22/05/2023

General Comment

The last week was a positive one for the financial markets as they managed to recover, and a strong upward trend emerged that led many of them to multi-month highs. Kevin McCarthy, the Republican Speaker of the House of Representatives, said there would be a debt ceiling deal in the United States this week. We remind that this was an issue that troubled the markets a lot, since US Treasury Secretary Janet Yellen had sounded the alarm a few days before that if there is no agreement, on June 1 the United States could declare a default.

U.S. stock indices jumped sharply, and many of them exceeded several-month highs. The stock indices in Europe also performed impressively, following the generally positive climate.

Regarding central banks and their subsequent actions, some statements by American Bankers were considered hawkish by the markets. However, the most likely scenario remains that at the Fed’s next decision on June 14, interest rates will remain unchanged, but those statements boosted the dollar. However, there was a small correction for the dollar’s rise after Jerome Powell’s speech at the end of the week, who appeared more easing about the Fed’s next moves.

European Central Bank officials stressed that the main objective remains to bring inflation back to 2% and that the European Central Bank will do everything possible to achieve this. These statements, however, were not able to prevent the major decline in the European currency.

Perhaps the strengthening of the dollar is also based on the positive macroeconomic data presented last week by the United States. Retail sales remained in positive territory while industrial production increased unexpectedly. Also, a surprise was the low number of initial jobless claims and the high number of new building permits.

The overall improvement in market sentiment led to pressure on commodities such as gold, while others such as oil recovered. Bond yields rose with the U.S. 10-year closing the week just below 3.70%. As far as cryptocurrencies are concerned, it has been a rather uneventful week with little volatility and little change.

The week that has started is particularly important because there is the announcement of the Fed’s minutes on Wednesday and even if no decisions on interest rates are expected from the minutes, we will get more information about the bank’s plans. Also important is the announcement of the U.S. GDP on Thursday and of durable goods orders on Friday. The Eurozone is dominated by announcements of PMIs, German GDP, and consumer sentiment while in the UK there is a very significant announcement of inflation.

SP500

With bullish trends, the US SP500 index closed last week, at 4,192 points and profits of 1.65%. The big boost for the index came from Wednesday onward, after the higher probability of a deal regarding the debt ceiling issue in the USA. On Wednesday & Thursday, we saw an uptrend rally that led SP500 to its highest price since the last August, above 4,200 points. There was a mild correction on Friday, mainly due to the hawkish speech of Jerome Powell. Also, the macros for the US economy were decent enough: retail sales rose by 0.4% in April, industrial production rose by 0.5%, housing starts rose by 2.2% and initial jobless claims were 12K lower than the number that the markets estimated. Some announcements of the current week, including Fed minutes, GDP, and durable goods orders may improve the sentiment even more. The next resistance for SP500 is around 4,325 points and this could be a good target for those who are keen to try long positions this week.

DAX30

The German DAX40 index was strongly bullish last week, closing at 16,275 points, with profits approaching 2.30%. It was the global sentiment that was improved significantly that helped the European indices (including DAX40) to recover. The highest weekly price was at 16,332 points which is a new all-time high as the old one that took place in November 2021 was at 16,290 points. The upcoming debt ceiling deal in the USA helped almost all the equity indices. German did not have important data to release last week. The economic sentiment remains in negative territory and the producer price index in April was announced at 4.1% on a yearly basis, above the 4% that the markets predicted.  The current week started with a new all-time record high price so we don’t see why we should not follow this strong trend by selecting long positions this week.

FTSE100

The British FTSE100 index was slightly bullish last week, closing at 7,757 points, with a marginal profit of 0.03%. Although the investing sentiment was improved compared to the week before, the FTSE100 could not take advantage and underperformed the rest of the major stock indices worldwide. The speech of Governor Andrew Bailey was a catalyst since it was hawkish enough to scare the markets with much higher interest rates in the near future. Another factor is the worsening macroeconomic results since the unemployment rate was a bit higher in March, compared to February: 3.9% vs 3.8%. This week is quite important for the UK with the announcements of inflation, the PMI indicators, and retail sales. It seems though, that the global sentiment is positive creating a new uptrend in the markets so long positions is our selection for the current week as well.

Gold

The previous week was heavily bearish for gold, with the next month’s futures closing at $1,980 and losses close to 1.80%. The strong US dollar was the main reason for this drop. Another reason was the optimism about a deal on the debt ceiling issue that has occurred in the US lately. It was a perception that improved the market sentiment significantly and made a serious portion of the investing community avoid safe-haven assets such as gold. Since the gold lost its milestone price of $2,000 it is undoubtedly a sign of a bearish reversal to a strong uptrend that had started about 2 months ago. The US data this week (GDP, Fed minutes, and durable goods orders) as well as any estimations regarding the inflation and the next moves of the central banks will be critical for gold’s price action this week. Below $1,954 we may see a downtrend acceleration and we may try short positions this week.

US Oil

Last week was bullish for oil with the next month’s futures closing at $71.67, with profits approaching 2.30%. As the market sentiment started to improve last week, the oil buyers returned. The optimism cleared many of the concerns that were developed regarding the oil demand. Of course, this fact was not enough to create a strong uptrend rally and by the end of the week we saw some corrective trends appearing. Energy Information Administration announced a rise in crude inventories of 5 million barrels and predicted a significant demand-supply gap in the second half of the year, mainly due to China’s economy. Moreover, the U.S. oil rig count, an indicator of the oil supply, had a weekly decline of 11 rigs and it was the largest weekly decrease of the last 1.5 years. As long as the oil price remains below $73.40 there’s a good chance to meet $70 again and to threaten the important resistance of $69.40. We may try short positions this week.

EURUSD (Euro vs US Dollar)
Last week was bearish for EURUSD as it opened at 1.0856 and closed at 1.0805. The statements of officials from both the Fed and the European Central Bank were hawkish and so the exchange rate should remain relatively neutral and perhaps the euro should be strengthened because the economic sentiment improved markedly after the looming debt ceiling deal in the USA. However, the EURUSD moved lower for the second week in a row, and this was a mini surprise for many analysts and investors. Nor were the macroeconomic effects of the Eurozone such as to justify a fall in the euro. Industrial production may have decreased in March by 4.1% but employment increased, and GDP in the first quarter of the year increased by 1.3% compared to the previous year while the trade balance was well above market expectations. Given the importance of the release of the Fed’s minutes and U.S. GDP announcement this week, it is not ruled out that the dollar will continue to strengthen, especially since at a technical level it has moved well away from the critical 1.10 zone. In this sense, we prefer sell positions this week.

GBPUSD (Great Britain Pound – US Dollar)

Mildly bearish was the last week for GBPUSD, which opened at 1.2454 and closed at 1.2444. The U.S. dollar continued to strengthen, but the exchange rate did not move lower mainly due to the reaction of the British sterling. Bank of England chief Andrew Bailey’s speech was taken by markets as a sign of determination to fight inflation. Andrew Bailey said inflation has been particularly high for a long time and that anything possible would be done to bring it down to 2%. He also said that he understands that higher interest rates are a big problem for many people but that the same is true for high inflation. As well as the important US announcements this week, important announcements also have for the UK with inflation and retail sales standing out. If the strengthening of the dollar continues and the exchange rate falls below its support of 1.2350, it is not excluded that we are facing a reversal of the long-term upward trend and therefore we will choose sell positions this week.

USDJPY (US Dollar – Japanese Yen)

USDJPY moved upward last week, opening at 135.59 and closing at 137.94. About two months ago, an apparent upward trend has begun which has driven the exchange rate from the 130 to the 138 range. Last week agreed with this trend as the US dollar strengthened and bond yields that affect the USDJPY moved higher. Japan’s producer price index was announced on Monday below market expectations, and this is of course another indication that the Bank of Japan is not going to change its very loose monetary policy and negative interest rates. Positive macroeconomic announcements for Japan’s economy didn’t help the yen. Annualized Japanese GDP grew by 1.8% in the first quarter of the year well above the 0.7% predicted by markets. The country’s industrial production, imports, and exports have been positive. The USDJPY is on the considerable resistance of 137.90 and if it escapes noticeably from it, the road to 140 is open and so we may try buy positions this week.

EURJPY (Euro – Japanese Yen)
Bullish was last week for EURJPY which opened at 147.22 and closed at 149.07. The euro was not particularly strong last week, although economic sentiment improved, and Eurozone central bankers said new rate hikes are imminent. But rising yields on European bonds (especially German bonds) and the continued weakening of the Japanese currency have brought this result. We need to remind you that the exchange rate is close to the very significant resistance of 151.60, which if broken will be at a high price for about 15 years. But there is still room for a rise from the current price, and therefore we may try buy positions for one more week.

EURGBP (Euro – Great Britain Pound)

Last week was bearish for EURGBP, which opened at 0.8707 and closed at 0.8681. The exchange rate appears to be continuing its downward trend that started at the beginning of February and the price range of 0.90. The sterling has been looking stronger than the euro all this time because the inflation problem in the UK is much more acute and therefore the Bank of England may be forced to take more action on interest rates in the coming period. It is worth noting that both the UK and Eurozone economies have a decent macroeconomic picture lately. Technically, there is room until the major support of 0.8545 so we will continue with sell positions for one more week.

USDCAD (US Dollar – Canadian Dollar)

Bearish was the last week for USDCAD, which opened at 1.3536 and closed at 1.3497. The exchange rate was unable to recover despite the continued strengthening of the US dollar for two main reasons. The first reason has to do with the rise in oil prices which most of the time has a positive effect on the currency of the country. The second reason has to do with the announcement of inflation in Canada which was announced in April at 4.4%, above the 4.1% that markets estimated. That as is reasonable sparked the view that the Bank of Canada could raise interest rates further. The rest of the macroeconomic announcements from Canada’s economy came on the back burner. It also seems that the exchange rate has not been in a clear direction for about a month and a half, but if the Fed’s minutes and U.S. GDP help the dollar, we may see an upward reaction and therefore we may try buy positions this week.

USDCHF (US Dollar – Swiss Franc)
The USDCHF had an upward course last week as the opening price was at 0.8960 and the closing price was at 0.8992. The main reason for the strengthening of the exchange rate was the rise of the U.S. dollar after the Swiss economy had no major news or announcements. Of course, the trend of the dollar and the USDCHF will depend to a large extent this week on the announcements of the Fed’s minutes on Wednesday and the US GDP on Thursday. But there was a weakness for the pair to close the week above the psychological threshold of 0.90 and this fact puts us on second thoughts in relation to the continuation of the upward path. In any case, we’re keen to try buy positions this week as well.

AUDUSD (Australian Dollar – US Dollar)

Neutral was the last week for AUDUSD, which opened and closed around 0.6640 – 0.6645. While the US dollar was quite strong and would have justified a correction for the exchange rate, there were virtually no changes because the Australian dollar was also strong. On Tuesday, the Reserve Bank of Australia announced its minutes suggesting a new 0.25% interest rate hike at its next meeting. This made sense to strengthen the currency of the country. Other macroeconomic data from the Chinese and Australian economies did not allow the Australian dollar to perform a stronger upward trend though. China’s retail sales, industrial production, and direct investment were lower than expected. In Australia, on the other hand, we had a slight deterioration in the labor market as expressed by the employment change. If the U.S. dollar strengthens, we will probably see a return to the downtrend and therefore we may try sell positions this week.

Bitcoin

Last week, Bitcoin was bearish and closed at $26,750 with losses close to 0.70%. Bitcoin and most of the cryptocurrencies could not take advantage of the bullish trend that the traditional markets developed. Moreover, there was a massive sale of Bitcoins at the beginning of the last week. On May 15, nearly 50K Bitcoin held by long-term wallet addresses were sold. It was almost $1.3 billion worth of Bitcoins. Most likely, those long-term holders found out that the uptrend rally that the community expected, after the latest exceeding of $30K, is not the prevailing scenario. The resolution of the banking issues and the debt ceiling upcoming agreement creates conditions for other markets to rally, not in favor of alternative ways of investing such as the cryptos. We may try 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.