27/02/2023

General Comment

The sentiment in financial markets deteriorated in the past week mainly due to ongoing concerns about high rates of inflation and new geopolitical concerns that have been created. Inflation that persists at rather high levels and is declining at a lower rate than expected has led many investors and analysts to believe that central banks, and especially the Fed, will be forced to make new rate hikes, with a final rate higher than previously expected.

Those concerns were heightened throughout the week by announcements in the U.S. about personal consumption expenditures. The result showed that spending remains high and confirms the slow de-escalation of inflation.

These trends are also confirmed by the Fed’s announcement of its minutes on Wednesday, which showed that the central bank intends to continue raising interest rates. In addition to the minutes announced, several statements by many American central bankers align with this perception. This creates a sense in the markets that the cost of money will rise, and liquidity will be further constrained. For now, however, the macroeconomic results do not indicate a recession as US GDP grew by 2.7% in the fourth quarter of 2008 and PMI indicators had a positive result in most of the world’s economies.

The same situation with fears and concerns is prevalent in Europe, with inflation remaining at high levels to trigger scenarios of an interest rate hike by the European Central Bank. In a speech, Christine Lagarde said she expects a 0.50% rise in interest rates at the next meeting in March without new increases being ruled out.

Added to the problem of inflation is the geopolitical risk since the situation in Ukraine’s war does not seem to be normalizing. President Biden visited Kyiv signaling the critical situation, while Russian President Putin continues to talk about the use of nuclear weapons. In any case, the situation at the moment does not seem to de-escalate.

Based on all the above, most major equity indices in Europe and USA fell sharply while the trend of most commodities such as gold was also declining. The U.S. dollar began to strengthen significantly with a simultaneous pullback of other currencies such as the euro and sterling. Another indicator of the concerns is the rise in bond yields with the U.S. 10-year bond yield close to around 4%. Finally, we saw significant price declines in Bitcoin and most cryptocurrencies.

The week that has just begun is mild in relation to announcements and economic news. Announcements of durable goods orders in the US, inflation in the Eurozone, and PMI indices stand out. Investment sentiment will again play an important role in market expectations for the next moves by central banks.

SP500

With strong bearish trends, the US SP500 index closed last week, at 3,970 points and losses of 2.70%. The negative investing sentiment affected SP500 very much and led it below 4,000 points for the first time during the last month. FOMC minutes and the increased personal consumption expenditures give the sense that the Fed has to intention to move more aggressively in the next period. A week ago, the probability of raising interest rates by 0.25% in the next decision session was almost a certainty. Now the 0.50% case has a remarkable 28% chance, according to the FedWatch tool. Some concerns and fears regarding a possible recession have returned although the US GDP had a decent performance of 2.7% in the last quarter of 2022. Technically speaking, the next major support is at 3,885 points and if SP500 breaks out below this price, the sentiment will worsen a lot. We may try short positions this week.

DAX30

The German DAX40 index was bearish last week, closing at 14,210 points, with losses of 1.75%. It was the biggest weekly correction in the last two months as the DAX40 is in an uptrend rally since mid-September. This index as well as many major European indices were negatively affected by the investing sentiment which worsened last week. Still, the macroeconomic results are not too bad in Eurozone & Germany. More specifically in Germany the PMIs had a positive sign and the GDP of the 4th quarter of 2022 was below markets’ expectations but still positive (0.9% vs 1.1%). The high inflation that persists which may cause big interest rate hikes by the ECB and the continuing war in Ukraine is a bad combination for the investing sentiment. Below 15,000 points and even more, below 14,700 the uptrend will start to break so we may try short positions this week.

FTSE100

The British FTSE100 index moved downward last week, closing at 7,879 points, losing more than 1.55%. The index dropped below 8,000 after having a series of all-time highs during the previous weeks. There were some minor macroeconomic results for the UK such as the PMIs and the consumer confidence which had good results but the big picture has to do with the possibility of a recession, the high inflation, and the possible new actions by the Bank of England. According to Catherine Mann (Bank of England policymaker), more tightening is needed as there are worries about the extended persistence of inflation into this year and the next one. The bullish trend that started last October has not changed yet but if the index is not able to surpass 8,000 points again, a further correction has a chance. We prefer short position this week.

Gold

The previous week was bearish for gold, with the next month’s futures closing at $1,817 and losses close to 1.85%. The strong dollar was the major reason for the continuous dropping in the price of gold. By the end of January, the gold price had touched the area of $1,975 but in the last month, there’s a strong downtrend that has resulted in total losses of 8%. Another major factor that caused the gold prices dropping, is the uptrend rally in the bond yields. The US 10-year bond yield touched the area of 4%, for the first time since the beginning of last November and it seems that low-risk options such as bonds gather more investing preferences than gold which was in an overbought condition lately. Below $1,800, the downtrend may have signs of acceleration but we cannot exclude any recovery attempts so we may try long positions this week.

US Oil

Last week was slightly bearish for oil with next month’s futures closing at $76.45, with marginal profits of 0.25%. Two contradicting factors kept the oil prices in this balance. First of all, the latest developments regarding the global high inflation and the aggressive actions of the central banks bring back the fears & concerns of a recession. In such a case, the oil demand will be hurt and this perception pushed the oil prices lower.  On the other hand, though, the Ukrainian war creates certain concerns about the demand. On Wednesday, Reuters reported that Russia plans to cut oil exports to the west by 25% in March (compared to the current month). It will be an extra production cut to the announced ones. This factor helped the recovery of oil prices. Also, the emerging economic recovery of China which is the biggest oil consumer worldwide is a factor that may help the demand. We may try long positions this week.

EURUSD (Euro vs US Dollar)
Last week was a bearish one for EURUSD which opened at 1.0687 and closed at 1.0545. It is obvious that the exchange rate has been in a downward movement during the last month. The main reason for this is the strengthening of the U.S. dollar since there is now widespread belief in the markets that the Fed will be forced to continue with new rate hikes to combat slow-falling inflation. Personal consumption expenditures as announced this week for the United States confirms the above scenario. There is a slow decline in inflation in Europe as well and an increase in interest rates of 0.50% is expected in the next ECB decision, but the unfavorable economic situation in the Eurozone and on the other hand the strengthening of the euro lately creates downward pressure on the exchange rate. The next support in case of continuation of the downtrend is in the price range of 1.0370. Signs of recovery will emerge if there is an excess of more than 1.0790. We may try sell positions this week.

GBPUSD (Great Britain Pound – US Dollar)

Bearish was last week for GBPUSD, which opened at 1.2020 and closed at 1.1939. The exchange rate could not hold above the milestone price of 1.20, succumbing to the great strength of the US dollar. The dollar has been in a strengthening phase for the past week because markets are expecting new interest rate hikes in the United States, which was not the general feeling until recently as the US inflation was declining sharply. Inflation levels in the UK are particularly high, but they are slowing down faster, and the latest interest rate hikes that did not have the unanimous decision of members of the Bank of England reinforce the view that new big hikes are not easy to do. The macroeconomic results in the UK are not negative but this cannot rule out a possible recession in the future. Critical is support close to 1.1840 because it’s been the lowest price for about three months. On the other hand, any upward reaction above 1.20 enhances the upward profile of the exchange rate. We prefer buy positions this week.

USDJPY (US Dollar – Japanese Yen)

USDJPY moved upward last week, opening at 134.24 and closing at 13.48. Although the Japanese currency has no particular reasons for strengthening, the exchange rate has been on an upward rally since mid-January. The main reasons are the strengthening of the U.S. dollar and a sharp rise in bond yields. The U.S. 10-year bond yield found itself near 4% after many weeks. The new head of the Bank of Japan Kazuo Ueda, in the Japanese parliament on Friday, said he was a proponent of low interest rates and loose monetary policy. Of course, this continued loose monetary policy has created quite high inflation for Japan’s data of around 4% but according to the statements at least, this is not going to change any time soon. The current week contains major announcements on Japan’s economy such as industrial output inflation and unemployment. A continued rise to parity could bring it close to 140 again. We may try buy positions this week.

EURJPY (Euro – Japanese Yen)
Bullish was last week for EURJPY which opened at 143.40 and closed at 143.92. The uptrend for the exchange rate continued this week even though the euro performed bearish movements. However, the weakness of the Japanese currency does not leave much room for a downward reaction for EURJPY. The European Central Bank will likely raise interest rates by 0.50% in its next decision, while the Bank of Japan does not seem to do the same in the near future. An excess of the price of 145 could trigger new upward momentum and therefore we will prefer buy positions this week.

EURGBP (Euro – Great Britain Pound)

Last week was bearish for EURGBP which opened at 0.8880 and closed at 0.8831. Currencies such as the euro and sterling weakened last week because investor sentiment deteriorated and safer investment solutions such as the US dollar were in the focus. But it seems sterling had more reasons to react. Although interest rates are expected to rise from the ECB, may also rise from the Bank of England given the problem of high inflation in the country. If the rising for the pair continues perhaps the price will find itself close to supporting 0.8720. We will prefer sell positions this week.

USDCAD (US Dollar – Canadian Dollar)

Strongly bullish was the last week for USDCAD, which opened at 1.3475 and closed at 1.3606. The factors affecting the exchange rate recently have helped in this rise. The US dollar strengthening was a catalytic reason. As for Canada’s economy, the most important news of the week was the sharp de-escalation of inflation. Inflation was announced in January at 5.9%, well below the previous month’s 6.3% and the 6.1% expected by markets. This gave the signal that the Bank of Canada may be easing its stance on interest rates. Oil prices remained roughly unchanged last week so it was a relatively neutral factor for parity. The rise has been great in the last two weeks and so it is not excluded that we will see the exchange rate react downward. In this basis we will prefer sell positions in the current week.

USDCHF (US Dollar – Swiss Franc)
The USDCHF had a strong upward course last week as the opening price was at 0.9252 and the closing price at 0.9410. Switzerland’s currency had shown recovery trends due to the high inflation announced in the country. However, the strength of the U.S. dollar as expressed last week was catalytic and left no room for reaction to the exchange rate. Except for Monday all the remaining days were strongly upward. The dollar is in a period of strength as new rate hikes are expected by the Fed. In terms of economic announcements, durable goods orders in the US and the Swiss GDP announcement are the most important. If the rise continues above 0.95, the tendency to strengthen further cannot be ruled out. We may try buy positions this week.

AUDUSD (Australian Dollar – US Dollar)

Strongly bearish was the last week for AUDUSD, which opened at 0.6865 and closed at 0.6725. There were no major economic announcements for the Australian and Chinese economies. The People’s Bank of China left interest rates unchanged at its meeting last Monday and was therefore not a factor influencing the exchange rate. But the significant strengthening of the U.S. dollar, combined with the worsening climate in the global geopolitical environment, put strong pressure on the exchange rate. Australia’s economy in the current week has some announcements like retail sales and GDP that could cause bullish reactions and change the climate.  We will prefer buy positions this week.

Bitcoin

Last week, Bitcoin closed at $23,562 with losses close to 3%. The negative investing sentiment hurt the world of cryptocurrencies as well. There was no bad news for the crypto community last week and this is considered to be positive as there’s a bad experience lately with cases such as the Luna/Terra, the FTX, the Paxos, and some other cases. The point is that Bitcoin had lower losses compared to the traditional markets, given its high volatility.  It is something that gives extra optimism reason for crypto investors. On the other hand, there was an obvious weakness for Bitcoin to exceed the important resistance of $25,200. Short positions is our selection for the current 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.