31/07/2023

General Comment

The decisions of the central banks (Fed, European Central Bank, and Bank of Japan) and the press conferences that followed, understandably gathered most of the eyes of the investment community last week.

The beginning was made by the Federal Bank of the United States (Fed) and as expected by a large portion of investors, it increased bank interest rates by 25 basis points. The head of the Bank, Jerome Powell, was not particularly revealing concerning the Bank’s next moves. So, no possibility is ruled out neither the possibility that this increase was the last nor the possibility that there will be further increases. But the next day there were important announcements about the US economy, on GDP, inflation, durable goods orders, and initial jobless claims, all with a positive sign.

In Europe, things were completely different. On Thursday the European Central Bank raised interest rates by 25 basis points but Christine Lagarde did not give any information about the future at the press conference that followed. She stated that the Bank’s next moves will be data-dependent, a phrase that raises many interpretations and creates concerns. But what is very important is that the image of the European economy and the prospects for the future are rather negative. The image described by Mrs. Lagarde is of a fragile economy with problems in growth, especially in important sectors such as manufacturing.

The cycle of central banks was closed on Friday by the Bank of Japan, which maintained negative interest rates and a loose monetary policy but produced a mini surprise in relation to the bond market and the yield curve, as we will see in detail below in the sections concerning the Japanese Yen.

As per the rest of the world, there’s another factor of optimism for the global economy that comes from China. China has announced recently growth below expectations and inflation at 0%. Also, early this week China released the NBS manufacturing PMI at 49.3 which is higher than the 49 of the previous month but still below the threshold of 50. It means that there’s room for a new stimulus to help the growth via domestic consumption, although there are some worries about a possible debt increase. In any case, a stimulus from China, most likely, will be welcomed by the markets.

The week was bullish for most major stock indices, probably for different reasons the American ones compared to the European ones. The week was also strongly bullish for the market of commodities such as gold and oil. As far as the foreign exchange market is concerned, the dollar strengthened significantly, while other currencies such as the euro and the Australian dollar fell. Bond markets also moved upward, with the US 10-year yield closing the week just below the 4% threshold. Finally, last week Bitcoin and most other cryptocurrencies could not follow the rise of traditional markets and fell.

After the volatile week, we went through, the current week is important for the markets as well. At the top is the US labor market release on Friday (NFPs), while China PMI manufacturing announcement, Eurozone inflation and GDP, and the UK interest rate decision are also important.

SP500

With bullish trends, the US SP500 index closed last week, at 4,582 points and profits a bit above 1%. The uptrend which has been formed since mid-March continued and so the index has touched the significant resistance at 4,637 points which is also the highest price in the last 1.5 years. The week started early with upward trends that continued on Wednesday too, after the announcement that Fed raised interest rates by 25 basis points. On Thursday the volatility decreased significantly following the announcements of the U.S. economy. The GDP of the United States rose in the second quarter of 2023 by 2.4% while markets predicted an increase of 1.8%. A significant increase also was for the durable goods orders in July which rose by 4.7% vs 1% that the markets estimated. Finally, initial jobless claims also fell sharply. On Friday the uptrend returned as the core personal consumption expenditures announced at 4.1% vs 4.6% of the previous month. It looks like the economy of the United States overcomes the crisis unscathed and the optimism continues since most of the analysts think the rate hike cycle either it’s over or it’s going to be over soon. Regarding the company earnings, at the mid-point of the Q2 earnings season for the SP500, the number of companies reporting positive earnings is above recent averages, while the magnitude of these earnings is below recent averages. There’s room for correction as the recent rise is very sharp for the SP500 (only 2 of the last 11 weeks were bearish) so we may try short positions this week.

DAX30

The German DAX40 index was bullish last week, closing at 16,470 points, with profits a bit more than 1.80%. DAX40 had a new all-time high with strong bullish momentum. It had a certain help on Wednesday from the positive investing sentiment that developed after FOMC. On Thursday there was a new boost for DAX40 although the outlook of the European economy, according to Christine Lagarde, is not positive at all, especially for the manufacturing sector which is the most important sector of the German economy. It seems though that the vagueness regarding ECB’s next moves helped the stock markets as the new interest rate hikes that could hurt them is not sure anymore. On Friday there was a new boost for DAX40 after the announcements for the German economy: 2023 G2 GDP dropped by 0.2% but it was better than the -0.5% of the previous quarter and the inflation in June (harmonized index of consumer prices) dropped to 6.5% from 6.8% in May. The recent all-time high combined with the negative outlook of the European economy are good reasons for us to try short positions this week.

FTSE100

The British FTSE100 index moved slightly upward last week, closing at 7,694 points, earning about 0.40%. The FTSE100 underperformed the rest of the major indices in Europe & USA and the main reason for that is the high inflation in the UK that insists and forces the Bank of England to continue aggressively with more interest rate hikes. The next decision is on Thursday and the main scenario is a 0.25% hike, although the case of 0.50% is not excluded at all. According to a recent Reuters poll, nearly 70% of economists, expect the Bank of England to raise rates by 0.25% while 30% predicted a 0.50% rise. Also, the PMIs announced last week for the UK economy were all below market expectations, especially the manufacturing PMI which was announced at 45. This week, besides the BoE decision for interest rates and monetary policy, there are new releases of PMI indicators. Most likely, the cycle of rates hike will continue, at least until the end of the year and this could hurt the UK stock markets and the psychology of the market that’s why we prefer short positions this week.

Gold

The previous week was bullish for gold, with the next month’s futures closing at $1,999 and profits close to 1.80%. The usual factors that affect gold prices lately, keep on doing it. The US dollar which is in a mode of strengthening during the last two weeks weighed on gold prices, especially on Thursday and the positive US economic data but on Friday there was a significant recovery after markets assessed that the cycle of interest rate hikes by the Fed is close to an end. The following critical announcement is the US inflation announcement on August 10. If the inflation continues to drop, maybe no more hikes will take place. On the same page, ECB was not clear if and when will apply new hikes. A pause in interest rates rise gives more credits to non-interest-paying assets. The major factor remains the US dollar though and a further dollar strengthening may push the gold prices lower that is why we’re keen to try short positions this week.

US Oil

Last week was bullish for oil with the next month’s futures closing at $80.64, with profits of more than 5%. Oil prices completed five consecutive bullish weeks with totals gains of 16%. Both demand and supply contribute to the uptrend of oil. There’s an optimism that the demand will remain high as the economic situation in many countries and especially in the USA is positive. A common sense that interest rate hikes will end soon helps the perception that a growth slowing or a recession will be avoided. Also, the information about a new stimulus package in China pushes oil prices higher because it would mean a boost to the Chinese economy which is the biggest oil consumer worldwide.  As per the supply, the recent decisions of production cuts by OPEC members, announced a few weeks ago, will start taking place. The next important resistance for oil prices is close to $83.50 but corrections cannot be excluded after 16% profits in five weeks, as some profit takers will appear. We may try short positions this week.

EURUSD (Euro vs US Dollar)
Last week was bearish for EURUSD as it opened at 1.1119 and closed at 1.1013. This drop was almost entirely due to the developments of last Thursday. On Thursday, the European Central Bank increased interest rates as we saw above by 25 basis points, which was more or less expected by the markets, but Christine Lagarde made a big difference in the press conference that followed. In addition to being vague in relation to the ECB’s future actions, it also presented a negative picture for the European economy in important sectors such as manufacturing. At the same time, there were important announcements about the American economy that were impressively positive overall. This divergence in the outlook and expectations of the two economies had the effect of strengthening the US dollar against the euro. The news continues into the current week as inflation, retail sales, GDP in the Eurozone, and non-farm payrolls are announced in the United States. It seems however that the upward trend of the exchange rate that has started for about a month and a half is starting to reverse since the euro is showing signs of weakness and the dollar is strengthening. If the situation continues perhaps the EURUSD will be found solidly below 1.10 and therefore we will choose sell positions this week.

GBPUSD (Great Britain Pound – US Dollar)

Unchanged was the last week for GBPUSD, which opened and closed around the price area of 1.2840 – 1.2850. The dollar strengthened significantly not only because of the increase in interest rates made by the Fed (which was expected by the markets) but mainly because of the impressive picture that the American economy shows based on the latest announcements. For the results of these announcements please see the SP500 stock index section. However, the rate did not move sharply downwards like the EURUSD, and the reason is that sterling has certain reasons for strengthening. The main reason is that due to the very high inflation that remains in the United Kingdom, the markets expect that the Bank of England will continue with interest rate hikes, starting next Thursday when the relevant decision is taken. The main scenario is a 25 basis points increase without excluding the surprise of 50 basis points. Of course, there will be other factors that will affect the rate such as the announcement of the US labor market and the PMI indicators. We may try sell positions this week.

USDJPY (US Dollar – Japanese Yen)

USDJPY moved mildly downward last week, opening at 141.61 and closing at 141.16. The whole week was strongly bearish for the exchange rate, as it was found even in the price area of 138. The reason was that the markets estimated that the Bank of Japan in Friday’s decision would discuss adjusting the yield curve control policy by a certain amount. These expectations were disproved, and the Bank of Japan announced that it will now control its yield curve more flexibly. The target for the 10-year Japanese bond yield remains at 0% and the tolerance range for yield movements around the target also remains at 0.5 percentage points, but according to the BoJ, this limit would be more flexible. The result of this development was the large weakening of the Japanese currency which combined with the strengthening of the US dollar brought the exchange rate well above 140, close to the opening levels of the week. In addition to the important US NFPs announcement this Friday, the Bank of Japan will announce its monetary policy minutes on Wednesday, so more news is yet to come. Buy positions is our selection for the current week.

EURJPY (Euro – Japanese Yen)
Bearish was last week for EURJPY which opened at 157.49 and closed at 155.46. The exchange rate moved sharply lower at the beginning of the week due to the atmosphere surrounding the decisions of the Bank of Japan which strengthened the yen. The decline deepened on Thursday following the downbeat picture of the European economy, presented by Christine Lagarde at the European Central Bank’s press conference after the interest rate decision. The decision of the Bank of Japan which as we saw above was contrary to the expectations of the markets weakened the yen, but the weak euro did not allow the exchange rate to close the week with a positive sign. Given the significant problems of the European economy and the European currency, it is not excluded that the fall will continue and therefore we may try sell positions this week.

EURGBP (Euro – Great Britain Pound)

Last week was bearish for the EURGBP, as it opened at 0.8648 and closed at 0.8567. Since the beginning of the week, the euro had shown signs of weakness which worsened after Thursday and Christine Lagarde’s press conference, where the disappointing picture of the European economy and the ambiguity of the European Central Bank regarding its future movements were highlighted. While the state of the economy in the United Kingdom is not particularly positive however, high inflation and the determination shown by the Bank of England lead investors to conclude that there will be more interest rate hikes by the end of the year. If this perception continues it is not excluded that there will be an approach of the EURGBP to the support at 0.85, a price that is also the lowest since August 2022. Under these conditions, we are keen to try sell positions this week.

USDCAD (US Dollar – Canadian Dollar)

Bullish was the last week for USDCAD, which opened at 1.3213 and closed at 1.3249. The exchange rate could not rise to the extent that the great strengthening of the US dollar would allow, and the reason is that the Canadian dollar also had reasons to strengthen. First, the rise of the oil prices that traditionally helps the currency of Canada was such that it balanced the strength of the US currency. Canada also had a positive macroeconomic picture, as the country’s GDP increased by 0.3% in May, a value that was above the previous month’s 0.1% and was within market expectations. The important news for the economies of the two countries, the USA and Canada, is on Friday at the same time and concerns their labor market. We may try sell positions this week.

USDCHF (US Dollar – Swiss Franc)
The USDCHF had an upward course last week as the opening price was at 0.8641 and the closing price was at 0.8702. Switzerland continues to have a positive macroeconomic picture that continued last week as retail sales in the country increased in June by 1.8% and the KOF economic leading indicator was announced at 92.2, well above the 90.5 expected by markets. But as we have emphasized many times in the past, during this period the dominant factor in the exchange rate is the US dollar, which strengthened significantly due to the impressive news announced by the US economy, regarding GDP, durable goods, inflation, and other figures. Tt was the second bullish reaction in a row for USDCHF which seems to be gaining momentum and so we may try buy positions this week.

AUDUSD (Australian Dollar – US Dollar)

Bearish was the last week for AUDUSD, which opened at 0.6727 and closed at 0.6645. It was the second week in a row of sharp declines for the AUDUSD. The US dollar strengthened after the Fed raised interest rates and after the impressively positive picture of the US economy as reflected in the latest announcements. Australia had announcements and results that did not favor the country’s currency. Inflation in June eased significantly to 6% from 7% the previous month, raising the prospect of more dovish action by the Bank of Australia in the near future. The producer price index was also down, while retail sales in Australia were in negative territory. Another factor negatively affecting the Australian dollar recently is the modest performance of China’s economy and market expectations for the future. Under this consideration, China’s manufacturing announcement this week takes on particular significance. Buy positions is our selection for the current week.

Bitcoin

Last week, Bitcoin was bearish and closed at $29,279 with losses close to 2.70%. It seems that the crypto community is stuck to the upcoming decision of the SEC regarding the Spot BTC ETF application and as time passes by, the boost of the cryptocurrencies prices that took place in mid-June, starts to fade out. There is some other news that makes crypto investors feel uncomfortable. The SEC had asked Coinbase (a big American crypto exchange company) to stop trading in all cryptocurrencies except bitcoin before suing the crypto exchange, as Coinbase CEO Brian Armstrong said. We remind you that on June 6, the SEC charged Coinbase, alleging that it was simultaneously operating as a broker, an exchange, and a clearinghouse for unregistered securities. Bitcoin and most of the cryptocurrencies could not follow the uptrend of the traditional assets lately and since it could be a correction this week, we may try short positions on Bitcoin.

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.