21/11/2022
General Comment
It was a relatively quiet week for the financial markets after the high volatility that had preceded it. Until Tuesday, markets continued their upward trend that had formed due to the announcement of inflation in the US that seems to be de-escalating. This had led many analysts to believe that the Fed’s next rate hikes may be lower than the 0.75% that took place four times this year. But several central bankers have said from Tuesday ad on, that the inflation problem has not yet been resolved and that aggressive interest rate hikes must continue. Following these statements the climate changed, equity markets began to show corrective trends and the dollar strengthened again.
On the European continent, inflation showed little sign of de-escalating, and in October it was priced at 10.6%, down slightly from September’s 10.7%. The head of the European Central Bank Christine Lagarde, however, stressed in her speeches that inflation is particularly high and that the bank will make new increases in interest rates to stabilize prices and bring inflation back to the level of 2%. UK inflation was particularly high, at 11.1%, 1% above the September price.
Outside of the economic news and announcements, the week was marked by the G20 meeting that did not hide special news and developments since there was no consensus on disapproval of the Russian invasion of Ukraine nor any serious development in the recent issues of conflict between the US and China.
Overall last week, there was a small correction for United States equity markets, while corresponding European markets had gains. Volatility in the commodities market remained high, with most commodities such as gold and oil performing losses. The US dollar managed to turn profitable towards the end of the week, at the expense of other currencies such as the euro. Bond yields had been stabilizing trends, with the U.S. 10-year closing the week at 3.83%. Bitcoin, like most cryptocurrencies, also had stabilizing trends, as we will see below.
The current week is calm regarding the market news, and what stands out is the announcement of the Fed’s minutes on Wednesday. But we remind you that this announcement is not accompanied by a decision on interest rates since the next decision to raise interest rates is in December. PMI indicators in most major countries of the world will give a good sense of the course of their economies, while the announcement of durable goods orders in the US is also important. Germany on Friday announces the GDP for the third quarter of 2022 while from Thursday onwards America enters a public holiday due to Thanksgiving, so we expect market volatility to decrease.
SP500
The US SP500 index closed last week with downward trends, at 3,972 points and losses of 0.70%. It was a mild correction after the big rise that had preceded and that continued until Tuesday when the index reached 4,050 points after 2.5 months. Many central bankers in the United States, such as Mary Daly, head of the Fed in San Francisco, argued that the recent decline in inflation is clearly a positive development but the problem has not yet been addressed and that new rate hikes are needed, with a final rate value of up to 5.25%. We recall that the current price is 3.75% and that markets thought that the Fed would soften its stance, after the de-escalation of inflation to 7.7% in October. A negative impact on the SP500 was the announcement of the results of retail sales company Target, which had a 50% profit drop and was considered by many analysts as a harbinger of a recession in the US. The situation, however, did not magnify because retail sales in the US in October, increased by 1.3%, a price that was considered a good one. Perhaps central bankers think there should be no complacency on the big issue of inflation. From Thursday onwards, however, markets in the US will be down due to Thanksgiving. As long as the index is below 4,000 points, the likelihood of an upward reaction decreases so we prefer short positions this week.
DAX40
The German DAX40 index moved upward last week, closing at 14,454 points, with gains approaching 0.90%. It was the seventh bullish week in a row for the index which has managed to stabilize above 14,000 points, even if the signals from the economies of Europe and Germany are not positive. An official from Germany’s Civil Protection warned German citizens to get food, water, and other supplies due to possible blackouts from power shortages. There may also be measures by the authorities to manage fuel inventories after the ongoing war in Ukraine. In relation to the announcements of macroeconomic figures, the producer price index was slowed in October, to 17.4%, while economic sentiment in Germany was announced above market expectations. Since the ECB’s stance is in favor of new large interest rate increases, it is not ruled out that at some stage we will see corrective moves that will reflect a possible lack of liquidity due to more expensive money so we may try short positions this week.
FTSE100
The British FTSE100 index moved upward last week, closing at 7,397 points, gaining almost 0.80%. The new measures that raise taxes and cut spending, seem to be accepted positively by the country’s markets because high deficits and high borrowing costs do not suit anyone. Although inflation in the UK continues to rise (11.1% in October), the British equity market has recovered, mainly due to the good macroeconomic picture announced. The unemployment rate may have risen marginally to 3.6% but retail sales had an unexpectedly positive sign in October after rising by 0.6%. Consumer confidence was also higher than expectations. However, difficulties for the British economy are ahead, according to many statements by officials and analysts, so we may see corrective trends for the FTSE100 and we prefer short positions this week.
Gold
The previous week for gold was bearish, closing at $1,752 with losses close to 1.25%. The strengthening of the dollar was a key reason for this correction, which came after two strongly upward weeks. Statements by Fed officials about continued large interest rate increases have reignited market concerns and so we saw a fall in almost all commodity prices. The situation with lockdowns in China is also a negative development as COVID cases appear increased and the country’s economic activity is limited. Gold stopped for all these reasons its upward course at $1,790, while if it loses $1,700 it will have returned for good to its long-term downward trend that started last March, where gold was priced above $2,000. Short positions is our selection for the current week.
US Oil
Last week’s oil futures closed at $80.17, with strong losses approaching 10%. Except for last Tuesday, all days were sharply bearish while on Friday we saw prices close to $77.50 before a mini-recovery came in the last hours of the week. The statements of new large interest rate increases by the Fed reignited the scenarios of a severe recession that will hurt oil demand. The news from China is also negative, due to the ongoing lockdowns. There are reports from many media outlets that China may cut its oil imports after shrinking economic activity and limited travel has reduced energy needs. The only exception to this sharply negative picture for oil prices was the announcement of US inventories on Wednesday, which unexpectedly fell by 5.4 million barrels. Below $77.50, a downward channel begins to form that could lead to even lower prices, while in the first instance, an established upward movement above $81.30 could help the recovery of prices. We may try short positions this week.
EURUSD (Euro vs US Dollar)
Slightly bearish was the last week for EURUSD which opened at 1.0334 and closed at 1.0321. Until Tuesday, the uptrend for the exchange rate that had begun after the announcement of reduced inflation in the US continued. But then, some Fed central bankers ‘ statements put back the scenarios for new big interest rate hikes in the bank’s forthcoming decisions. The most likely scenario for the December meeting remains an increase of 0.50%, amassing about 75% but the probability has already decreased significantly. Perhaps central bank executives are trying to combat any complacency after the reduced price of inflation we’ve seen recently. In Europe, inflation continues to move to very high levels and Lagarde’s statements converge on how the ECB plans to move with new large interest rate hikes in the Eurozone. The GDP growth in the third quarter of 2022 by 2.1% is considered satisfactory, while the sign in industrial production was also positive. The macroeconomic results in the United States were positive with retail sales announced well above market expectations. If the conviction formed last week of aggressive Fed policy continues, we may see the exchange rate move even lower, with the price range of 1.02 being the next support so we may try sell positions this week.
GBPUSD (Great Britain Pound – US Dollar)
Bullish was the previous week for GBPUSD, which opened at 1.1803 and closed at 1.1882. The dollar may have strengthened, but the British sterling was also strong, especially after the program announced by the new Finance Minister Jeremy Hunt. It is a program of tax increases and spending cuts of 60 billion pounds, in order to address the large deficits of the economy. But the macroeconomic picture in the UK also helped to strengthen the sterling. First of all, inflation that was announced at 11.1% in October, significantly above September’s 10.1%, is a fact that makes the need for new large rate hikes by the Bank of England all the more imperative. The rest of the macroeconomic results, which do not yet show great pressures on the economy, allow this to happen. Any upward break out in the milestone price of 1.20 will give a new upside to the exchange rate, while it is logical that if the dollar strengthens much, there may be a return even below 1.1650. We prefer sell positions this week.
USDJPY (US Dollar – Japanese Yen)
The previous week was bullish for the USDJPY, opening at 139.06 and closing at 140.37. The U.S. dollar strengthened slightly, helping the exchange rate to recover above 140, but that recovery was weak because bond yields remained almost unchanged. Inflation in Japan was reported in October to be significantly higher, at 3.7%, and this would naturally strengthen the yen. But the statements of Kuroda (head of the Bank of Japan) right after, left no such room. Kuroda said loose monetary policy would continue to the point of full stabilization of the Japanese economy. Disappointing were the rest of the results for Japan such as GDP and industrial output which were announced in negative territory. The strong dollar, unchanged bond yields, and weak yen brought about the effect of a small rise in the exchange rate. However, the recovery above 140 is a sign that favors further upside, especially if there is a new split above 143.50 so we may try buy positions this week.
EURJPY (Euro – Japanese Yen)
Bullish was the last week for EURJPY which opened at 143.83 and closed at 144.89. Positive trends prevailed for the euro after the good macroeconomic picture for the Eurozone and Christine Lagarde’s statements about new interest rate hikes by the European Central Bank. On the contrary, in Japan, although inflation was reported to be quite high, there seems to be a willingness to continue the loose monetary policy and negative interest rates from the Bank of Japan. This situation creates bullish trends for the exchange rate which rebounded after two strong bearish weeks. The price range of 148.40 continues to remain the main target of buyers since it is the highest price for about 8 years. On the contrary, the downward trend may return if we see prices below 142.50. We may try buy positions this week.
EURGBP (Euro – Great Britain Pound)
Last week was bearish for EURGBP which opened at 0.8755 and 0.8684. The euro and the sterling were both strong this week but the British currency had extra momentum mainly due to the new tax-raising and spending-cutting program announced in the UK. Rising inflation in the UK also makes it more urgent for bigger interest rate hikes by the Bank of England than the Eurozone and the European Central Bank. If the same situation continues, it is not excluded that we will see the exchange rate approaching 0.85 so we prefer sell positions this week.
USDCAD (US Dollar – Canadian Dollar)
Last week was bullish for USDCAD, which opened at 1.3272 and closed at 1.3382. The U.S. dollar, which has strengthened, and the heavy pressure on oil prices, which is strongly correlated with the Canadian dollar, have brought this result. Inflation in Canada in October was unchanged at 6.9% and this fact probably indicates that the Bank of Canada will have to make new moves to raise interest rates in order to combat the continued high inflationary rate. The most likely scenario for the December decision is an increase of 0.50%, according to most analysts. Last week’s upward reaction came after four in a row of downward weeks and to have continuity we should see prices for the pair above 1.35. But if last week’s low breaks below 1.3220, the downward scenario will probably return more severe. We may try buy positions this week.
USDCHF (US Dollar – Swiss Franc)
The USDCHF had a bullish trend last week since the opening was at 0.9419 and the closing was at 0.9546. It was a relatively good upward reaction after the huge decline we had seen in the week before and that was mainly due to the recovery in the US dollar. Even though the producer price index (a precursor to inflation) was announced quite reduced in Switzerland, the statements of the head of the Swiss National Bank Thomas Jordan were in the direction of new interest rate hikes. He stressed that continued price growth needs to be addressed and that there is a high probability of tighter monetary policy. However, it seems that the dollar prevails and if it continues to strengthen this week, we may see the exchange rate move even above 0.97 so we may try buy positions this week.
AUDUSD (Australian Dollar – US Dollar)
Slightly bearish was the last week for AUDUSD, which opened at 0.6699 and closed at 0.6672. The relative rise of the US dollar helped the exchange rate to perform a downward trend after four-in-a-row upward weeks. Macroeconomic results in Australia were satisfactory, with the unemployment rate shrinking to 3.4%. Also, with the announcement of the minutes from the Bank of Australia, we learned that there is an intention for a continued increase in interest rates, but at small relative values, perhaps like 0.25%, until next May. A balance is therefore created in relation to the corresponding movements of the Fed if of course this information is confirmed. But the Australian dollar is being hit by ongoing lockdowns in China that are shrinking the country’s economic activity. We remind you that the two economies are strongly correlated and connected. Each approach to the price range of 0.65 is an additional possibility of strengthening the downward scenario so sell positions is our selection for the current week.
Bitcoin
Last week, Bitcoin closed at $16,256 with marginal losses of 0.35%. Bitcoin tried to recover within the week and prices marginally exceeded $17,000, but it seems that the negative climate has now established itself in the ranks of cryptocurrency investors. It’s not just the bankruptcy of FTX, the developments with its founder, and its failed takeover attempts that are shaking up the cryptocurrency world. In recent days, it seems that FTX has been attacked repeatedly by hackers, who exploit several factors to recover funds. Rumors in the ranks of investors come and go, in relation to possible dominoes in the market and about which organization will be the next in trouble. The baseline of support in the event of a further fall for Bitcoin is between $12,500 and $13,000. These prices are more or less the mining cost prices and so it’s a very critical zone. We may 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.
