10/04/2023

General Comment

The past week had relatively low volatility for financial markets. On the one hand, the Easter of Catholics and on the other hand, the lack of intense market news with the exception of the American labor market, removed the interest even temporarily of the investment community.

There are still fears and concerns that a recession will not ultimately be avoided due to the continued tight monetary policy pursued by most of the world’s central banks. The primary objective remains the fight against high inflation, and in this context, next Wednesday’s announcement on inflation in the United States is very important. Given that the current rate is 6%, a major de-escalation may allow the Fed to halt its rate-raising program, which has been in place since March 2022. On the same day, the Federal Open Market Committee (FOMC) minutes are announced, but there will be no decision on interest rates. The next decision is slated for May 3, with a 70% chance of a 0.25% increase.

The markets placed some importance on the labor market in the United States announced on Friday. The result was 236K new jobs for March, a figure that was very close to market expectations and so combined with Catholic Easter kept volatility relatively low.

Besides the purely economic news, China-Taiwan tension adds strength to the geopolitical fears. China sees self-ruled Taiwan as a breakaway province that will eventually be under Beijing’s control and has sent warships, including an aircraft carrier, into the seas around Taiwan as Reuters wrote. 

Most equity indices in Europe and the United States had stabilizing trends without significant change. The U.S. dollar continued to fall while other higher-risk currencies such as the euro and sterling performed some gains. In commodity markets, the trend was bullish with gold continuing its upward rally and oil surging after the recent OPEC decision that upset the markets. Bond yields continued to de-escalate with the U.S. 10-year closing the week in the 3.40% zone. Finally, bitcoin and most cryptocurrencies were on a stabilizing trend for the third week in a row after their big rise.

As we already mentioned, the markets ‘ gaze turns this week to the announcement of inflation in the United States and the minutes of the Fed. Other announcements worth mentioning are China’s inflation and trade balance, retail sales in the United States and Eurozone, GDP in the United Kingdom, and the IMF’s meeting.

SP500

With slightly bearish trends, the US SP500 index closed last week, at 4,105 points and marginal losses of 0.10%. Markets anticipated a higher probability of a recession after the latest decision for a production cut from OPEC+ that will rise the oil prices and may bring back the inflation issue although Fed tries to deal with it with several interest rate hikes. The macroeconomic results that were announced during the week for the US economy didn’t help too. PMI indicators were all below market expectations and the labor market news (ADP employment changes and NFPs) also failed to meet the estimation. It is positive though that after all these developments, the SP500 was resilient with marginal weekly losses. This week is very important as the inflation announcement and the FOMC meeting minutes may affect the markets in the near future. The expectations for the inflation de-escalation seem very ambitious and a good result but below these expectations may occur, we prefer short positions this week.

DAX30

The German DAX40 index was mildly bearish last week, closing at 15,598 points, with losses approaching of 0.20%. The uptrend rally of the previous two weeks stopped as the index was affected by the negative sentiment that was developed from the OPEC+ decision which may keep the oil prices high. The volatility was obviously lower compared to the last period as the Easter holidays in Germany kept the investing attention at low levels. Things were balanced and the DAX40 managed to end the week with limited losses after the positive results of the German economy. Industrial production and factory orders had a good performance. Only the PMI indicators performed a mixed picture while the imports/exports both increased. The index is very close to the resistance of 15,737 points which is also its highest price since January 2022. A bullish breakout above this resistance may bring a stronger uptrend so we may try long positions this week.

FTSE100

The British FTSE100 index was bullish last week, closing at 7,742 points, gaining more than 1.40%. The perception of the markets regarding the UK economy is improved during the last weeks and FTSE100 had three consecutive upward weeks. It means that a high portion of March’s losses has been recovered already and the index is able to look again to the all-time high price of 8,047 points. Last Tuesday was a bearish day after the statement of the Bank of England chief economist Huw Pill who said that “There is a lot of policy in the pipeline still to come” meaning that new interest rate hikes may be necessary. PMI indicators had mixed results and did not affect things a lot and as the week was closing in, volatility dropped due to the Easter holidays. The trend remains bullish so we may try long positions this week.

Gold

The previous week was bullish for gold, with the next month’s futures closing at $2,023 and profits of more than 1.80%. The recent OPEC+ decision for an oil production cut brought back the fears of insisting on inflation. Gold is a traditional investment option in times of high inflationary pressures so it was favored after this news. Another bullish factor for gold prices is the continuous drop of the US dollar, as the denomination currency for gold is the dollar. The announcement of the US inflation on Wednesday and the FOMC meeting minutes which are going to be released on the same day may be proved very critical for gold. A bullish indication is the weekly close price well above $2,000 but in the current week, we saw a big bearish gap of 0.80%. Short positions is our selection for the current week.

US Oil

Last week was strongly bearish for oil with next month’s futures closing at $80.42, with profits approaching 6.30%. This profit was from the big gap that the oil prices had at the beginning of the previous week. Investors reacted following OPEC+’s unexpected decision to reduce production. Also, for the second week in a row, there was a drop in US crude oil inventories. It is a signal of a lower demand which is also confirmed by some energy companies which reduced the number of oil rigs. This fact also may hide a drop in production. If the oil prices climb to higher levels, the fight against high inflation may have a serious obstacle. A bullish signal may occur if there’s a bullish breakout above the last week’s highest price of $81.80. On the contrary, below $80 the big price gap may soften and ease. We are keen to wait and see for one more week by staying out.

EURUSD (Euro vs US Dollar)
Last week was bullish for EURUSD which opened at 1.0838 and closed at 1.0896. It is obvious that the exchange rate has developed an upward trend since the end of February, mainly due to the weakness of the dollar. The problem of inflation in the Eurozone is more painful than in the US and so the perception of the markets is that while interest rate hikes are coming to an end at the Fed, for Eurozone and the European Central Bank there is still a future. The PMI indicators in the euro area were lower than the market expectations, while the producer price index, which is a precursor to inflation, also had a relatively low price. If the U.S. inflation announcement on Wednesday weakens the dollar further, it is not ruled out that the exchange rate will be above 1.10, and under these circumstances, we will prefer buy positions this week.

GBPUSD (Great Britain Pound – US Dollar)

Bullish was last week for GBPUSD, which opened at 1.2321 and closed at 1.2415. The pair continued its upward trend which started at the beginning of March and has brought it close to the significant resistance of 1.2450. The continued fall in the US dollar is a key reason for this move, but the sterling is also having a good period. The high inflation that persists in the United Kingdom has forced several officials and central bankers to say new interest rate hikes by the Bank of England are imminent, and this development favors the country’s currency. The current week is important enough for the UK because Bank of England chief Andrew Bailey’s speeches may inform markets more about future moves. Also important is the announcement of the British GDP. If there is an excess of 1.2450 it can open the way for a new upward movement therefore, we prefer buy positions this week.

USDJPY (US Dollar – Japanese Yen)

USDJPY moved downward last week, opening at 133.36 and closing at 132.13. The perception that the Bank of Japan will continue its loose monetary policy continues, but the weakening of the U.S. dollar and the de-escalation of bond yields brought about this slight downward movement. The news from Japan was not much and important, only the manufacturing index, which was announced well below market expectations, stood out. The current week with the announcement of U.S. inflation and Fed minutes is expected to increase volatility. In order for the downward reaction to continue, support of 129.60 will have to be broken out downwards. On the contrary, an upward turn above 133.75 would rather change the direction of the market so we may try buy positions this week.

EURJPY (Euro – Japanese Yen)
Neutral was the last week for EURJPY which opened and closed around the price zone of 144. This balance was caused by the relative strength of both the euro and yen. The high inflation in the Eurozone favors the anticipation that ECB will continue with new interest rate hikes and this fact strengthens the euro. In Japan, there are some analysts that predict that the central bank (BoJ) may put some second thoughts to the ongoing loose monetary policy after the decision of OPEC+ to cut daily production. The long-term trend remains bullish but EURJPY has an inadequacy to surpass the resistance of 145.70. We may try sell positions this week.

EURGBP (Euro – Great Britain Pound)

Last week was slightly bearish for EURGBP which opened at 0.8790 and closed at 0.8777. Both economies (Eurozone and UK) face the intense problem of high inflation but according to the latest releases, Eurozone shows signs of a faster de-escalation. The reasonable conclusion is that the Bank of England may become more aggressive to tighten the monetary policy even more. Bank of England chief economist Huw Pill confirmed this, more or less. We prefer sell positions for one more week.

USDCAD (US Dollar – Canadian Dollar)

Last week the USDCAD was practically unchanged as it opened and closed around 1.3505 – 1.3515. Higher oil prices after the latest OPEC+ decision for oil production cut had a result in a strong bearish trend for USDCAD at the beginning of the week. From Tuesday and on though, things changed and the pair fully recovered even if the US dollar remained weak. It means that the currency of Canada was significantly weak and the main reason for that is the opinion of many market analysts that the Bank of Canada will leave the interest rates unchanged at 4.5% at the decision session this Wednesday. Given that the most likely scenario of the Fed is to hike the interest rates by 0.2% at the beginning of May, there’s an obvious divergence. The Canadian unemployment rate dropped in March to 5% from 5.1% in the previous month but it didn’t help the CAD. This week is a different story though and if the US dollar weakens after the inflation announcement, the USDCAD may drop so we prefer sell positions this week.

USDCHF (US Dollar – Swiss Franc)
The USDCHF had a downward course last week as the opening price was at 0.9153 and the closing price was at 0.9053. All this bearish movement for the pair was based on Monday’s bearish over-reaction after OPEC+ decided to cut the oil production rate. This fact increased the risk-off mood of the markets, favoring the safe-haven currency options such as the Swiss franc.  The following days were neutral as both the US dollar and the franc were weak. Franc was weak due to the inflation announcement in Switzerland for March. Inflation declined to 2.9% from 3.5% in February and the conclusion for the markets is that the Swiss National Bank has no particular reasons to apply a new interest rate hike. The pair is very close to the strong support/milestone price of 0.90 and it makes sense to see bullish reactions. We may try buy positions this week.

AUDUSD (Australian Dollar – US Dollar)

Bearish was the last week for AUDUSD, which opened at 0.6680 and closed at 0.6663. The week opened with a strong bullish trend due to the negative results of the US PMI indicator which weakened the dollar. From Tuesday on, things changed very much. The Reserve Bank of Australia (RBA) on Tuesday kept the interest rates unchanged at 3.6% and it was a factor of weakness for the Australian currency. Fed has a much higher rate than this and most likely, we should see a new hike in May. Head of RBA Philip Lowe, in his speech ‘Monetary Policy, Demand and Supply’ at the National Press Club, in Sydney said that he’s “not 100% certain if we will raise rates again“. All these reasons prevented AUD to take advantage of the US dollar’s weakness. This week is a different story and a possible new weakness of the USD, especially after the inflation announcements, may cause bullish reactions for the pair so we may try buy positions this week.

Bitcoin

Last week, Bitcoin closed at $28,340 with marginal profits close to 0.55%. It was the third consecutive week for Bitcoin with low volatility and weekly changes below 1%. Four weeks ago, we had seen a very big rise in Bitcoin and most of the cryptocurrencies, as a result of the banking crisis that had arisen. The banking crisis is not an important issue anymore but it seems that cryptocurrencies retain the gains without serious losses. On the other hand, Bitcoin is unable to touch the milestone price of $30,000. Last week’s fundamental results, mostly regarding the US labor market, did not affect the price of Bitcoin seriously. This week, we may see a different story as the inflation announcement in the USA and the release of the Fed minutes may create new perceptions for investors. If the inflation drops significantly, a case of a bullish reaction of the markets is not excluded. In such a case, cryptocurrencies will be favored as well so we may try long 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.