23/01/2023

General Comment

The relatively optimistic views in financial markets in relation to the course of the global economy continue. The pessimistic scenario that prevailed last summer seems to have little chance of confirmation compared to the soft-landing scenario after recent events. The pandemic followed by the war in Ukraine and combined with the very large liquidity that prevailed in recent years from the central banks had created an explosive mixture that many believed could even lead to a crash. The macroeconomic results so far do not indicate this. Also, the expected energy crisis due to the war seems not to have such serious effects since its important ally in this was the relatively warm weather in many countries that kept energy reserves at high levels and prices low.

Inflation, which is perhaps the biggest thorn in the world economy at the moment, seems to be de-escalating and so central banks will probably adjust their policy of raising interest rates accordingly. Several statements from European Central Bank officials were in the direction of a milder rate hike. Something similar is happening in the United States, with the probability that the next increase from the Fed will be in the order of 0.25%, now reaching certainty.

Most stock indexes moved slightly correctively, but without any particular nervousness and worries. Commodities such as gold and oil moved upwards while we saw a slight downturn for the US dollar compared to the rest of the main currencies. The de-escalation of bond yields continued with the U.S. 10-year closing the week below the psychological threshold of 3.50%. Cryptocurrencies also had a significant rise for the second consecutive week, as a result of the improved climate and the positive economic sentiment.

The week that has just started is calm compared to regular economic news since the great news about the Fed’s decision on interest rates is on February 1. Stand out are announcements of durable goods orders and personal consumption expenditures in the United States, PMI indicators for the world’s major economies, the decision on interest rates in Canada, and inflation in Australia and Japan.

SP500

The US SP500 index closed last week with corrective trends, at 3,973 points and losses of just over 0.60%. Until Thursday, the index had a sharp correction as it dropped even below 3,900 points but on Friday there was a strong recovery that limited the weekly losses, but without achieving a full recovery. The perception by the markets that the Fed’s rate hikes are coming to an end and that the next ones may be at 0.25%, boosted investment sentiment because it seems that liquidity will not be as limited as initially expected. This feeling also reinforces growth estimates in the US, with the recession scenario now the least likely. On Friday, the US market also gave a boost to some positive news, mainly in relation to the increased sales of NETFLIX and it seems that the market is thirsty for such news that raises the psychology. A clear breakout above 4,000 points will be another reason for good psychology, while below last week’s lows at 3,885 points, the climate may deteriorate quite a bit. We may try long positions this week.

DAX40

The German DAX40 index moved a bit lower last week, closing at 15,034 points, with losses of 0.35%. It was a slight correction after two strongly upward weeks that could also be described as reasonable after the index had been at around 11-month highs. Rumors of a lower final interest rate from the ECB are helping some European markets that according to several international analyses are undervalued and could have a good profit margin. The inflation indicators announced in Germany last week, however, do not give a clear picture: the wholesale price index fell in December by 1.6% but the producer price index fell by just 0.4%. In contrast, the harmonized index of consumer prices fell by 1.2% in the same month. There is therefore a de-escalation of inflation, with some indicators strong and others softer. If the index manages to stay consistently above 15,000 points, it may be able to look higher so we prefer long positions this week.

FTSE100

The British FTSE100 index declined last week, closing at 7,771 points, with losses of almost 1%. The high inflation that insists in the UK gives no room for the Bank of England to ease the tight monetary policy and the high interest rate hikes. On the other hand, the head of the Bank of England appears more optimistic by underlining that the worse is behind and that inflation may drop sharply within the year. The rest of the UK macros are in a good shape as the retail sales and the unemployment rate do not point out a strong recession. Since the FTSE100 is close to its all-time high, everybody should pay extra attention even if the trend is strongly bullish. We may try long positions this week.

Gold

Gold was bullish last week, closing next month’s futures at $1,927 and gains of just over 0.20%. The climate remained positive but the volatility decreased quite a bit, mainly towards the end of the week due to the absence of the Chinese due to the New Year holidays. Markets ‘ expectations of lower interest rate hikes by central banks are also sustaining the positive sentiment. Bond yields, which have been declining for a few weeks, are an ally for gold in the low-risk stock market category. Gold prices have managed to break out several critical resistances and have now found themselves close to the milestone price of $2,000. The last time gold was found above $2,000 was in mid-April and if this is achieved again, it will be a psychological leap for investors of this option. Long positions is our selection for the current week.

US Oil

Last week was bullish for oil with next month’s futures closing at $81.69, with gains exceeding 2%. Oil has performed a strong recovery in prices for about a month, led by China with positive economic results and market estimates for large growth in 2023. Let’s not forget that China is the world’s largest oil consumer. The news from the other main economies looks positive too, with the result that expectations for oil demand are high. Recent International Energy Agency and OPEC reports on demand in 2023 are also positive. But there is a mild winter in many European countries that keeps energy inventories high, limiting new orders. If this is combined with the recent sharp rise, it is not excluded that it will be accompanied by price stabilization or even corrections. We may try short positions this week.

EURUSD (Euro vs US Dollar)
Bullish was the last week for EURUSD which opened at 1.0829 and closed at 1.0855. In addition to the slight weakening of the US dollar, from Wednesday onwards the euro began to strengthen. The main reason was the announcement of inflation in the Eurozone, which found itself at 9.2% in December. The price may not yet be low enough but inflation has been in negative territory (on a monthly basis) for the second consecutive month. Given the expressed willingness of the US central bank to lower interest rate hikes in the near future, there is a high probability that for at least the first months of 2023, the European Central Bank will prove much more aggressive in this area. Inflation in the Eurozone which is significantly higher than in the US is driving this scenario. This perception has greatly strengthened the euro in recent weeks. In the field of financial results, retail sales in the US were in negative territory in December. The exchange rate seems to have stabilized above 1.08 and if there is a bullish breakout of the resistance of 1.0870, it is not excluded that we will soon see prices above 1.10. We prefer buy positions for one more week.

GBPUSD (Great Britain Pound – US Dollar)

Bullish was the last week for GBPUSD, which opened at 1.2215 and closed at 1.2396. For the third consecutive week, the exchange rate has been on the rise, which is due not so much to the slight weakening of the US dollar as to the strengthening of the sterling. Inflation in the UK in December was announced at 10.5%, with a very slight decrease from the previous month’s 10.6%. So, markets are getting the message that there is still a long way to go and probably new big interest rate rises from the Bank of England will come in order to tackle the problem. The head of the bank Andrew Bailey, however, seemed more optimistic, saying that the difficulties are behind and that the most likely scenario is a rapid de-escalation of inflation in 2023. The UK had other major announcements this week: the unemployment rate was unchanged at 3.7% and retail sales fell in December. Significant is the resistance in the price range of 1.2450, which is also a high of about 7 months. A bullish breakout above these levels can lead to a further rise so we may try buy positions this week.

USDJPY (US Dollar – Japanese Yen)

The previous week was bullish for the USDJPY, opening at 127.74 and closing at 129.56. The U.S. dollar that did not strengthen and bond yields that de-escalated cannot justify this rise. Therefore, this is a major weakening of the Japanese currency, which began and continued on the basis of the announcements and speeches of last Wednesday. On Wednesday interest rates were announced by the Bank of Japan, which were unchanged in negative territory, at -0.1%. The speech of the head of the bank Hirohiko Kuroda was in the direction of continuing a very loose monetary policy, and this was the main trigger of the weakening of the yen. On Thursday, one of the Bank of Japan’s top contenders, Takatoshi Ito, said the band around the yield on Japan’s 10-year bond could widen further from its current 0.50% level. It is a fact, however, that from mid-October onwards, the exchange rate has a strong downtrend without missing, however, some upward reactions like the one of last week. Importantly, there was no closure above 130 last week and so it is not ruled out that the downward trend will return this week so sell positions is our selection.

EURJPY (Euro – Japanese Yen)
Bullish was the last week for EURJPY which opened at 138.36 and closed at 140.65. The picture for the exchange rate was clear: the euro strengthened due to the good macroeconomic picture in the Eurozone and the imminent new interest rate hikes by the ECB, and the yen weakened after interest rates remained unchanged in Japan and the statements of the head of the country’s Central Bank Kuroda, were towards the continuation of very loose monetary policy. But many analysts believe that even though there are such statements from Japan, the situation is about to change. The long-term picture of the yen is in the direction of strengthening, and if the exchange rate gets below 140 again, the likelihood of a downtrend is significant so we prefer sell positions this week.

EURGBP (Euro – Great Britain Pound)

Last week was bearish for EURGBP which opened at 0.8855 and closed at 0.8753. The euro had a generally positive picture, but the strength of the sterling pushed the exchange rate into a downward movement. Inflation in the UK that persists sustains the belief that the Bank of England must continue with aggressive rate hikes. The head of the bank Andrew Bailey appeared reassuring and so sterling gained strong momentum. However, aggressive moves are also expected from the ECB in the near future and so it is not ruled out that this week the euro will be strengthened again and we will see the exchange rate move to higher levels. We may try buy positions this week.

USDCAD (US Dollar – Canadian Dollar)

Slightly bearish was the USDCAD last week, as it opened at 1.3381 and closed at 1.3375. The two economies, the United States and Canada, show several similarities in relation to inflation and central bank policy lately. Canada’s inflation rate was announced in December at 5.4%, significantly lower than the previous month’s 5.8%. The United States has a similar picture of inflation. So, the markets have taken the view that the central banks of the two economies will de-escalate interest rate increases in the coming period and this has created the balance between the two currencies that we saw last week. The slight rise in oil prices gave an extra boost of strengthening to the Canadian dollar. The trend has been clearly downward for a few weeks now and if it continues, significant support at 1.3220 may be threatened so we prefer sell positions for one more week.

USDCHF (US Dollar – Swiss Franc)
The USDCHF moved lower last week after the opening was at 0.9258 and the closing was at 0.92. The week was without special developments for the Swiss economy and so the exchange rate moved downwards, mainly on the basis of the weakening of the dollar. There is a widespread sense in the markets and many analysts that the Central Bank of the United States will stop high rate hikes, starting with the next decision on February 1. Based on this feeling, the final interest rates in the US will be lower than the estimates that prevailed a few months ago. If there is a solid fall below 0.91 it will mean that the downward movement is further consolidated so we prefer sell positions for one more week.

AUDUSD (Australian Dollar – US Dollar)

Unchanged was AUDUSD last week as it opened and closed around 0.6965. The news of the lifting of the embargo by the Chinese authorities on Australian products seems to have been consumed by the markets and passed into the past. As for the Australian economy, the unemployment rate remained unchanged at 3.5% while the important news of this week is the announcement of inflation next Wednesday. China has had several important announcements before closing its market due to the New Year holidays. Interest rates remained unchanged at 3.65%, while Chinese GDP, industrial production, and retail sales performed very well. AUDUSD has been very close to the milestone value of 0.70 and based on this value it may mark its course in the next period. We may try buy positions this week.

Bitcoin

Bitcoin closed at $22,717 last week with gains approaching 9%. Bitcoin was on an upward rally for the third week in a row with total gains of this period, about 36%. Cryptocurrency fans have welcomed this news with enthusiasm and were not even intimidated by the announcement of the bankruptcy of Genesis (cryptocurrency lending company) that we saw last week. Bitcoin and most cryptocurrencies are considered high-risk investment options and thus are favored by high liquidity in the markets. Rumors and expectations regarding the behavior and actions of central banks have raised the bar of increased liquidity, giving a big boost to the crypto markets. The most significant resistance now ahead of Bitcoin is at $25,200, and a breakout above those levels would rock investor psychology. But special attention must be paid: structural problems remain and cases such as Terra/Luna and FTX are still fresh memories. We may try low-risk short positions this 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.