10/07/2023

General Comment

Two were the main news that dominated the financial markets last week. The first had to do with the announcement of the Fed’s minutes (FOMC) on Wednesday on the monetary policy of the United States. From the minutes we learned that there is a clear intention of the Central Bank members to continue the policy of increasing interest rates, with at least two increases in the near future imminent. The reason for this is the positive economic results announced by the United States, which give vital space for an aggressive monetary policy.

The second development came from the US labor market. More specifically on Friday, the new jobs (Non-Farm Payrolls) for June were announced, with the result slightly lower than market expectations. It was a result that created some concerns and second thoughts.

From the European area, there were no important economic announcements except Christine Lagarde’s speech on Friday where she stressed once again that the inflation problem must be addressed by any means and that there is still a lot of work to be done in order to achieve this.

A mini upset was caused in the markets after the new tension that has been created between the United States and China over restrictions on the imports of metals used in the manufacture of microchips. Many analysts consider that this is perhaps the beginning of a new tension in the relations between the two countries and how there could be a continuation up to the brink of an economic war.

With what we saw above, the stock markets in Europe and America had corrective tendencies since the policy of increasing interest rates and the tensions between the USA and China do not create a favorable economic climate. In contrast, commodity markets moved higher with gold and oil performing gains. At the close of the week, the US dollar, which until then was in positive territory, weakened strongly, while on the contrary, higher-risk currencies such as the euro and the sterling became bullish. Anticipation of further interest rate hikes also pushed up bond yields, with US 10-year yields closing above 4%, after 4.5 months. Finally, in the cryptocurrency space we had stabilizing trends for the second week in a row.

The week that has just begun is clearly dominated by the announcement of inflation in the United States on Wednesday. The result will affect to a great degree the decisions of the Fed. Other important announcements are inflation in China and Germany, Producer Price Index in the United States, the unemployment rate in the United Kingdom, and the decision on interest rates in Canada.

SP500

With bearish trends, the US SP500 index closed last week, at 4,399 points, and losses of 1.15%. The hawkish stance of the Fed lately has stopped the heavy uptrend of the SP500 that had started four months ago. There was a general perception that we were very close to the end of the cycle of interest rate hikes. This perception is not valid anymore. According to official statements, Fed meeting minutes (FOMC), and market analysts, Fed may hike the interest rates at least two more times in the next period while the probability of a decrease before the end of the year is now very small. It is the decent picture of the US macros that allows this behavior and that is why every time a positive result is announced, markets react bearishly. ADP employment change and PMIs had a good result and only after the NFPs (209K vs 225K expected) the SP500 performed a bullish reaction but nothing so special. SP500 was not able to recover for one more reason: the tensions between the USA and China which potentially can be the beginning of a new trade war between the world’s biggest economies. The inflation announcement on Wednesday is critical and the result may bring more corrections so we may try short positions this week.

DAX30

The German DAX40 index was heavily bearish last week, closing at 15,603 points, with losses of a bit more than 3.35%. The investing sentiment got worse after the hawkish statements of both the Fed and ECB which means that new growth slowing tendencies may occur. High inflation is still there in Eurozone and Germany and according to Christine Lagarde, there’s still a lot of work to be done before the problem is resolved. Germany’s economic data did not help stock indices at all: manufacturing PMI dropped to 40.6, the trade balance was well below market expectations, and industrial production dropped by 0.2%. Only the factory orders had a recovery of 6.4%. If there are not any game changers this week, the downtrend is expected to carry on and that is why we prefer short positions.

FTSE100

The British FTSE100 index moved strongly downward last week, closing at 7,257 points, dropping about 3.65%. No significant economic news was released last week, except the PMI announcements which had a mixed performance and did not affect the stock markets. It is the perception of the markets for more interest rate hikes that creates concerns and fears of a growth slowing or even a recession. Some analysts estimate that the target rate from the Bank of England will be as high as 7%. The macro results return in the UK in the current week as the unemployment rate and the GDP will be released on Tuesday & Thursday accordingly and markets will get a better idea of the economic situation and they’ll be able to estimate better the BoE next moves. We may try short positions for one more week.

Gold

The previous week was slightly bullish for gold, with the next month’s futures closing at $1,931 and profits close to 0.20%. Gold was rather bearish until last Friday but after the NFPs and the dollar’s strong losses, it had a decent recovery with a positive weekly sign. During the last week, gold prices touched the support of $1,900 but it seems that the fair price for the moment, according to the markets’ perception is above this level. As the bond yields moved higher and the US 10-year government bond yield exceeded the milestone of 4%, it was not easy for the gold prices to recover further. Gold is an inflation-sensitive commodity which means that the US inflation announcement on Wednesday has great importance for gold’s trend in the following weeks. In case the US dollar returns to its strength, we may see a new downtrend for gold, that is why we prefer short positions this week.

US Oil

Last week was bullish for oil with the next month’s futures closing at $73.66, with profits approaching 4.60%. Several factors affect the oil prices in this period. First of all, the demand remains strong according to the released inventories in the USA and according to the Energy Information Administration announcements. Another factor that contributes to the oil uptrend is the fact that some oil producers like Saudi Arabia and Russia announced additional output cuts recently. Obviously, the increased demand allows OPEC members such movements to support high prices. The counterweight to all the above is the high probability of interest rate hikes in many major central banks, including the Fed, ECB, and BoE that may hit the demand. Most likely, without these developments, oil prices could be much higher. Inflation announcements in US and China are the most critical events of the current week and we may see a downward turn for oil that we’re going to support with our short positions.

EURUSD (Euro vs US Dollar)
Last week was bullish for EURUSD as it opened at 1.0908 and closed at 1.0968. That rise in its entirety came from Friday’s US labor market announcement. Until then the exchange rate was in decline. The U.S. dollar strengthened all week on the prospect of the Fed raising interest rates at least two more times, according to minutes released on Wednesday and earlier statements by officials. The positive macroeconomic results favored this version since the possibility of a recession has been removed. But on Friday the new jobs announced were below expectations and this seems to have brought concern to the markets about the Fed’s future aggressive moves. On the contrary, in Europe, the inflation problem is more severe, and thus new interest rate increases by the European central bank must be considered certain. For some time now the EURUSD has shown an inability to stay above 1.10. We will prefer sell positions this week.

GBPUSD (Great Britain Pound – US Dollar)

Bullish was the last week for GBPUSD, which opened at 1.2683 and closed at 1.2838. Leading up to Friday’s US jobs announcement, the rate was slightly up but since the announcement, strong bullish trends were developed on the back of a weaker US dollar. The dollar has been strengthening for some weeks since the statements of central bankers and the Fed’s minutes are converging on new interest rate increases, at least two more. This is a change from the recent market’s belief that maybe we are done with the hikes. This belief has partially changed since the US labor market announcement and then after the result disappointment and concerns were raised in relation to tight monetary policy and the effects it may have on the labor market. On the contrary, the problem of very high inflation in the UK will result in a more aggressive monetary policy from the Bank of England. The GBPUSD finds resistance at 1.2850 which is also the highest price since April 2022. For this reason, we may try sell positions this week.

USDJPY (US Dollar – Japanese Yen)

USDJPY moved downward last week, opening at 144.35 and closing at 142.09. The exchange rate has undergone a sharp correction although it has generally been in a strong upward trend since the end of March. Most of the correction took place on Friday after the US job market announcement resulted in a large weakening of the US dollar. So, the big rise in bond yields took a back seat and couldn’t offset the drop in the exchange rate. Major economic news or executives’ speeches from Japan were absent last week so the dollar was the dominant factor. Given the importance of the inflation announcement in the US on Wednesday, if the result is such that it strengthens the dollar then the exchange rate will continue its upward course and therefore, we may try buy positions this week.

EURJPY (Euro – Japanese Yen)
Bearish was last week for EURJPY which opened at 157.45 and closed at 155.82. Such a correction was expected since the rate has been at a multi-year high. The euro was not particularly weak, but the Japanese currency prevailed after the economic sentiment worsened internationally mainly due to the recent tension that has been created between the US and China. The current week also has no important news regarding the Japanese economy with the exception of the industrial production announcement on Friday. Buy positions is our selection for the current week.

EURGBP (Euro – Great Britain Pound)

Last week was bearish for the EURGBP, as it opened at 0.8589 and closed at 0.8540. The strong downtrend of the last few months has reappeared in the pair even though there was a two-week bullish break. The euro and sterling have been strong lately since new interest rate hikes are expected from the two central banks, but sterling is a bit stronger because the inflation problem in the United Kingdom is more severe and therefore the reaction of the Bank of England is expected to be stronger. However, the price area just above 0.88 seems to be an insurmountable support for the pair at the moment and so it is possible to see an upward turn again and therefore we prefer buy positions this week.

USDCAD (US Dollar – Canadian Dollar)

Bullish was the last week for USDCAD, which opened at 1.3235 and closed at 1.3275. The correction in the rate on Friday was big due to the weakening of the US dollar but not such as to negate the positive sign of the week. Another factor that could strengthen the Canadian dollar is the increase in oil prices, but even this factor was not able to give a downward push to the exchange rate. There were negative macroeconomic results for Canada’s economy: the trade balance was in negative territory and the unemployment rate rose from 5.2% to 5.4%. Although the Bank of Canada is expected to raise interest rates by 0.25% on Wednesday, this is something that maybe the markets have already digested and therefore we will prefer buy positions this week.

USDCHF (US Dollar – Swiss Franc)
The USDCHF had a downward course last week as the opening price was at 0.8936 and the closing price was at 0.8891. The Swiss Franc had no reason to be strong mainly due to the inflation announced in the country, at 1.7% in June well below 2.2% of the previous month. Thus, inflation has fallen below the level of 2% and therefore the Swiss National Bank has no reason to make new interest rate increases. However, the fall in the US dollar was such on Friday that it dragged the exchange rate lower and probably pushes it to retest the important support of 0.8820. If the dollar is able to recover with the help of the inflation announcement in the USA, the pair may apply a bullish reaction and that is why we are keen to try buy positions this week.

AUDUSD (Australian Dollar – US Dollar)

Bullish was the last week for AUDUSD, which opened at 0.66759 and closed at 0.6691. It was an anemic bullish reaction even though the weakening of the US dollar was very strong. This is due to several reasons. At first, the markets were expecting an increase in interest rates from the Bank of Australia on Tuesday, but this did not happen, and the interest rates remained unchanged at 4.1%. In addition, the recent tensions between the US and China weaken the Australian dollar because the economies of Australia and China are strongly linked. As a counterweight to what we mentioned were the positive macroeconomic results for both Australia and China in relation to manufacturing and the trade balance. The US dollar can return to a strength mode this week and we may try sell positions.

Bitcoin

Last week, Bitcoin was bearish and closed at $30,167 with losses close to 1.50%. Bitcoin could not continue its strong uptrend that we saw three weeks ago. The latest news regarding the Bitcoin ETF filing to SEC from BlackRock brought waves of enthusiasm to the crypto community because one of the main issues which is the regulation, seemed to be in a better shape than before. Although the most likely scenario is that the SEC will approve it, the altcoins (other cryptocurrencies except Bitcoin) will hardly benefit. Also, according to some analysts, this approval may not prove as transformational as many crypto fans expect. Many important issues remain as the reliability after several cases in the recent past (FTX etc.) is still hurt. We may try short positions this week as well.

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.