03/04/2023

General Comment

The mood in the financial markets has improved over the past week. The problems of the banks that had arisen seem not to concern the markets so strongly anymore since the has not extended to other banks so far and the situation seems controllable. The immediate and timely statements of officials have allayed the concerns and fears. On the other hand, the mood was also improved by the macroeconomic results announced in the world’s major economies which also shows that the economies are resilient and that recession scenarios are becoming less and less likely.

The eyes remain on the main problem of this period which is high inflation. The United States had a sharp decline in inflation for February and based on data on personal consumption expenditures released last week, this trend is confirmed. We also saw a strong de-escalation of inflation in the Eurozone in March, to 6.9% from 8.5% the previous month. So, the perception that markets are getting is that central banks will soften their stance on monetary policy and interest rate hikes, money costs will not run too high, and current liquidity will be maintained. A factor that may negatively affect things is the unexpected decision of OPEC+ on Sunday to cut oil production by 1 million barrels per day. This cut has already boosted oil prices and it may create new inflationary pressures.

The stock markets in Europe, the United States, and the other major economies performed strong profits last week. As for commodities, after the calm in the markets, gold suffered some losses while optimism helped oil to recover. The U.S. dollar continued its decline for the fifth consecutive week, while higher-risk currencies had relative gains. In the bond markets, we saw a slight rise but again the price of the US 10-year ended the week below 3.50%, at 3.47%. Finally, the broadly positive sentiment has helped the cryptocurrency market to profit, even though this rise has been smaller than we have seen in recent weeks.

Having entered the Holy Week ahead of the Catholic Easter, the volatility may lower but all eyes are surely turning to the United States labor market (Non-Farm Payrolls – NFPs) announcement next Friday. This announcement will show the US economic situation in the sensitive area of the labor market space and so is likely to influence the Fed in its future decisions. Also important is the announcement of the US ADP employment change, and the announcements of PMI indicators in the major economies of the world. Besides the scheduled announcements, the decision of OPEC+ will affect the markets seriously.

SP500

With heavy bullish trends, the US SP500 index closed last week, at 4,109 points, and profits that touched 3.50%. The sentiment was clearly improved after the decompression and the relief of the markets from the banking crisis that had created a lot of fears and concerns. Furthermore, there was a perception that due to the strong de-escalation of inflation, the Fed may stop being aggressive in tight monetary policy and higher interest rates. Also, the macro results of the US economy last week were encouraging enough: GDP rose by 2.6% in the 4th quarter of 2022, the personal consumption expenditures shrank in February while the pending home sales rose by 0.8%. The unexpected decision of OPEC+ during the weekend to cut oil production may be a serious backsliding of the US economy as it can cause new inflationary pressures. SP500 already performs losses at the beginning of the current week and by following this trend, we may select short positions. A possible new game changer may be the result of NFPs on Friday.

DAX30

The German DAX40 index was strongly bullish last week, closing at 15,629 points, with losses approaching of 4.50%. Most of the major indices were affected by the positive sentiment that was developed throughout the week. Positive news from the banking crisis and a perception that the market liquidity will not be as limited as expected due to a softer stance of the central banks, helped a lot. Mixed was the outlook of the German economy as a result of the last week’s announcements but it could not change the strong uptrend. Business climate and expectations were improved, and inflation dropped from 9.3% in February to 7.8% in March but retail sales dropped by 7.1% and the unemployment rate rose marginally from 5.5% to 5.6%. The recent news regarding the oil production cut may change the positive climate as it can inflame inflation again so we may try short positions this week.

FTSE100

The British FTSE100 index moved strongly upward last week, closing at 7,632 points, gaining more than 3%. It was the second consecutive bullish week in a row for FTSE100, reflecting the risk-on mood in the investing community. Governor Andrew Bailey (head of BoE) tried to convince the markets that the recent banking crisis will not affect seriously the UK economy and he succeeded to a degree. Also, consumer credit and the mortgage approvals announcements helped the perception that the UK economy is in a good shape (at least better than what most of the analysts expected) but a better confirmation came on Friday after the GDP announcement. UK GDP for the 4th quarter of 2022 rose by 0.6% on an annual basis, well above the 0.4% that the markets expected. Although the news from OPEC’s decision regarding the oil production cut has alarmed the markets, FTSE100 opened the week in profit so we prefer long positions this week.

Gold

The previous week was mildly bullish for gold, with the next month’s futures closing at $1,987 and profit of 0.30%. Last week was rather consolidative with small ups and downs and low volatility. There is a strong uptrend for gold in the last 5 months but it is obvious that the price zone of $2,000 is a milestone and a hard resistance that may be proved a serious obstacle for further upward movements. The weak US dollar of the last weeks has helped gold prices to climb higher. Central banks and their decisions are also an impactful factor for gold prices as well as the bond yields that decline (the US 10-year bond yield stayed below 3.50% at the end of the week). In the current week though, the dollar performs important profits based on the market’s perception that the Fed may be forced to raise interest rates after the unexpected decision of OPEC+ to cut oil production. We may try short positions this week.

US Oil

Last week was strongly bullish for oil with next month’s futures closing at $75.66, with profits surpassing 9%. Oil prices rose for the second consecutive week as US inflation data create the perception that Fed will not raise significantly the interest rates from its current rate and the higher liquidity would mean a higher oil demand. Another factor that helped oil prices climb higher was the closure or restriction of oil production in multiple oil fields in the area of northern Iraq. All these factors resulted in a price rise given that OPEC+ would keep oil production unchanged. OPEC+ though with an unexpected decision announced more than 1 million barrels per day of oil output cuts. Oil cuts will start in May 2023 and will continue until December and OPEC+ members claim that it’s a movement of stabilizing the oil market prices. In the current week, oil opened above $80 (6% gap) and there are already analysts that predict that after this development, we may see oil above $100 again. In an environment of such uncertainty and unexpected announcements, we’d better stay out this week.

EURUSD (Euro vs US Dollar)
Last week was bullish for EURUSD which opened at 1.0773 and closed at 1.0841. Markets ‘ belief that the Fed will not continue with aggressive rate hikes after inflation de-escalates has weakened the dollar which performed losses in all five previous weeks. Improved economic sentiment has also helped the euro recover as it is considered a higher-risk currency compared to the U.S. dollar. There were two major announcements the markets expected last week: GDP in the United States and inflation in the Eurozone. On an annual level, U.S. GDP for the fourth quarter of 2022 grew by 2.6%, a rate that was slightly below market expectations but showed that growth remains. One mini-surprise for markets was the result of inflation in the Eurozone for March. Inflation fell from February’s 8.5% to 6.9% in March. It was a sign of hope for the major problem of high inflation in the European continent. Also, personal consumption expenditures in the United States in February rose 4.6%, a slight decrease from the previous month’s 4.7%. EURUSD has gained an upward momentum which if continued may bring it up to the significant resistance of 1.10 and therefore we may try buy positions this week.

GBPUSD (Great Britain Pound – US Dollar)

Bullish was last week for GBPUSD, which opened at 1.2226 and closed at 1.2329. The exchange rate benefited from continued weakness in the U.S. dollar and climbed to higher levels, threatening the important resistance at 1.2450, the highest price for the pair since early June last year. Sterling strengthened on a three-factor basis. The improved economic climate was a factor boosting higher-risk currencies. Also, Bank of England head Andrew Bailey’s statement about the collapse of Silicon Valley Bank at the Treasury Select Committee had a positive impact on markets after he stressed that “I don’t think any of these features of recent bank problems are causing stress in the UK”. Finally, the UK’s GDP for the fourth quarter of 2022 was announced on Friday, up 0.4% compared to the previous year, which delighted markets and further removed the scenario of a great recession. If the exchange rate exceeds 1.2450, the formed upward trend may be further strengthened, and so we shall prefer buy positions this week.

USDJPY (US Dollar – Japanese Yen)

USDJPY moved upward last week, opening at 130.51 and closing at 132.80. It was a bullish reaction for the pair after four consecutive weeks of falls. Japan’s currency has been preferred in recent times due to its nature as a safe-haven asset for investment in times of crises and worries. As soon as the situation normalized, it lost that momentum. So, the exchange rate rose even though the U.S. dollar weakened, and this is mainly due to two factors. On the one hand, the slight recovery in bond yields helped the exchange rate rise, and on the other hand, statements by the outgoing head of the Bank of Japan Kuroda confirmed the weakness of the yen. Kuroda said last Tuesday that the “Sustainable inflation target has not yet been met and thus, it’s premature to debate an exit from easy monetary policy”. This prospect of continued loose monetary policy weakens Japan’s currency markedly. Finally, Japan’s economy had a series of announcements last Friday: inflation climbed to 3.3% in February, unemployment rose slightly to 2.6%, and industrial output rose in the same month by 4.5%. We may try buy positions this week.

EURJPY (Euro – Japanese Yen)
Strongly bullish was last week for EURJPY which opened at 140.55 and closed at 143.97. The euro is one of the strong currencies this season after the European Central Bank recently raised interest rates by 0.50%, having left open the possibility of new increases. Also, the macroeconomic results in the Eurozone have a positive sign and there is optimism about the course of the economy. On the other side, Japan’s Kuroda statements to continue the very loose monetary policy have weakened the yen considerably. If EURJPY finds itself above the resistance of 145.60, then maybe we’ll see a stronger uptrend and therefore we prefer buy positions this week.

EURGBP (Euro – Great Britain Pound)

Last week was slightly bearish for EURGBP which opened at 0.8799 and closed at 0.8791. There was a balance between the euro and sterling as both currencies were quite strong in the past week. The prospect of new rate hikes by the two economies ‘ central banks is helping their currencies. Improved investment sentiment also boosted both currencies, which are considered higher-risk options. One important difference that may be decisive for the future of the exchange rate is the difference in the inflation course of the two economies: in the Eurozone, we saw a major de-escalation in March while the inflation of the Kingdom remains in double digits. The higher UK inflation may give some extra credits to the sterling so we prefer sell positions this week.

USDCAD (US Dollar – Canadian Dollar)

Heavily bearish was the last week for USDCAD, which opened at 1.3729 and closed at 1.3813. In addition to the continued weakening of the U.S. dollar that we’ve been seeing in recent weeks; the Canadian dollar got a boost from the big increases in oil prices that we saw last week. We repeat once again the correlation that Canada’s economy has with oil prices since oil and energy in general are the main export commodity for the country’s economy. A positive development for Canada’s economy was also the announcement of GDP for January, which grew by 0.5%. Technically speaking, the next support for the USDCAD is nearly 1.3220. Therefore, there is room at least technically for the downward movement to continue and therefore we may try sell positions this week.

USDCHF (US Dollar – Swiss Franc)
The USDCHF had a downward course last week as the opening price was at 0.9181 and the closing price at 0.9148. The weakness of the U.S. dollar was a key factor in this small downward move, but the exchange rate could not benefit further, and we did not see a bigger fall. The Swiss economy results announced last week were not positive: the KOF indicator fell to 98.2 in March from 98.9 in February and retail sales were announced at 0.3%, well below market expectations of a 1.9% increase. Also important is that the exchange rate is approaching the very important support of 0.9060 which is the lowest value since August 2021. However, the trend is clearly declining and so we will choose sell positions for one more week.

AUDUSD (Australian Dollar – US Dollar)

Bullish was the last week for AUDUSD, which opened at 0.6650 and closed at 0.6684. This slight rise should be attributed mainly to the losses the US dollar had last week. Australia’s economy has had no major developments and announcements, singled out only by the announcement of retail sales for February which grew by 0.2%, a price less than market estimates. The positive wind, however, continues mainly because of China and the prospects of its economy. China’s manufacturing PMI indicator had a positive result of 51.9 but striking was the result in non-manufacturing which was 58.2. Important is the decision on interest rates by the Reserve Bank of Australia next Tuesday. The most likely scenario is an increase of 0.25% but any possible surprises in the rate or the RBA Rate Statement may cause turbulence. If AUDUSD can climb above 0.6760, perhaps the upside scenario has a better chance, and so we may try buy positions this week.

Bitcoin

Last week, Bitcoin closed at $28,186 with marginal profits of 0.65%. Although the traditional markets performed significant profits, the cryptos could not follow as the recent profits were big enough and many crypto investors liquidated their profits. This piece of information has been extracted by the on-chain analysis which showed that there was a decline in holdings of large wallet investors with 100 to 100,000 Bitcoin. The price zone of $30,000 has been proved so far, a difficult resistance for Bitcoin to break out. Furthermore, many of the concerns and fears have returned after the fresh decision of OPEC+ to cut more than 1 million barrels per day of oil production. Most likely, this would mean higher oil prices which may make inflation rise again. In such a case, the central banks may be compelled to raise interest rates more than expected and to apply extra tightening monetary policy. Lower liquidity will hurt the high-risk options like cryptos and this perception is already reflected in Bitcoin’s price which is below $28,000 at the beginning of the current week. 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.