06/02/2023

General Comment

Last week was particularly important for the global economy and financial markets, both in relation to central bank decisions on interest rates and the financial results announced.

More specifically, three major central banks announced their interest rate decisions. The Fed raised interest rates by 0.25% as the largest share of markets climbed, confirming the downward trend in hikes. Jerome Powell’s statements at the press conference that followed were also positive. Jerome Powell confirmed the deflation trend but said there was still a lot of work to be done to address the problem. After these developments, equity markets rose sharply, believing that the final price of interest rates would not be as high as initially expected. This rise dragged almost all major equity markets upward as well as commodity markets. The U.S. dollar has had big losses, while other currencies such as the euro and sterling were on the rise. That picture began to change on Thursday but on Friday it was completely reversed after the United States labor market results were announced. The result surprised the markets which expected 185K new jobs for January while the actual number was 517K. The unemployment rate dropped to 3.4% which is the lowest rate since May of 1969. The markets considered that the Fed may have more room for interest rate hikes, so the U.S. dollar skyrocketed, while equity markets were under intense pressure. After about an hour, the announcement of the PMI Services Indicator followed with also unexpectedly very positive results (55.2 against expectations for 50.4), confirming the economy’s good news.

In Europe, the European Central Bank raised interest rates by 0.50% with a clear commitment to an equal increase in March since the problem of inflation in the Eurozone has not yet been adequately addressed. There was a 0.50% increase in interest rates from the Bank of England too, as we will see below.

Besides the pure economic developments, there was an incident that caused concerns in the markets. A US military fighter jet shot down a suspected Chinese spy balloon at South Carolina. The relationship between the two countries worsened given that the US Secretary of State Antony Blinked called off his previously planned visit to Beijing. China’s President Xi Jinping called it “an obvious overreaction”.

The final picture of stock indexes was bullish despite Friday’s big correction. On the other hand, for commodities such as gold and oil, the correction was higher, and the week ended in a negative sign. The U.S. dollar turned positive, in contrast to the rest of the major currencies which eventually found themselves at lower levels. The week was also down for cryptocurrencies, which due to the weekend had greater margins for losses. Finally, there was a small rise in bond yields with the US 10-year bond yield approaching 3.60%.

The week that has just begun is distinctly calmer. The announcement of inflation in China and Germany, retail sales in the Eurozone, GDP in the UK, and interest rates in Australia stand out. Markets will try to digest last week’s information.

SP500

With bullish trends, the US SP500 index closed last week, at 4,136 points and profits of 1.60%. The index had strong upward trends until Thursday when it approached 4,200 points. The Fed’s announcement to raise interest rates by 0.25%, a value much lower than the last increase of 0.50% and much more than the previous increases of 0.75% consecutively, has helped a lot. Jerome Powell at the press conference that followed confirmed that inflation has fallen significantly but stressed that the problem had not yet been resolved in its entirety. The confidence of the markets that the final price of interest rates will not be particularly high, it may even remain below 5%, helped the SP500 to perform significant gains. That picture changed dramatically on Friday after the impressive labor market result. In January were created more than half a million new jobs, which was well outside market expectations, and created the impression that the Fed might have more room for new rate hikes. Based on this reasoning, the index developed strong pressure and corrective movements without however changing the weekly sign. The service PMI index, which also had a marked improvement, gave further credit in this scenario. If the 4,100 points are lost easily, nervousness is expected to intensify further, while any upward breakout above the 4,200 points confirms the upward trend of the index. We may try short positions this week.

DAX30

The German DAX40 index was bullish last week, closing at 14,476 points, with profits of 2.15%. The DAX40 was heavily influenced by the U.S. market and had significant gains on Wednesday after the Fed announced interest rates, but a big explosion took place on Thursday with the announcement of interest rates by the European Central Bank. The 0.50% increase was expected as well as the next increase in March and thus avoided any surprises that could cause nervousness and worries. The economic announcements from Germany were rather negative but did not appear to greatly affect investors. German GDP declined in the fourth quarter of 2022, while retail sales fell significantly in December. In the same month, the unemployment rate remained unchanged at 5.5%. Given that the problem of inflation in Germany and the wider Eurozone region remains, the ECB will probably continue aggressively and so it is not excluded that Friday’s correction will have a follow-up, especially if there is an approach of 15,000 points. We prefer short positions this week.

FTSE100

The British FTSE100 index moved upward last week, closing at 7,902 points, gaining more than 1.70%. The index touched its all-time highs (May 2018) but at these levels, corrective pressures emerged that pushed the index lower. All this rise occurred on Thursday and Friday, especially after the Bank of England’s decision to raise interest rates by 0.50%. Andrew bailey’s speech that followed was encouraging as it was pointed out that inflation started to de-escalate so the sentiment was particularly positive and the FTSE100 had an impressive week up to all-time highs. But Friday’s correction raises concerns, especially ahead of the UK GDP announcement this week. The risk of recession has not passed, and any negative news could push the index to lower levels. We may try short positions this week.

Gold

The previous week was sharply bearish for gold, with the next month’s futures closing at $1,878 and losses close to 3.50%. Gold, despite approaching $1,975 by mid-week, had strong downward trends from Thursday onwards. The dollar strengthened on Friday following a U.S. labor market announcement that showed the U.S. economy is resilient and can therefore be put under more pressure by raising interest rates. The small rise in bond yields, as a low-risk competitive product, also played a negative role in gold. The climate has deteriorated further due to the tension in relations between the US and China after a suspected spy balloon was shot down by the US. It remains to be seen whether this strong correction signals a change in trend or whether gold will return to its upward channel. Technically there are no levels of supports or resistors that could have a role and therefore we will prefer long positions this week.

US Oil

Last week was strongly bearish for oil with next month’s futures closing at $73.17, with losses approaching 8%. The whole week has been downbeat for oil as several factors have contributed to this. The strengthening of the dollar especially after the announcement of the U.S. labor market was a decisive factor. A large portion of investors also believe that lower growth and possibly a recession could significantly affect oil demand. Sweden, as president of the European Union, has also announced a new cap on oil imported from Russia at $ 100 per barrel. OPEC’s meeting on Wednesday was rather neutral, as member states have kept a wait-and-see attitude towards Russia and demand from China, leaving production unchanged. Oil prices have been hard pressed but close to $ 70 there is significant support where it is also a low price of several months. Α recovery therefore cannot be ruled out and so we are going to try long positions this week.

EURUSD (Euro vs US Dollar)
Last week was a downward one for EURUSD which opened at 1.0864 and closed at 1.0793. The rate has an impressive uptrend until Thursday when it managed to surpass 1.10 for the first time since last April. But towards the end of the week, there was strong pressure. On Thursday, the European Central Bank announced a 0.50% interest rate hike and promised a new one for March, but markets agreed that Christine Lagarde did not convince in the press conference that things were going well or show much determination on the next moves. In addition, the US dollar strengthened significantly after the impressive performance of new jobs in the US. The whole rise therefore disappeared and thus the pair closed lower. The overall upward trend, however, has not yet changed and so there may be a new approach of 1.10. In this regard, we prefer buy positions this week.

GBPUSD (Great Britain Pound – US Dollar)

Sharply bearish was last week for GBPUSD, which opened at 1.2388 and closed at 1.2050. It was a hard landing for the pair after the strong rise that had preceded it for several weeks. The 0.50% rise in interest rates from the Bank of England that was announced on Thursday was expected but there was no clear commitment to new hikes at the forthcoming meetings. The result of the 7-2 vote opens the possibility that this increase was even the last one. The fact is, however, that the bank’s forecasts for the upcoming recession are milder since they estimate that 2023 will end with a recession of 0.5%. We recall that in the previous meeting, the estimate was for a recession of 1.5%. Of great importance is the announcement of GDP in the UK for the final quarter of 2022 next Friday. A sold downward breakout of 1.20 can create new downward pressures, and therefore we may try sell positions this week.

USDJPY (US Dollar – Japanese Yen)

USDJPY moved upward last week, opening at 129.58 and closing at 131.19. The exchange rate was trending downward until last Friday, but the U.S. labor market announcement boosted the dollar dramatically and helped the USDJPY find itself above 130 again. A strengthening factor was also the slight rise in bond yields. Japan had on Tuesday a series of economic announcements which generally left a positive impression. Industrial production and retail sales rose in December while the unemployment rate remained unchanged at 2.5%, which is a satisfactory figure. The rise of the dollar combined with the sentiment from the Bank of Japan that continues to move in the context of the continuation of loose monetary policy help the exchange rate move higher and therefore we will prefer buy positions this week.

EURJPY (Euro – Japanese Yen)
Bullish was last week for EURJPY which opened at 140.83 and closed at 141.61. Although the euro weakened on Thursday after Christine Lagarde’s speech, it is generally stronger at this time than Japan’s currency. The European economy may be under pressure and inflation may remain high, but ECB applies interest rate hikes and at the same time the continued loose monetary policy from the Bank of Japan leaves no room for the yen to recover. The upward breakout of 140 combined with the above lead us to the decision to try buy positions this week.

EURGBP (Euro – Great Britain Pound)

Last week was strongly bullish for EURGBP which opened at 0.8758 and closed at 0.8954. Throughout the week, the exchange rate has been rising since the euro is generally stronger than the sterling. The two central banks have announced a 0.50% rate hike, but the market seems to perceive the ECB as more determined to continue at that pace than the Bank of England. If this trend continues and there is an excess of 0.90, the pair will have entered a strongly bullish channel and therefore we could try buy positions this week.

USDCAD (US Dollar – Canadian Dollar)

Bullish was the last week for USDCAD, which opened at 1.3311 and closed at 1.3401. Canada had positive announcements towards the beginning of the week, relative to GDP which strengthened by 0.1% in November and with the PMI indicator in manufacturing announced above 50. However, the strong U.S. dollar, especially towards the end of the week, and the sharp decline in oil prices, helped the exchange rate to develop an uptrend for the first time after six bearish weeks. This week Tiff Macklem’s speech and the unemployment rate announcement stand out for Canada’s economy. It seems though that the upward reaction could have a continuation and therefore we will prefer buy positions this week.

USDCHF (US Dollar – Swiss Franc)
The USDCHF had an upward course last week as the opening price was at 0.9204 and the closing price at 0.9259. This rise in its entirety was caused by the rebound in the dollar on Friday following the impressive announcement of the labor market in the United States. By then the exchange rate had been on a downward trend that had driven it up to levels of 0.9050. On Tuesday, the unemployment rate for Switzerland’s economy is announced, but it seems that the dollar’s recovery is strong and so it is not ruled out a continuation of the upward trend. In this case, we will prefer buy positions for one more week.

AUDUSD (Australian Dollar – US Dollar)

Strongly bearish was the last week for AUDUSD, which opened at 0.7095 and closed at 0.6921. The dismal picture of Australia’s economy in the last period has been confirmed one more time after a significant drop in retail sales was announced for December. China’s economy, on the other hand, is on the rise and this has been confirmed once again by the positive results of the PMI indicators announced. However, the impressive recovery of the US dollar did not leave much room for the exchange rate to rise, and it easily missed the critical price of 0.70. If this reaction continues it could threaten the significant support of 0.6680 and therefore, we may prefer sell positions this week.

Bitcoin

Last week, Bitcoin closed at $22,945 with losses close to 3.30%. The climate for cryptocurrencies began to deteriorate from Thursday onwards. The downtrend strengthened on Friday after markets were pressured by labor market announcements in the United States. The negative picture continued into the weekend as crypto markets do not have days off. The main reason for the decline was the poor performance of other markets that have developed a strong correlation with Bitcoin and other cryptocurrencies in recent times. Cryptocurrency companies and exchanges in particular, did not share the optimism of the recent weeks after making major job cuts in January. If this downtrend continues, cryptocurrencies may sink even further, and Bitcoin may reach the $ 20,000 zone again. Under this logic, we may try 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.