26/12/2022

General Comment

Relatively quiet was the last week before the Christmas holidays for the financial markets. It was preceded by a storm of interest rate hikes by central banks and major economic news that had set a new framework for equity markets, commodities, and foreign exchange markets. These decisions and announcements may mark the general course of the economy and markets for the next period and several months in 2023.

Looking back at the week that just ended, the most important news that came to us from the United States had to do with GDP, personal consumption expenditures, and durable goods orders. The United States ran the third quarter of 2022 at an annualized rate of 3.2%, above market expectations, setting new data on an upcoming recession that most analysts have estimated. Durable goods orders were down and the marginal increase in personal consumption expenditures shows that the inflation monster is still untamed. Especially this latest development gave a signal that the Fed may be forced to continue with new rate hikes.

With no major economic announcements or speeches that could change the data and estimates for the European economy, it was last week. In the rest of the world, China’s decision to open its borders and further lift restrictions on the pandemic was a positive development. Of course, the war in Ukraine continues without a visible window of finding a solution, and the energy crisis is expected to afflict many of the world’s economies in 2023 as well.

An important development came from Japan with a sudden decision of the central bank, opening the permissible limit of the 10-year bond, in the range from -0.50% to 0.50% from -0.25% to 0.25% that was previously. This move was seen as a harbinger of a change in monetary policy but also alarmed the global economy in general because Japan is still the only major economy to provide increased liquidity.

The stock markets closed the week without any special changes compared to the previous one, except for the UK stock index as we will see below. For another week the US dollar suffered losses while the euro continued to strengthen. As for the main commodities, gold had sideways trends but we saw a big rise in oil prices. Bond yields were on the rise with the U.S. 10-year closing at 3.75% on Friday. Finally, little volatility and little changes were seen in the cryptocurrency markets.

The last financial week of the year has no important economic news and given the festive climate and holidays, no speeches or interventions are expected that may upset the markets. The only exception is Japan’s economy which has economic announcements and a speech by the head of the central bank.

SP500

The US SP500 index closed last week without any important changes, at 3,845 points and marginal losses close to 0.20%. By Wednesday, the index had recovered to 3,900 points, but Thursday’s announcements caused new nervousness. Personal consumption expenditures that increased in November raised concerns in the investment community that inflation is something that will persist and that stronger interventions from the Fed may be needed. Strong U.S. GDP in the third quarter of 2022 also aligned with this perception because a strong economy is supposed to withstand such interventions. So, the index found itself below 3,800 points. The positive mood returned in part on Friday, mainly due to China announcing liquidity injections of $30 billion, which is the biggest intervention of this type in about two months, according to Reuters. The recovery could have a continuation above 3,900 points and even more above 4,000 points. Below 3,800 points, however, and if there is an approach of 3,700 points which is important support, nervousness will probably have taken the baton. We may try short positions this week.

DAX30

The German DAX40 index moved slightly upward last week, closing at 13,941 points, with gains of 0.35%. The trends were stabilizing, almost throughout the week, with low volatility. Some economic news for Germany was announced at the beginning of the week, and then it seems that the festive climate has removed the mood of many investors to deal with the markets. Business sentiment improved in December while the producer price index in November rose by 28.2%, well below October’s 34.5%. So, Germany had no unpleasant surprises and the index managed to close around 14,000 points. If it can exceed 14,250 points, the climate becomes more optimistic but any downward break out below 13,790 points (the lowest price of about 1.5 months) may push the DAX40 even further. We prefer long positions this week.

FTSE100

The British FTSE100 index moved upward last week, closing at 7,473 points, gaining more than 1.90%. The gains are significant considering that the holiday season usually has low volatility. The pressure on the sterling and the questioning of markets over the continuation of the Bank of England’s aggressive interest rate policy helped the FTSE100 to perform better than all other major equity indices. Of course, the economic announcements did not have a positive sign (GDP was in negative territory in the third quarter of 2022 and public borrowing was very high in November at 21 billion pounds) but investors are weighing the intensity and duration of the possible recession, concerning interest rates. We remind you that prices close to 7,680 points are multi-year highs that are usually difficult to break out, while if there is a downward mood, the closer to 7,000 points, the more the climate will worsen. In any case, we prefer long positions this week.

Gold

Gold was slightly bullish last week, with next month’s futures closing at $1,806 and gains close to 0.17%. The dollar, which had a relative weakness, and personal consumption expenditures that rose in the U.S. in November, were factors that boosted gold’s investment profile last week. As a counterweight acted the bond yields strengthened, gaining a share of the investment community that is looking for safe investment options at the moment. Given the lack of economic news this week, gold is expected to be affected again by the same factors: dollar, safe-haven competitive products, and of course investment sentiment. The most significant resistance in the event of a continuation of the rise is at $1,837, which is the highest price for gold since the end of June so we may try long positions this week.

US Oil

Last week’s oil futures closed at $79.31, with important gains approaching 6.50%. While the case of a global recession that will hurt oil demand is becoming more likely, oil prices have had reason to be on the rise. The weather in America though with very low temperatures and blizzards has affected the supply chain. While concerns about China’s demand and supply from Russia continue, Saudi Arabia Energy Minister Abdulaziz bin Salman said OPEC had set aside policy and relied only on its estimates for its decisions. He also praised the recent decision to cut production which has been the subject of intense criticism, mainly from the US. Above $80, oil could gain new upward momentum while the downward turn would favor a split below $77. We may try long positions this week.

EURUSD (Euro vs US Dollar)
Bullish was the last week for EURUSD which opened at 1.0582 and closed at 1.0614. There was low and mild volatility, without significant changes, with the only developments that moved the pair being the announcements from the United States. The positive picture of US GDP for the third quarter, gave more points to the optimistic attitude that things will eventually not be so bad for the economy. The “thorn” was the increase in personal consumption expenditures, which shows that inflation is a harder opponent than many have estimated. The week has been quiet for Europe, without any particular announcements or developments but the attitude shown by the European Central Bank lately, foreshadows aggressive increases in interest rates in the near future, favoring the rise of the euro. If the exchange rate manages to compactly break out 1.08, perhaps the uptrend will gain new interest so we prefer buy positions for one more week.

GBPUSD (Great Britain Pound – US Dollar)

Last week the GBPUSD was bearish, as it opened at 1.2144 and closed at 1.2050. It is noteworthy that this downward move took place within a week when the US dollar was weak. The psychology of sterling is not good because there is still the aftermath of last week and its developments. The Bank of England raised interest rates by 0.50% but on announcing the vote, we learned that two members voted for rates to remain unchanged. This was seen by markets as a crack in the bank’s resolve and a question of its next moves. In addition, the UK’S GDP, which was announced into negative territory in the third quarter, leaves little room for optimism and confirms recession scenarios. Important for the exchange rate is the price zone of 1.20 because if it is below it, it will mean that the downtrend begins to consolidate and widen. It takes a dynamic reaction at least above 1.2250 to change things. We may try buy positions this week.

USDJPY (US Dollar – Japanese Yen)

The previous week was sharply bearish for the USDJPY, opening at 135.78 and closing at 132.79. The most central event that affected the exchange rate was the Bank of Japan’s decision to increase the 10-year bond’s margin, from -0.25% to 0.25% where it was until last week, to a range of -0.50% to 0.50%. Most analysts saw this move as a sign of a willingness to change the very loose monetary policy in force in Japan, as opposed to the rest of the economies raising interest rates and tightening their monetary policy. So, the Japanese currency strengthened significantly, ignoring the rise in bond yields. Japan’s rising inflation rate, as announced on Friday, to 3.8%, was another reason markets thought the country’s monetary policy needed to change. If the same perception continues and the exchange rate falls below 130, we will be able to talk more thoroughly about the downtrend so we prefer sell positions this week.

EURJPY (Euro – Japanese Yen)
Last week was bearish for EURJPY which opened at 143.76 and closed at 140.96. The euro was strong enough but the significant rise in the yen following the Bank of Japan’s decision on Tuesday about 10-year bonds clearly outweighed the exchange rate. It was a change after a long time and was interpreted as a precursor to a more general change in monetary policy in Japan. On Tuesday when this decision was announced, the exchange rate was well below 140 but then we saw some upward recovery trends. If it falls below 140 again, however, it is not excluded that the downtrend has become more established so we may try sell positions this week.

EURGBP (Euro – Great Britain Pound)

Last week was bullish for EURGBP which opened at 0.8706 and closed at 0.8806. The view of the markets towards the euro and sterling was different. The European Central Bank has made clear its intentions for new interest rate hikes to combat high inflation in the Eurozone. The UK also has strong inflation, but the two members of the Bank of England who voted against raising interest rates are the reason why the sterling has weakened. If the rise continues above 0.90, it will probably mean that the downtrend of recent months has been reversed for good. It is not ruled out, however, that the sterling will react and then we may see a shift to 0.85 again so we may try sell positions this week.

USDCAD (US Dollar – Canadian Dollar)

Last week the USDCAD was bearish, as it opened at 1.3673 and closed at 1.3593. The relative weakness of the U.S. currency, combined with rising oil prices, favored the downward movement of the exchange rate. The Canadian economy had important announcements last week, but they came into the background after the trend of the US dollar and oil prices dominated. Inflation in Canada was announced for November at 5.8%, unchanged from the previous month but well below the 6.4% estimated by markets. Retail sales did well after rising 1.4% in October but industrial production was negative. Finally, GDP strengthened slightly in the third quarter of 2022, but it is important that the country did not enter a recession. It remains to be seen whether the downward mood of the past week will have a continuation or will be a parenthesis of the upward movement that started about 1.5 months ago. We may try buy positions this week.

USDCHF (US Dollar – Swiss Franc)
Unchanged remained the price of USDCHF last week since the opening & closing prices were in the zone of 0.9320-0.9330. The relative weakness in the US dollar was balanced by the negative performance announced for Switzerland’s economy. The trade balance in November was announced at 2.3 billion francs, well below the previous month’s 4.3 billion. Also, the recent increase in interest rates by the Bank of Switzerland is expected to further strain the country’s economy. The most important factor, however, remains the US dollar, which, if it continues to weaken, could lead to a further fall, especially if its price falls below 0.92 so we prefer sell positions this week.

AUDUSD (Australian Dollar – US Dollar)

Slightly bullish was the last week for AUDUSD, which opened at 0.67 and closed at 0.6713. The Reserve Bank of Australia announced its minutes after the recent increase in interest rates and so we learned that there were three dominant trends among members: 0% increase, 0.25% increase, and 0.50% increase. In the end, the second case prevailed and there is a perception that new increases will occur in the near future. It was important, however, that after a long time, an opinion was heard that there should be no increase. On China’s side, interest rates remained unchanged at 3.65% and the positives of the country’s economy include the fact that there was openness to visits from other countries. For over two months, there has been a strong uptrend in the exchange rate but it needs a net break out above 0.69 to be able to continue. A shift below 0.66 strengthens the reversal scenario. We may try sell positions this week.

Bitcoin

Bitcoin was slightly bullish last week, as it closed at $16,828 with marginal gains close to 0.50%. Volatility, for about 1.5 months, has fallen to very low levels, compared to previous periods in cryptocurrencies. It is a fact that after all-time highs in November 2021, a collapse has occurred, with losses in many cryptocurrencies that reach or even exceed 80%. The strikes were important: the cases of Terra / Luna and FTX being the main ones. The recent reaction may be attributed to exogenous factors since Bitcoin’s hashrate has fallen about 40% after most U.S. mining companies are out of business amid very low temperatures and snowstorms. The $15,500 support remains the most important technical line of defense for Bitcoin 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.