29/05/2023

General Comment

Until last Friday, markets were miserable after the issue of the debt ceiling in the United States was still pending, raising concerns. U.S. Treasury Secretary Janet Yellen warned that if there was no deal by June 1, the U.S. could default. The first few days of the past week have been busy on this issue, but towards the end of the week we saw light in the tunnel, and on Saturday night, Republican House Speaker Kevin McCarthy announced that he struck an agreement in principle with President Joe Biden to raise the borrowing limit of the U.S. federal state, adding that the required votes are expected to be held on Wednesday, May 31. The agreement is expected to end the political deadlock of recent months.

There were also important economic announcements and events in the past week, especially in the United States. The Fed meeting did not contain any decisions on interest rates and monetary policy as it was known, but the announcement of the minutes gave us to understand that policymakers are divided in two with some arguing that the rate hike should continue and some else that it should stop. Also positive was the announcement of the US GDP for the first quarter of the current year, which was announced at 1.3% against 1.1% of what the market has estimated. Durable goods orders also recorded a positive pace for April, with a rebound of 1.1%, as for markets that were expecting a negative number.

In Europe, things are completely different since the contraction of GDP in Germany for the first quarter of 2023 caused major concerns. GDP dropped by 0.3% below the 0% that markets expected and so the specter of recession in Germany is not just visible but real.

The issue of the debt ceiling led to a rally in U.S. markets on Friday and the week closed profitably. On the other hand, equity indices in Europe have been corrected. The dollar continued to rise for the third week in a row on the basis of the hawkish Fed and positive macros, while higher-risk currencies such as the euro and sterling fell. The commodity market had a mixed picture with gold continuing to lose ground and oil continuing to recover. The bond market continued upward for the second week in a row, with the U.S. 10-year closing at the area of 3.80%. Finally, the cryptocurrency market closed the week with low volatility and small changes but on Sunday there was a remarkable bullish rally.

The week we are already going through starts relatively loosely with the United States holiday (Memorial Day) but towards the end, there are important announcements such as Eurozone inflation on Thursday and the United States labor market on Friday (NFPs). Other major announcements are PMI indicators in the world’s major economies, unemployment and retail sales in Germany, and the ADP employment change in the USA.

SP500

With bullish trends, the US SP500 index closed last week, at 4,205 points and profits of 0.31%. The whole week was bearish for SP500 but the recovery on Friday was impressive, leading the index to new multi-month highs. All the perception of the markets for an upcoming Biden-McCarthy deal regarding the US debt ceiling caused a 1.30% rally on Friday that made the week profitable. Besides the debt issue, the Fed minutes that were released on Wednesday had a more-than-expected hawkish stance and it was another factor for the downtrend on Wednesday. The US macros though were decent enough: the US GDP for Q1 2023, rose by 1.3%, confirming that the recession is not the most possible scenario anymore. Also, the durable goods orders that rose by 1.1% were another positive factor. The increase in the personal consumption expenditures which may be interpreted as an inflation come-back, was not able to cause serious concerns. As we’ve already entered the deadline week for the debt-ceiling deal (June 1st) a formalization of a possible deal may give an extra boost to the SP500 so we may try long positions this week. We’ll pay special attention to the NFPs on Friday.

DAX30

The German DAX40 index was bearish last week, closing at 15,984 points, with losses approaching of 1.80%. The index performed a recovery on Friday just like the US stock indices but it was not enough for a positive weekly sign. Besides the debt issues in the US that affect the global sentiment, Eurozone & Germany were not in good shape last week. Hawkish statements from ECB bankers that foreshadow new interest rate hikes is a factor that causes bears to the DAX40. Disappointing was the GDP result for the German economy as well: there was a -0.3% in the 1st quarter of 2023 which brings Germany into the zone of recession. Consumer confidence, business climate, and expectations were all below market estimations too. The recovery of the last Friday though has caused a wind of optimism globally which is expected to be continued so long positions is our selection for the current week.

FTSE100

The British FTSE100 index moved downward last week, closing at 7,627 points, dropping 1.67%. The bullish Friday helped FTSE100 to recover from the weekly low price of 7,557 points but the distance for being positive on a weekly basis was too long to be covered. The week was full of negative developments for the UK economy. On Tuesday, all the PMI indicators were announced below market expectations. On Wednesday, the inflation was announced at 8.7% in April vs 8.2% expected so new actions by the Bank of England should be expected and a further tightening would hurt the stock markets. It’s a fact that was also confirmed by Jonathan Haskel (member of the monetary policy committee) said that “Further increases in Bank rate cannot be ruled out“. Finally, retail sales in April dropped by 3% (on an annual basis). Hopefully, this week will be dominated by the positive week from the US, in case of a debt ceiling deal, so we prefer long positions.

Gold

The previous week was bearish for gold, with the next month’s futures closing at $1,946 and losses close to 1.70%. The major reason for the continuous downtrend of gold during the last three weeks is the strong US dollar. The US dollar has been boosted lately as a safe and risk-off currency, favored by investors when concerns rise. Also, lately, the probability of a 0.25% rate hike by the Fed in June has increased very much. Moreover, the rising bond yields (bonds are gold’s competitor when investors are in a risk-averse mood) keep gold prices low. The next 2-3 weeks will be critical: we will learn the new rate of the US inflation and the Fed’s decision for the interest rates. During the current week though, the inflation announcement in the Eurozone and the NFPs will also increase the volatility. We may try short positions for one more week.

US Oil

Last week was bullish for oil with the next month’s futures closing at $72.86, with losses approaching 1.60%. The strong dollar was not able to change the upward trend of oil prices. On Wednesday US data showed that inventories and fuel supplies tightening as the inventories had a serious decrease of 6.8M barrels in the last week. Also, there’s an upcoming OPEC meeting to discuss oil production decisions, and Abdulaziz bin Salman (Saudi Arabia’s Energy Minister) tried to limit the short-selling speculators and this was interpreted by the markets as a new production cut warning. On Thursday, we saw a sharp downtrend in oil prices as Russian Deputy Prime Minister Alexander Novak downgraded the probability of further production cuts by OPEC at the next meeting in early June. The balance between Saudi Arabia and Russia’s conflicting statements regarding the OPEC production decision causes lower volatility on Friday and some soft bullish trends so the week closes in profit. In the current week, the looming debt ceiling deal has helped the perception of higher oil demand and the prices are moving higher. Following this trend, we may try long positions this week.

EURUSD (Euro vs US Dollar)
Last week was bearish for EURUSD as it opened at 1.0804 and closed at 1.0724. It was the third bearish week in a row for the exchange rate after the strong dollar prevailed again. Both the anticipation of positive developments from the debt ceiling issue and the positive macroeconomic results in the United States (GDP and durable goods orders) contributed to the strengthening of the dollar. A determining factor though was the hawkish nature of the Fed’s minutes announced on Wednesday. In Europe, gloom prevails especially after the announcement of GDP in Germany that showed that the first quarter of this year was recessionary for the country. It is clear how the announcement of inflation in the Eurozone on Thursday and the announcement of the labor market in the US (NFPs) on Friday will have the first say on the pair. Along with these announcements, developments in the debt ceiling will also play an important role. If investment sentiment improves there may be a greater willingness to risk and in that sense, we will choose buy positions this week.

GBPUSD (Great Britain Pound – US Dollar)

Bearish was the last week for GBPUSD, which opened at 1.2438 and closed at 1.2344. The strong U.S. dollar prevailed on the pair even though sterling had important reasons to strengthen too. The inflation in the UK remains at particularly high rates since even though it decreased from 10.1% to 8.7% in April, it was again above the market estimations. A series of statements and speeches by Bank of England executives including head Andrew Bailey were drafted in line with the fight against high inflation. Andrew Bailey stressed how high inflation persists and how they should respond, clearly hinting at new actions to raise interest rates. Sterling is expected to continue strengthening under this framework while this is not a sure thing for the dollar and so we may try buy positions this week.

USDJPY (US Dollar – Japanese Yen)

USDJPY moved upward last week, opening at 137.96 and closing at 140.59. It was the first time since last November that the exchange rate managed to overcome the significant resistance of 140 and this is certainly a strong confirmation of the upward trend. The strong dollar that dominated combined with rising bond yields brought about this result. Tokyo’s Consumer Price Index fell to 3.2% in May from 3.5% in April, a sign that inflationary pressures are easing and the Bank of Japan has less reason to change its loose monetary policy. It is therefore logical that the exchange rate may strengthen independently of the course of the dollar due to the weakness of the yen. This week though we are keen to try sell positions as a pullback cannot be ruled out.

EURJPY (Euro – Japanese Yen)
Bullish was last week for EURJPY which opened at 149.07 and closed at 150.79. The euro was not particularly strong this week after investing sentiment was rather negative but that did not stop the exchange rate from comfortably surpassing the more important milestone value of 150. It is therefore easy to conclude that the weak yen was behind this move. The Bank of Japan is continuing its loose monetary policy, there are no obvious signs that this will change any time soon and so the yen continues to weaken. Rising bond yields were another reason for the rise. This increase, however, brought the exchange rate to a high price of about 15 years, and therefore corrections cannot be excluded and thus we may try sell positions this week.

EURGBP (Euro – Great Britain Pound)

Last week was neutral for EURGBP, as it opened and closed around 0.8680. The euro and sterling were both weak and so there was that balance in the exchange rate. Inflationary pressures persist in both the Eurozone economy and the UK economy, and so the perception of markets is that new interest rate hikes by the two central banks are imminent. Because the problem in the UK is more severe and because the Bank of England is more determined in general, we will give an extra point to the downward trend and therefore we prefer sell positions this week.

USDCAD (US Dollar – Canadian Dollar)

Bullish was the last week for USDCAD, which opened at 1.3496 and closed at 1.3614. It was a reasonable rise for the exchange rate after the U.S. dollar strengthened for another week. This strengthening was able to overcome the rise in oil prices that normally favors the Canadian dollar. Canada’s economy had no other major economic announcements and so there was no reaction. This week, however, things are different since in addition to the important announcement of the United States labor market (NFPs), there is the announcement of Canadian GDP. The rise of last week has not changed the sideways character in which the pair has been for about two months and therefore we will choose sell positions this week.

USDCHF (US Dollar – Swiss Franc)
The USDCHF had an upward course last week as the opening price was at 0.8984 and the closing price was at 0.9049.  The third week in a row has helped the exchange rate rise above the critical value of 0.90. The main reason was the strong dollar. Switzerland’s economy continues to have positive results with industrial production increasing in the first quarter of the year by 3.4%. Swiss National Bank (SNB) policymaker, Andrea Maechler, said on Wednesday that “The March rate hike serves to only slow inflation towards the 2% mark”. We may try sell positions this week.

AUDUSD (Australian Dollar – US Dollar)

Bearish was the last week for AUDUSD, which opened at 0.6643 and closed at 0.6516. There were no developments from the Australian economy or in relation to the Reserve Bank of Australia in the past week so this fall for the exchange rate should be attributed mainly to the strengthening of the US dollar. The PMI indicators performed well in Australia while retail sales were unchanged in April. As for China and its economy, the only development we saw was that the People’s Bank of China left interest rates unchanged at 3.65%. If the U.S. dollar starts to weaken due to improved economic sentiment in the markets, we may see the exchange rate react upward and so we may try buy positions this week.

Bitcoin

Last week, Bitcoin closed at $28,072 with important profits close to 5%. The whole week was rather neutral as we saw a big drop on Wednesday and some minor recovery attempts in the next three days. After the announcement of a in principle agreement between Biden and McCarthy on Sunday though, regarding the debt ceiling issue, the sentiment changed a lot and we saw a strong uptrend rally that caused a 2-week high price for the Bitcoin. It makes perfect sense because Bitcoin and most of the cryptos as high-risk assets are favored when the risk mood is on. This rally does not seem to have a strong footing as early in the current week the Bitcoin is losing more than 2%. 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.