada’s currency) was significant. The reason that the Canadian dollar could not benefit and the exchange rate was driven lower was the announcement of the Bank of Canada’s decision to raise interest rates by 0.50% last Wednesday, given the expectations of markets that spoke of a 0.75% increase. Tiff Macklem, the head of the Bank of Canada, said that new increases are in the bank’s intentions and that they do not expect inflation to fall based only on international developments, which did not help the Canadian dollar much. If the weakness of the Canadian currency continues, we may see the exchange rate heading for higher levels, but in the event of a further weakening of the US dollar, the exchange rate may be below 1.35. We prefer buy positions this week.

USDCHF (US Dollar – Swiss Franc)
The USDCHF was bearish last week, as the close was at 0.9958, about 20 pips below the previous close. The weakness of the US dollar could have caused a bigger drop in the exchange rate, but a series of economic announcements did not let the Swiss franc breathe. Business sentiment expectations and the KOF index for the Swiss economy were announced below expectations and so the Swiss currency remained pressed. The week that has just begun is particularly important for the US dollar with the announcements on interest rates and new jobs in the US standing out. A jump above 1: 1 will breathe new bullish momentum into the pair but below 0.9840, the correction could widen. We may try buy positions this week.

AUDUSD (Australian Dollar – US Dollar)

Bullish was the last week for AUDUSD, which opened at 0.6395 and closed at 0.6412. Inflation in Australia in September was reported to have risen considerably above market estimates (7.3% vs. 7%) but the recent increase in interest rates by the Bank of Australia of just 0.25% has clipped investor expectations for the country’s currency. A similar increase is expected next Tuesday, which compared to the 0.75% expected in the US does not give an upward value to the Australian dollar. Most commodities and metals are also under pressure, not favoring the Australian dollar. China had important announcements but with mixed results: GDP strengthened significantly, as did industrial production but retail sales and exports fell. A further upward reaction for the pair requires entrenched prices above 0.65. On the contrary, below 0.63 the downward scenario increases its chances so we may try sell positions this week.

Bitcoin

Last week, Bitcoin closed at $20,628 with profits exceeding 5.30%. It was the most decent effort for Bitcoin in recent weeks to manage a serious recovery. Bitcoin and cryptocurrencies in general got great help from the general rise of the markets, confirming the correlation that has developed between them lately. A survey by Charles Schwab showed that almost one in two young people aged 10 to 40 are willing to invest in cryptocurrencies. The continuation of the rise has encountered difficulties, however, and is currently far from an upward price boom, which many analysts have estimated due to the recent large decline in volatility. It takes a clear break out of $21,100 in the first stage and a quick overrun of $22,800 afterward to confirm this dynamic but buy positions is our selection in the current 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.