05/12/2022

General Comment

Markets continued to rise for one more week, with positive sentiment returning mainly from Wednesday onwards, when Fed chief Jerome Powell spoke at the Brookings Institution, stressing how the pace of interest rate increases will decrease and the beginning will be made by the next interest rate decision in December. The probability of a 0.50% increase in interest rates in December has now exceeded 78% according to the CME FedWatch tool. We remind you that there have been four increases in a row of 0.75%. Powell’s statements significantly improved market sentiment in the sense that interest rates would eventually not be as high and that liquidity would not be as limited as originally estimated. That positive sentiment partly dissipated on Friday after the November labor market (NFPs) announcement in the U.S. 263K new jobs were created in November against market expectations of 200K. Such a positive image for the labor market created a sense for some investors that the good state of the economy will allow for new large increases in interest rates. However, after a few hours, the positive mood returned and much of the losses were recovered. The positives of the week for the US economy certainly include GDP growth of 2.9% in the third quarter of 2022 but below the markets’ expectations were announced the PMI indicators.

In Europe, little has changed: November inflation was reported to be lower but in double figures again (10%), and Christine Lagarde in a speech reiterated that the European Central Bank will continue to do what is necessary to stabilize and control prices. An important development was the agreement of the member countries of the European Union, for a cap on Russian oil prices at $ 60 per barrel. The decision foresees a revision of the price cap every two months and that the price should always be at least 5% below an average price set by the International Energy Agency. In addition to the member states of the European Union, the cap will include other countries such as the USA and the United Kingdom. There were strong reactions from Moscow, which in a statement claimed that it would not sell oil to those countries that adopt the ceiling.

The news from China is positive since the Chinese government has decided to lift part of the restrictions on the pandemic, after the strong reactions and protests that have taken place. The Chinese PMI indicators, however, had an unexpectedly disappointing result, probably due to the economy shrinking after the lockdown.

Overall, the week was profitable for the major European and U.S. stock indices, while most commodities such as gold and oil performed significant gains as well. The pullback in bond yields continued, with the U.S. 10-year closing below 3.50% for the first time in about 2.5 months. We saw a small recovery for Bitcoin and most cryptocurrencies but on a limited scale compared to the rise of the rest of the markets.

The week that has just begun is calmer in terms of economic announcements and news. PMI indicators in the world’s largest economies, GDP in the Eurozone, and inflation in China stand out. In secondary economies, the announcements of interest rates in Australia and Canada and the GDP of Japan and Australia are important.

SP500

The US SP500 index closed last week with upward trends, at 4,066 points and gains of 0.80%. This move in the index is entirely due to Wednesday’s rise and the speech of Jerome Powell, who gave the signal for a reduction in the rate of increase by the Fed, starting from the December meeting. It was something the markets expected but this time it was confirmed by official lips. The Powell speech was preceded by the announcement of GDP in the US for the 3rd quarter of 2022, with an increase of 2.9% that exceeded market expectations. At the same time, we saw below the expected result of personal consumption expenditures in November and so the climate had already prepared positively. The SP500 began to significantly correct on Friday, following the announcement of the unemployment rate in the US. The strong picture of the labor market strengthened the dollar and pushed the index, which again found itself in the region of 4,000 points but quickly recovered, indicating that there is a generally positive mood in the market. If the high of the previous week is exceeded, above 4,110 points then the index will “chase” the 4,175 points which is a high value of about 3.5 months. A significant setback will be considered a correction below 4,000 points. We may try short positions this week

DAX30

The German DAX40 index closed last week, at 14,559 points without a significant change. The situation in Europe remains critical as the war in Ukraine continues and the energy crisis is just around the corner, but there are now voices saying that things will not be as gloomy as originally estimated. This can be seen from the course of the DAX40, which has been on an upward rally since the beginning of October, but also from the good economic results announced by the Eurozone and Germany. Germany reported inflation of 11.3% in November, a price down on October’s 11.6%, and a strong trade balance in October, at 6.9 billion euros. Unemployment was announced marginally increased to 5.6%, while retail sales shrank by 5% in October, on an annual level. An important development for Europe’s economies was the imposition of a cap on the price of Russian oil, at $60 a barrel, and it remains to be seen whether this is something sustainable and feasible. Above 14,700 points, the index could potentially even approach 15,000 points. The downward scenario gains points below 14,300 points and we prefer short positions this week.

FTSE100

The British FTSE100 index moved upward last week, closing at 7,562 points, gaining almost 0.90%. This index followed the general upward trend of the markets, already in a bullish rally from mid-October onwards. The positive climate of market acceptance enjoyed by the new government is a good reason for euphoria. Officials from the Bank of England are also talking about new interest rate increases, but Huw Pill said that in the baseline scenario, interest rates will not reach 5.25%. We remind you that the current price is at 3%. Last week had no major announcements while in the current one there are only the PMI indicators. So, the British market will move again concerning views and statements on monetary policy in the UK. The FTSE100 has been very close to an important technical resistance zone: at 7,665 points and at 7,885 points which is the highest price for the index. There is therefore still room for further growth but at such high levels, some profit vesting corrections cannot be ruled out but we will prefer long positions this week.

Gold

Gold was strongly bullish last week, closing at $1,811 and gaining more than 2.30%. The strong pressure on the US dollar is the main reason that gold has been on an upward rally for several weeks. Bond yields that continue to fall are also favoring gold’s upside. We saw a slight correction in prices on Friday, with the announcement of the US labor market (NFPs) but the recovery that followed and the close of the week above $1,800, did not leave much room for major concerns. The climate in China is improved with a partial lifting of the lockdown while the positive climate in the markets is something that positively affects the market of commodities. A stabilization above $1,800 or even more, an upward breakout above $1,825 (a 5.5-month high) may also give gold a new upside. In the event of a price correction, critical is the range at $1,790 and we may try short positions this week.

US Oil

Last week was bullish for oil with next month’s futures closing at $80.26, with gains approaching 5%. A few hours ago, an online meeting of OPEC members took place and they decided to keep production at current levels. OPEC is hard to make new decisions at a time when demand is highly volatile: China’s lockdowns, the imposition of a cap on Russian oil prices in Europe, and the big question mark of a slowing global economy cannot allow for safe estimates of global oil demand. The next OPEC meeting will take place in February when there will be a better picture. The generally positive sentiment in markets, especially after Powell’s speech, helped oil recover from week lows that were parallel and near one-year lows, at $73.60. If oil is above $85, the trend begins to reverse more strongly and long positions is our selection for the current week.

EURUSD (Euro vs US Dollar)
Bullish was the last week for EURUSD which opened at 1.0369 and closed at 1.0539. The fall for the dollar continued, especially after Powell’s speech that confirmed markets ‘ expectations for a lower rate of interest rates rise in the United States from now on. The US dollar has been declining since late September when this perception began to emerge and prevail. On the contrary, in Europe, the problem of inflation remains very acute (inflation in the eurozone was announced at 10% in November), and given that there have not been many large increases in interest rates by the ECB, the markets expect that this will happen shortly. The Lagarde statements support these expectations. The Eurozone generally presents a decent macroeconomic picture: the unemployment rate fell marginally in October to 6.5% while the producer price index was in negative territory. So, exchange rate has managed to climb above 1.05 for the first time since last June and if the weakness of the dollar continues, the next resistance near 1.0790 could be threatened. Below 1.03, the uptrend in the pair that has been erasing for about 2.5 months could partly be called into question. We’ll prefer buy positions for one more week.

GBPUSD (Great Britain Pound – US Dollar)

Bullish was the previous week for GBPUSD, which opened at 1.2062 and closed at 1.2286. It was the fourth strong upward week for the exchange rate that has managed to return to the levels it was at in the middle of the summer, before the government crisis and before the big fall for sterling began. The rise strengthened on Wednesday and Powell’s statements weakened the US dollar but expanded on Thursday after statements by Huw Pill (Bank of England official), who said that the situation requires new interest rate increases at the next meetings. He also stated that under the baseline scenario, interest rates will probably not reach 5.25% but this statement did not weaken the pair because anyway this value is above market expectations for the final price of interest rates in the US. GBPUSD is very close to the very important resistance of 1.23 and if it manages to overcome it could be led in the first phase to 1.25 and then to 1.2660 so we may try buy positions this week.

USDJPY (US Dollar – Japanese Yen)

The previous week was sharply bearish for the USDJPY, opening at 139.20 and closing at 134.31. There is a very big fall in the exchange rate not only in the week that passed us but also in general, from mid-October onwards. The dollar continues to weaken due to the general perception of the markets that the next increases in interest rates in the US will be smaller than the previous ones and that interest rates may stabilize in mid-2023. Based on the same reasons, there is a widespread decline in bond yields that helps in the downward course of the exchange rate. Asahi Noguchi, a member of the Board of the Bank of Japan, said the bank’s loose monetary policy for some time could change if economic conditions allow. Inflation in Japan may be lower than in other economies, but it has certainly reached record levels for the country and many central bankers are considering revising their stance on monetary policy. If these rumors become stronger in the near future and are combined with any continued fall in the dollar, the exchange rate could continue downward until 130, at least in the first phase so we prefer sell positions for one more week.

EURJPY (Euro – Japanese Yen)
Last week was bearish for EURJPY which opened at 144.40 and closed at 141.54. The week has been positive for both the euro and the yen, but Japan’s currency is currently favored by two main factors: the decline in bond yields and statements by central bankers from Japan, according to which the first cracks in the change in the policy of negative interest rates and the very loose monetary policy that has been in force in the country for some time, are beginning to appear. If the exchange rate manages to get below 140, the move so far could develop into a strong downward trend so we may try sell positions this week.

EURGBP (Euro – Great Britain Pound)

Last week was slightly bearish for EURGBP which opened at 0.8594 and closed at 0.8570. The British pound continues to have an advantage over the euro mainly due to the perception of the markets that the Bank of England will be more decisive in its next moves on interest rates than the European Central Bank. The general philosophy in the United Kingdom and the bureaucracy with the many conflicting voices in the Eurozone are the main reasons that support this perception. In addition, the UK, after the latest government change, is considered to be in a better economic phase to make such moves. An important price zone for the further fall in the exchange rate is 0.85. Below these levels, we could see even lower prices so we prefer sell positions this week.

USDCAD (US Dollar – Canadian Dollar)

Bullish was the last week for USDCAD, which opened at 1.3385 and closed at 1.3468. That move came opposite regarding the weakening of the U.S. currency and rising oil prices that usually favor the Canadian dollar. Markets took note of the Bank of Canada’s possible decision on interest rates next Wednesday, where expectations are low, of 0.25% without excluding and a surprise increase of 0.50%. That’s a lower rate relative to the Fed, putting the Canadian dollar in a weaker position relative to the U.S. currency. In the field of macroeconomic announcements, there were mixed feelings about the economy of Canada in the past week. Canadian GDP for Q3 2022 grew by 2.9%, a value that was below market estimates. But the new jobs were more than expected and so the unemployment rate fell to 5.1% in November. Above 1.3650, the scenario of continuing the upward reaction is advantageous, while the opposite scenario seems to dominate if the price of the exchange rate is below 1.3220. We may try buy positions this week.

USDCHF (US Dollar – Swiss Franc)
The USDCHF had a downward course last week since the opening was at 0.9449 and the closing was at 0.9366. This fall is of course due to the weakening of the US dollar, especially from Wednesday onwards. The decline could have been much larger but Switzerland’s macroeconomic results did not help in that direction. Switzerland’s GDP strengthened in Q3 2022 by just 0.5%, a value significantly less than the 2.2% of the previous quarter. The country’s inflation was also announced for November at 3%, unchanged from the previous month, which decreases the possibility of strong intervention by the National Swiss Bank. The USDCHF is just above the significant support of 0.9370 and if it consolidates below these levels, we may see further decline. The downtrend that has been in place for about 1.5 months could stop if we see prices above 0.95. We prefer sell positions this week.

AUDUSD (Australian Dollar – US Dollar)

Bullish was the last week for AUDUSD, which opened at 0.6718 and closed at 0.6794. In addition to the weak US dollar, the situation in China, which seems to be normalizing, is helping Australia’s economy and consequently its currency. The exchange rate could have risen more strongly, but the negative effects on Australian retail sales and PMI indicators did not allow for this. On Friday, Bank of Australia chief Philip Lowe said interest rate hikes would continue, aimed at combating high inflation but to such an extent that they would not hurt the country’s economy. Next Tuesday the new rate hike in Australia will be decided and the big target of buyers of the exchange rate this time remains the price around 0.70. We may try buy positions under these circumstances this week.

Bitcoin

Last week, Bitcoin closed at $17,114 with gains exceeding 4.20%. This picture is a positive development for Bitcoin but also for other cryptocurrencies that also performed profits, but given their high volatility, it was a limited rise. The overall positive climate in the markets has also helped the cryptocurrency market, but the numbness and concerns after the recent developments with FTX have not yet subsided. The big exchange Kraken announced large cuts in jobs, while Bybit (another big exchange) announced something similar. The positives of the past week are of course the easing of restrictive measures in China and expectations of less aggressive interest rate hikes by the Fed. They are factors that improve the psychology of markets and increase risk appetite. It takes a decisive move near $20,000 for Bitcoin to recover more, but the trend remains downward so we prefer short positions for one more week.

IMPORTANT DISCLAIMER

The information in 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.