15/05/2023

General Comment

The financial markets have been struggling in recent years to recover from a series of problems. The crisis of the pandemic affected the production model, the inflation crisis brought interest rate increases to central banks and fears of a major recession, while recently we are also witnessing a crisis in the banking sector that has not yet spread and has affected individual banks mainly in the United States.

A new problem that seems to be emerging based on last week’s data is the debt crisis in the United States. “It’s a big worry. Every family should be concerned,” Rohit Chopra, director of the Consumer Financial Protection Bureau, told CNN in an interview on Thursday. This situation was fuelled by the issue of the U.S. debt ceiling. Treasury Secretary Janet Yellen said the U.S. government might not be able to pay its obligations from June 1 onwards if Congress does not first raise the debt limit, currently at $ 31.4 trillion. President Joe Biden has urged Republican lawmakers to vote in favor of raising the limits, but discussions between the two ruling parties continue. A meeting scheduled for this Friday was delayed to next Monday when President Biden and top lawmakers from both parties will discuss a possible deal. Republicans will vote positively if Biden agrees to retroactive government spending reductions. The debt crisis is not new, but nowadays it is combined with high inflation and concerns about the banking system and makes things more difficult.

Naturally, this situation has raised serious concerns and has put on the back burner the positive economic effects that the United States economy has had over the past week. Inflation continued its de-escalation and was announced in April at 4.9%. The producer price index for the same month also declined, which is also an indicator of inflationary pressures.

As for the rest of the world, the big drop in inflation in China was announced for April to 0.1%, which has also caused mini concerns because very low inflation most of the time means low growth. In Europe, there have been no major economic announcements, only speeches by central bankers who continue to mention the problem of inflation and the European Central Bank’s intention to take appropriate measures to combat it.

Mixed was the sign in the stock markets in Europe and America while bearish trends prevailed in commodity markets such as gold and oil. In the foreign exchange market, we have seen the dollar strengthen as a safer investment destination with a corresponding pullback of other currencies such as the euro and sterling. The cryptocurrency markets were not unaffected by the broader picture of the markets, so Bitcoin and most cases fell. Finally, bond yields were left roughly unchanged with the U.S. 10-year bond yield closing the week just below the 3.50% threshold.

The week that has just begun will be dominated by the decisions on the debt crisis in the United States and there are some other important news and announcements. The United States is dominated by the retail sales announcement, in the Eurozone inflation, GDP, and forecasts of economic growth, and in the United Kingdom the unemployment rate announcement.

SP500

With mild bearish trends, the US SP500 index closed last week, at 4,124 points, and losses close to 0.30%. The debt ceiling issues dominated the investing community during the last week, worsening the sentiment and the psychology of the markets. Although almost nobody believes that the US government is going to face an unprecedented national default, the whole noise and dust that was created were enough to affect the markets negatively. A debt ceiling agreement between the White House and Republicans in Congress is the most possible scenario though. On Sunday, President Joe Biden said that “I really think there is a desire on their part as well as ours to reach an agreement. And I think we’ll be able to do it”. Besides the debt ceiling, the macroeconomic announcements had a decent result: inflation dropped further to 4.9%, and the producer price index to 2.3% in April. It was another confirmation that the Fed (most likely) will not raise interest rates again. In case the debt ceiling problem will be arranged, maybe the positive sentiment will return so we may try long positions this week.

DAX30

The German DAX40 index was mildly bearish last week, closing at 15,914 points, with losses approaching 0.30%. The global investing sentiment turned negative and the European markets, including DAX40, were also affected. Also, DAX40 is close enough to the important resistance of the 14,000 points. A clear and solid breakout above 14,000 points will bring it very close to the all-time highs price of 16,290 points and these price levels require a series of positive events and developments as a fuel. For the moment, the ECB seems to stay committed to new interest rate hikes that may press the European economy even more. The inflation in Germany is still very high as the Harmonized Index of Consumer Prices announced at 7.6% in April. Industrial production raised by 1.8% in March (on a monthly basis) and the current account exceeded 34 billion euros in the same month. We may try long positions this week as we believe that the index can try the 14,000 points.

FTSE100

The British FTSE100 index moved downward last week, closing at 7,755 points, dropping 0.30%. Generally, it was a corrective week for most of the equity markets and the FTSE100 was also aligned with this trend. The week was important for the UK economy. The Bank of England raised interest rates by 0.25% and most of the market analysts believe that there’s more room for new hikes. New hikes may mean an increased probability of a recession and this is what the markets are afraid of. The point is that the results of the UK economy remain decent. The GDP in the 1st quarter of 2023 rose by 0.2% (on an annual basis), industrial & manufacturing production rose by 0.7% in March and the trade balance was better than expected. The FTSE100 approached the critical price zone of 8,000 points during April but it seems that for the moment it is not something feasible. News & events are necessary for such an exceedance. We prefer long positions this week as the index may recover after three consecutive weeks of falling.

Gold

The previous week was bearish for gold, with the next month’s futures closing at $2,016 and losses of more than 0.40%. We saw the same pattern as the previous weeks in gold’s price action. Bullish weeks produce big profits and bearish weeks produce small losses. It’s a clear uptrend for gold which has a performance of almost 18% during the last 7 months. The most decisive factor for gold’s correction last week was the recovery of the US dollar in which gold is denominated. Besides the dollar, the key factor for gold’s short-term future is the risk mood. As long as the debt ceiling agreement is not finalized the bearish trend is favored. A hawkish stance of the Fed and good results of the US economy (the retail sales are the most important announcement this week) also favor the downtrend. By trusting the agreement in Congress and looking at the price action of gold we prefer long positions this week.

US Oil

Last week was bearish for oil with the next month’s futures closing at $70.07, with losses approaching 1.80%. It was the fourth week in a row that oil prices declined and the total losses are more than 15%. The concerns and fears regarding global economic growth, mostly in the United States and China, create the perception of reduced oil demand. As per the USA, during the last period, a lot of issues have arisen: high inflation & interest rate hikes, banking crisis, and lately the debt ceiling issue. In China, the very low inflation that was announced in April also brought concerns for the country’s economic growth. Of course, the recovery of the dollar also was a reason for oil price pressures. The price found a support at $70 not only because it is an important support but because there are reasons for the supply to be reduced as well. The number of active US rigs was reduced with the largest decline since February 2016 while many analysts believe that OPEC may apply more production cuts soon enough. Since the price is on the $70 milestone, we’d better stay out this week until things get clearer.

EURUSD (Euro vs US Dollar)
Last week was bearish for EURUSD as it opened at 1.1019 and closed at 1.049. Investor sentiment deteriorated sharply due to the looming debt crisis in the United States and poor market psychology, and a larger portion of investors turned to the safety and security of the U.S. dollar. U.S. inflation decelerated further and was announced at 4.9% in April, and while all indications point to the Fed halting rate hikes, the dollar does not appear to be weakening. In the Eurozone, there were no major economic announcements, and so markets were moved mainly by the speeches of central bankers. Christine Lagarde reiterated once again that the main objective remains the fight against inflation and that there is more road to be covered to achieve this. These statements probably did not convince the markets of the European Central Bank’s hawkish stance and the euro remained weak. The fact is, however, that the long-term trend of the exchange rate has not yet changed and if there is a new excess of 1.10, the upward trend may return and for this reason, we will choose buy positions this week.

GBPUSD (Great Britain Pound – US Dollar)

Bearish was the last week for GBPUSD, which opened at 1.2628 and closed at 1.2447. It was the first bearish week after eight bullish weeks and the pair found itself below the significant threshold of 1.25. The Bank of England raised interest rates by 0.25% last Thursday, which now stands at 4.50%. This development was expected and thus did not greatly help sterling, on the contrary GBPUSD fell mainly influenced by the strengthening of the US dollar. Bank of England chief Andrew Bailey was vague about the central bank’s next moves, and that uncertainty has not helped sterling recover. The exchange rate was unable to gain upward momentum either with the positive economic news announced for the UK economy on Friday. However, a correction after eight upward weeks was something to be expected and it was a development that did not affect the uptrend of the exchange rate if there is a breakout above 1.25 this trend may return, and therefore we may try buy positions this week.

USDJPY (US Dollar – Japanese Yen)

USDJPY moved upward last week, opening at 134.77 and closing at 135.72. The strengthening of the U.S. dollar helped the exchange rate rebound. Bond yields moved into neutral territory and so did not strongly influence USDJPY moves. On the contrary, some news came from Japan which partially strengthened the Japanese currency and so the rise was not big. In the report of the Bank of Japan’s minutes on Monday, we learned that some members have concerns about a possible rise in inflation beyond expectations. We remind you that the Bank of Japan continues its very loose monetary policy, and any such statement or development puts that policy into question. Later in the week, Ueda’s bank chief tried to reassure markets by saying Japan’s banking system was strong and not at risk. Technically speaking, a significant resistance has formed in the value range of 138 which seems to be difficult to break at the moment and so we may try sell positions this week.

EURJPY (Euro – Japanese Yen)
Bearish was the last week for EURJPY which opened at 148.63 and closed at 147.27. Euro was weak as the statements of the ECB bankers failed to convince the markets of the hawkish stance of the central bank and also many investors moved to less risky currencies. On the contrary, the risk-off mood favored the Japanese currency which is considered a safe-haven asset. Moreover, the meeting minutes released by the Bank of Japan showed that many policymakers are afraid of an inflation explosion so the ultra-loose monetary policy shows some ruptures. If the sentiment improves during the current week, things may change and so we prefer buy positions.

EURGBP (Euro – Great Britain Pound)

Last week was slightly bearish for EURGBP, which opened at 0.8718 and closed at 0.8714. Both the euro and the sterling were avoided by the majority of the investors & traders due to the negative sentiment; the UK currency was a bit stronger than the euro because of the interest rate hike by 0.25% that took place last week by the Bank of England. Also, the head of BoE Andrew Bailey appeared more hawkish than Christine Lagarde and the results of the UK economy were decent. Maybe this downtrend for EURGBP carries on this week so buy positions is our selection.

USDCAD (US Dollar – Canadian Dollar)

Strongly bullish was the last week for USDCAD, which opened at 1.3373 and closed at 1.3557. The strengthening of the US dollar was the catalyst for the bullish behavior of the pair. Another helpful factor was the drop in the oil prices which is strongly correlated with the Canadian economy. There was no other news, announcements, or statements from Canada to support the Canadian currency during the last week. In the current week though, the inflation announcement as well as the retail sales are of high significance for the Canadian economy. Since the USDCAD is in a sideways movement in the last 1.5 months, we may stay out until a cleared trend is formalized.

USDCHF (US Dollar – Swiss Franc)
The USDCHF had an upward course last week as the opening price was at 0.8893 and the closing price at 0.8982. It was the strongest bullish reaction for the pair during the last weeks. The USDCHF is in a strong downtrend since the end of February. Since there was no important news for the Swiss economy the uptrend of the last week should be pointed to the strong US dollar. Also, the last announcement of the low Swiss inflation retains the perception that the Swiss National Bank will not raise the interest rates further. If the dollar returns to its weakness, the downtrend for the USDCHF may return as well so we may try sell positions this week.

AUDUSD (Australian Dollar – US Dollar)

Bearish was the last week for AUDUSD, which opened at 0.6743 and closed at 0.6640. The Australian currency was unable to fight the strong US dollar. The interest rate hike that took place from the Reserve Bank of Australia, almost two weeks ago, was quickly absorbed by the markets and the price action. Concerns about the growth of the Chinese economy are also a factor that presses the Australian dollar. The inflation in China was announced in April at 0.1% which is very low and it may imply a growth slowing of the Chinese economy. Australia is quite bound with China due to commercial activities. This week, Australia will release the RBA meeting minutes and will announce the unemployment rate. The risk mood seems improved though so we may try buy positions this week.

Bitcoin

Last week, Bitcoin was bearish and closed at $26,933 with losses close to 5.40%. Bitcoin was unable to continue its uptrend that was performed until early April. During the last month, it lost the significant threshold of $30K and during the last week, it dropped below $26K. The negative investing sentiment has affected the traders and the investors who favor less risky solutions than the volatile cryptos. Since the banking crisis has been calmed, the perception of an alternative solution to the traditional banking system was also limited. Also, the recent de-escalation of the inflation in the US (both CPI and PPI declined) is not good news for the crypto world as the cryptos appear as a counterweight to the inflation pressures. Maybe the sentiment will get better this week, especially if Congress will come to an agreement regarding the debt ceiling issue so we’re keen to 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.