20/02/2023

General Comment

The perception of the markets regarding the Fed’s monetary policy has shifted after the announcement of inflation in the US. During the last period, we’ve seen a sharp de-escalation of the inflationary rates but last Tuesday’s announcement created concerns: In January the inflation dropped to 6.4% from 6.5% in December while the markets expected a rate of 6.2%. These concerns were enlarged even more on Thursday after the producer price index (another inflation indicator) announcement which was at 6% in January. The markets estimated a rate of 5.4% so another source of nervousness arose. 

There was an immediate reaction from Fed officials after these results. The common conclusion is that there are still many risks of persistent inflation and that the Fed is not over yet with the interest rate hikes. There were some opinions for a 0.50% hike in March, after the 0.25% that we saw on February, 1st. 

In Europe, it seems that the path is clearer. The high inflationary pressures do not allow second thoughts about rate cuts. A 0.50% hike is expected in March by the ECB.

As per the rest of the economic news, retail sales in the US rose by 3% in January which was a figure above markets’ expectations. Decent results were announced in the Eurozone area, regarding the GDP which rose marginally in the 4th quarter of 2022, and regarding the industrial production and the trade balance. The big issue of the high inflation though keeps rising concerns overshadowing all the other developments.

Another source of concern for the markets is the latest tensions between US and China. Although US president Joe Biden said last week that “We are not looking for a new cold war” the atmosphere is still full of electricity due to the so-called Chinese balloon and three unidentified objects downed by U.S. fighters.

As a recap of the above, the equity markets in the US had corrective trends for the second week in a row but the European ones continued the bullish rally. Commodities such as gold and oil performed significant losses. As per the currencies asset class, the US dollar was strong for one more week due to the perceptions of the Fed’s further actions in the monetary policy while the euro and sterling had important losses. Another side effect of the persistent inflation was the rising in bond yields with the US 10-year bond yield climbing above 3.90% for the first time since last November. Finally, there was a remarkable bullish trend in Bitcoin & most cryptocurrencies, as we’ll see below.

This week contains more economic news & announcements that will help the markets to have a clearer opinion of the future. On Wednesday, the FOMC (Federal Open Market Committee) meeting minutes will be released. Also, very important is the GDP announcement on Thursday and the personal consumption expenditures announcement on Friday. In the Eurozone area, the CPI announcement on Thursday stands out. Finally, very important are considered the PMIs which will be released on Tuesday for all the major economies.  

SP500

The US SP500 index closed last week with mild bearish trends, at 4,079 points and losses that touched 0.30%. It was the second bearish week in a row. The main reason for that is the inflation which was announced at 6.4% in the USA, a figure which was above market estimations and showed that the problem is still there. The major perception of the markets which is also based on Fed officials’ statements is that the interest rate hikes may carry on and that the final rate may exceed 5%. The probability of a 0.50% hike in March has now a considerable figure of 15%. The sentiment has become more negative than it was a few weeks ago and this can be confirmed by looking at the rising of bond yields. The current week is full of data (FOMC, retail sales, PMIs and PCEs) that may change the trend of the SP500 and may increase the volatility significantly. Technically speaking, the bullish trend continuation must be confirmed by a breakout above 4,200 points. It will be a clear sign that the recovery is still solid and healthy. On the contrary, a drop below 4,000 points will increase the concerns for a deeper correction. We may try long positions this week, believing more in the first case.

DAX40

The German DAX40 index was bullish last week, closing at 15,482 points, with profits a bit above 1.10%. The ECB may have announced in advance another 0.50% interest rate hike in March but the German index is still in a strong uptrend rally for the fourth consecutive month. The economic results in the Eurozone area have limited the probability of a strong recession. There were many fears during the last summer and early autumn that this recession would be inevitable due to the energy crisis. The warm weather and some other factors though did not confirm this scenario until now. Of course, it’s still very early for conclusions. The current week is full of data for the German economy: PMIs on Tuesday, CPI on Wednesday, and GDP on Friday. In case of a bullish breakout above 15,660 points (one year’s highest price) a new uptrend momentum may occur. We prefer long positions for one more week.

FTSE100

The British FTSE100 index was strongly bullish in the past week, closing at 8,004 points, with profits of 1.50%. The index surpassed 8,000 points for the first time in its history. This result was a combination of the perception of the markets regarding the Bank of England monetary policy and many economic announcements that were released in the UK last week. More specifically, the major view of the markets is that there will be limited interest rate hikes in the future. If this comes true, the final rate will be much lower than it was initially estimated. Also, the economic results in the UK developed optimism amongst the investing community: the UK inflation dropped to 10.1% in January from 10.5% in December, faster than it was expected. Similar fast de-escalation took place in the producer price index as well. The unemployment rate remains very low at 3.7% and the retail sales in January were announced at 0.5% (-1.2% were in December). Under these circumstances, we may try long positions for one more week. Of course, any profit-taking (since we’re talking about all-time highs) may cause corrections.

Gold

Gold was bearish last week, as the next month’s futures closed at $1,851 with losses of 1.30%. The strong US dollar was a critical reason for this bearish trend as well as the hawkish Fed, after the release of the high inflation rates in the US. The bond yields which is the major competitor of gold as a safe-haven asset option, rose last week, limiting the buyers of gold. The biggest question for the financial markets for the next period is the behavior of the central banks and especially the Fed. We may see continuous interest rate hikes in the next months based on the latest inflation announcements. On the other hand, based on the retail sales results, we may conclude that people in the US still have high levels of consumption. Maybe it is another hint for the Fed to act accordingly. Gold has performed a sharp correction during the last 3 weeks and its highest price of $1,975. A recovery will have a better chance if gold prices exceed $1,900 again while any drop below $1,827 gives more credit to the bearish scenario. We may try long positions this week, trusting more the first case.

US Oil

Last week’s oil futures closed at $76.27, with losses close to 4.35%. The perception of the markets that the Fed may be more aggressive after the latest results of the persisting inflation has caused concerns and fears regarding the oil demand. Statements by Fed officials are on the same page and according to them, we may even see a 0.50% hike by Fed in March.  The result of the above perception tends to reduce demand for commodities like oil which are dollar-denominated. A tighter monetary policy may cause more damage to the global growth of the economy and it may even cause a recession which is something that has not been ruled out so far. We have noticed price range that the oil prices are moving during the last few months from $70 to $82.65. The current price is in the middle of this band and no safe estimations can be given. We may try some low-risk long positions this week.

EURUSD (Euro vs US Dollar)
Last week was slightly bullish for EURUSD which opened at 1.0680 and closed at 1.0694. The whole week was bearish until Friday, based on the dollar’s strength. The inflation that is de-escalating slowly, according to the latest announcement, has created the view that the Fed will have a final interest rate above 5%. This view is supported by many statements from Fed officials that took place last week and strengthened the dollar. The strong dollar found a similarly strong euro, mainly on Friday and the week was finally bullish. It is not only the healthy macros that the Eurozone released regarding the GDP, the employment change, the trade balance, and the industrial production. It is also the determination from the ECB that has developed lately regarding the Eurozone’s monetary policy and the upcoming interest rates. We’d feel more comfortable about this after the Eurozone’s inflation announcement on Thursday. The FOMC on Wednesday and the US GDP on Thursday will certainly affect the dollar as well. We may try sell positions this week.

GBPUSD (Great Britain Pound – US Dollar)

Slightly bearish was the last week for GBPUSD, which opened at 1.2064 and closed at 1.2041. The volatility of the pair was high enough as there were many data from both the US and the UK economies. The major event from the USA was undoubtedly the inflation announcement which showed that the problem remains serious and that most likely the Fed will raise the interest rates above 5%. It caused a strengthening of the US dollar since many investors estimated that we’re very close to the final/highest rate. The strong dollar caused a drop in the GBPUSD below 1.20 The softer inflation data from the UK earlier in the week did not allow the sterling to react accordingly. A bullish reaction of the sterling during the last working hours of the week though caused a recovery of the pair above 1.20 again. It was also combined with a relative weakness of the dollar in the same hours. If the GBPUSD is able to remain above 1.20 it may reach 1.22. Below 1.20, the downtrend becomes the basic scenario and in such a case we may try sell positions.

USDJPY (US Dollar – Japanese Yen)

The previous week was strongly bullish for the USDJPY, as it opened at 131.24 and closed at 134.15. The Bank of Japan has a new head, Governor Kazuo Ueda which had a very small difference from the other candidate, Deputy Governor Amamiya. For the sake of unity and consensus of opinions, Amamiya suggested Ueda as the best candidate to take the position. It was a sign and a confirmation for the markets that most likely the loose monetary policy will carry on. Earlier in the current week, the Bank of Japan announced that it offers to purchase 1.75 trillion yen for Japanese government bonds. This weak yen, combined with the stronger dollar and the rising bond yields, drove the pair to a strong uptrend last week. Japan had a positive figure for GDP in the 4th quarter of 2022, at 0.2% but this number was below the markets’ expectations of 0.5%. Industrial production returned to a positive rate as it was announced at 0.3% in January. In case of a solid bullish breakout above 135, we may see even higher prices but we can exclude a technical reaction of the yen as well. We prefer buy positions this week.

EURJPY (Euro – Japanese Yen)
Last week was significantly bullish for EURJPY, as it opened at 140.19 and closed at 143. Most of the data and statements coming from Europe, align and converge to the conclusion of a tighter monetary policy and higher interest rates in the following period. Eurozone has a very decent macroeconomic outlook based on the latest data releases that confirm this case. On the contrary, the new head of the BoJ Kazuo Ueda, according to many estimations, will continue the ultra-loose monetary policy in Japan. This divergence between the two central banks caused the pair’s strong uptrend reaction. Above the resistance of 144.30, the trend may become even stronger so we may try buy positions this week too.

EURGBP (Euro – Great Britain Pound)

Last week was bullish for EURGBP which opened at 0.8847 and closed at 0.8880. The euro seems stronger than the sterling since the next hike in interest rates by the ECB has been confirmed by many officials, including Christine Lagarde. Furthermore, this hike most likely will be 0.50% which is a significant change. There’s no such clear picture in the UK. Some analysts estimate a new hike but others predict that the rates will remain the same. The vote of the recent hike by the Bank of England which was 7-2, confirms this dissent. The inflation in the UK dropped to 10.1% from 10.5% but it’s still very high so maybe the Bank of England may have to act. Under this approach, we prefer sell positions this week.

USDCAD (US Dollar – Canadian Dollar)

Last week was strongly bullish for USDCAD, which opened at 1.3343 and closed at 1.3473. The strong US dollar after the persisting inflation according to the latest announcement was the main reason for this rise. Another critical factor was the big losses in oil prices. The Canadian dollar is highly correlated with oil prices since oil is the major export good of the Canadian economy. The uptrend of the USDCAD did not change even after the speech of the head of the Bank of Canada Tiff Macklem. Tiff Macklem was hawkish enough by underlying that if inflation does not decline according to the schedule and the forecasts, new interest rate hikes may be needed. Very important is the announcement of the Canadian inflation on Tuesday which may give more value to this statement and we may try sell positions this week.

USDCHF (US Dollar – Swiss Franc)
The USDCHF was slightly bullish last week after the open was at 0.9235 and the close at 0.9242. The US dollar was strong after the inflation announcement in the USA but there was a similar case in Switzerland that kept the balance between the two currencies. More specifically, on Monday there was the inflation announcement in Switzerland which was at 3.3% in January, much higher than the 2.8% in December and even higher than the markets’ estimations of 2.9%. The high inflationary pressures were confirmed on Tuesday after the higher rates of the producer price index as well: 3.3% in January vs 2.2% markets estimations. It was a clear sign to the markets that the Swiss National Bank may be forced to act accordingly before the inflation problem becomes stronger. We may try sell positions this week.

AUDUSD (Australian Dollar – US Dollar)

Bearish was the AUDUSD last week after it opened at 0.6915 and closed at 0.6877. The strong US dollar dominated the pair while there was no serious reaction from the Australian dollar. The macros for the Australian economy did not help the AUD at all. There was a sharp worsening in the labor market with the loss of 43.3K of full-time job positions in January. The result was a jump in the unemployment rate from 3.5% to 3.7%. Also, the head of the RBA Philip Lowe said on Wednesday that inflation is too high and that it needs to come down but it seems that he didn’t convince the markets regarding his hawkish intentions. Earlier this week, the PBoC left the interest rates unchanged in China at 3.65% and after that, the AUDUSD has bullish trends. The uptrend needs a bullish breakout above 0.70 as a clear confirmation so we may try buy positions this week.

Bitcoin

Last week, Bitcoin closed at $24,296 with total profits exceeding 11.50%. In a tweet on Feb. 16, crypto market analyst Mohit Sorout announced that the Dollar Cost Average (DCA) Indicator was now “suggesting a raging bull market”. “Today marks the 4th time this signal is suggesting a raging bull market,” he wrote in comments, describing the event as “the mother of all BTC bullish signals”. It was an oasis of good news after the latest developments of Kraken in the US. According to coindesk.com, the US Securities and Exchange Commission announced charges against crypto exchange Kraken, alleging its offering of a crypto staking-as-a-service program amounted to offering unregistered securities products in the U.S. Kraken has to pay $30 million and shutting all of its U.S. staking services. Many analysts consider the upcoming regulations as a positive development that will favor serious investors. This positive sentiment was translated into a strong uptrend that helped Bitcoin and the majority of the cryptos recover, in divergence from the traditional markets. The major resistance is at $25,200 and if Bitcoin fails to surpass it, may return to lower prices. We prefer 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.