07/08/2023

General Comment

The markets reacted negatively to the developments of the last week. Fitch has downgraded the United States’ long-term credit rating by one grade, from AAA to AA+, citing, in particular, the repeated crises surrounding the federal government’s borrowing limit. Fitch stressed that the US government lacks a medium-term fiscal framework and has a complex budgeting process, while several factors have contributed to increases in debt over the past decade. Markets reacted with corrective trends in equity indices in the United States but also in the rest of the world. The reaction of the United States government was strong, with the Minister of Finance Janet Yellen stating that she strongly disagrees with this decision because it is arbitrary and based on outdated data.

On Friday the markets attempted a recovery, but the negative outcome of the US labor market led to strong pressures and a bearish trend again. More specifically, for July, 187K new jobs were announced against the 200K jobs estimated by the markets. At the same time, there was also an increase in average hourly earnings. Just after these announcements, there was a positive reaction, but very quickly the corrective tendencies prevailed and thus the stock indices in Europe and America closed close to the lows of the week.

The PMIs released in the US, China, and several European countries proved and confirmed a fact that has been highlighted many times lately: the services sector is moving decently but there is a big problem in manufacturing. Almost all PMIs for manufacturing were reported below 50 which means there is a contraction while in Germany things were even worse as the index came in below 40.

As for the Eurozone, the results were not as negative as Christine Lagarde had presented in the last press conference, at least for the time being. Inflation eased, GDP was still in positive territory while the unemployment rate reduced slightly. more in the EURUSD section.

In addition to the stock markets that we went above moving strongly corrective throughout the week, we also saw the US dollar strengthen for a third week in a row with a corresponding correction of other currencies such as sterling, the Australian dollar, and the Swiss franc. The commodity market had a mixed picture with gold being pressured and oil strengthening, mostly for its own reasons as we will see below. Bond yields continued to rise, with the US 10-year yield closing above the 4% benchmark, even if there was a significant pullback on Friday after the yield had even exceeded 4.2%. Cryptocurrency markets followed traditional markets by reacting negatively even if their correction was not particularly extensive.

 The central event of the current week is undoubtedly the announcement of inflation in the United States. Inflation has been decelerating sharply lately and is expected to have decelerated further in July. However, it is not excluded that drawbacks, which may occur, can bring new disturbances to the markets, and overturn the prevailing perception that the Fed is done with interest rate hikes. In addition to inflation in the US, the announcement of inflation in China is also important, since the country has been experiencing very low inflation for a long time, which indicates a slowdown in growth. On Friday, GDP is announced in the United Kingdom, and a series of data for the United States such as the producer price index and the Michigan consumer sentiment index.

SP500

With heavy bearish trends, the US SP500 index closed last week, at 4,478 points, and loss of 2.70%. The downgrade of the US debt rating by Fitch on Tuesday from the highest AAA rating to AA+ was a strong strike for the markets and especially for the stock markets and indices. In another case, this strike could be more hurtable but markets assess and estimate that things are not that bad. The impressive macros announced in the USA lately and the strong reaction of the government has limited the concerns. SP500 tried to recover on Friday after NFPs but during the last hours of the trading week, the bearish trend returned. Markets are trying to understand by interpreting macros and statements of whether the Fed will hike the interest rates one more time or if this increasing cycle is over. Besides macros and the Fed, it was a week of earning announcements for many US companies. Overall, 84% of the companies in the SP500 have reported earnings for Q2 2023 so far. 79% of them, have reported Earnings Per Share above estimates. This performance is above the 5-year average of 77% and the 10-year average of 73%. It is also the best performance of the SP500 companies since Q3 2021 where the number was 82%. SP500 companies have reported earnings so far that are 7.2% above estimates. This figure is below the 5-year average of 8.4% and above the 10-year average of 6.4%. All eyes will be on the US inflation announcement this week. A possible slowing in inflation de-escalation may cause turbulence to the markets so we prefer short positions this week.

DAX30

The German DAX40 index was strongly bearish last week, closing at 15,952 points, with losses close to 3.15%. By the end of July, DAX40 had a new all-time high price but this performance does not reflect the real outlook of the German and the European economy. Germany has a lot of problems including insisting on high inflation and shrinkage in the manufacturing section as the latest PMI results show. So, every global negative development (like the US economy downgrade by the Fitch) leads to strong corrections, like the one we saw for DAX40 last week. The results of the German companies also create concerns. Chemical companies like BASF reported lower figures in earnings while the car industry is also in decline as the new trend which is the electric cars is a market dominated currently by the US companies as the German ones cannot have a good penetration so far. As per the macros announced last week for the German economy, retail sales dropped in July by 0.8%. the unemployment rate was announced at 5.6%, imports fell, exports remain unchanged creating a strong trade balance and the mini surprise came from the factory orders which jumped by 7% in July. We may try short positions for one more week.

FTSE100

The British FTSE100 index moved downward last week, closing at 7,564 points, dropping about 1.70%. The central event of the UK last week was the interest rate hike by the Bank of England by 0.25%. The reaction of the markets was not so strong as this hike had a very high probability of confirmation while the scenario of a 0.50% hike was also on the table. The rate is now 5.25% which is the highest one in the last 15 years. The point is that the cycle of interest rate hikes, most likely, is not over yet. Most analysts predict that the rate will be 0.50% higher than the current one within 2023. Some BoE policymakers like Jonathan Haskel and Catherine Mann supported a 0.50% interest rate hike on Thursday. The head of BoE Andrew Bailey was also hawkish, underlining that interest rates will stay sufficiently restrictive for sufficiently long. He also predicted a drop in inflation by the end of the year to 5%. It makes sense though that FTSE100 had a better performance compared to other major US & European indices. We may try long positions this week.

Gold

The previous week was bearish for gold, with the next month’s futures closing at $1,978 and losses close to 1.80%. It was the first corrective week after four consecutive bullish weeks. Gold was under pressure due to two major factors: the strong dollar and the rising bond yields. The dollar was particularly strong as the US economy has very good economic data to perform lately and this fact may give Fed the chance to hike interest rates one more time before the end of the hiking cycle. A recession in the US economy is now a very low-probability scenario. Bond yields, on the other hand, climbed last week above 4.20% which is the highest price in the last 9 months. Gold prices attempted a recovery on Friday, after the disappointing NFP results in the USA but the sign remained negative. Now the focus is on the US inflation that will be announced on Thursday. Gold is typically seen as a hedge against inflation and if the inflation stops dropping, gold prices may have higher volatility as markets will assess that additional rate hikes are required to keep inflation in check. Inflation results will also affect the US dollar and a stronger dollar may cause more corrections in gold prices. We may try short positions this week.

US Oil

Last week was bearish for oil with the next month’s futures closing at $82.59, with profits exceeding 5%. Oil prices are in a heavy uptrend during the last six weeks with total profits of 18.5%. The perception of the markets regarding the oil demand is that will be at high levels since the recession in the USA is now a scenario of very low probability. China’s economy creates come concerns as manufacturing is in decline and the 0% inflation implies a slowing in growth but the pledge of a new stimulus package and new structural monetary tools from the Bank of China, may cause a recovery in economic activity and so in oil demand. The strongest factor though that pushes the oil prices higher has to do with supply. Saudi Arabia announced that it will cut oil production of 1 million barrels per day until the end of the next month. Also, Russia may reduce its oil exports by 300,000 barrels per day within the same period. These production cuts from Saudi Arabia and Russia which are two of the biggest oil suppliers in the world are the main cause for the jumps in oil prices lately. There is strong resistance at $83.50 as it is the highest oil price of the last 9 months so we cannot exclude a correction, as a possible US dollar strengthening at a possible profit-takin may help in this direction. We prefer short positions this week.

EURUSD (Euro vs US Dollar)
Last week was mildly bearish for EURUSD as it opened at 1.1012 and closed at 1.1003. Almost all week the dollar strengthened after the downgrade of the United States by Fitch created several concerns. Macroeconomic results announced for the United States such as the PMI indicators further worsen the situation. The euro also had a miserable picture as a continuation of the situation of the previous week even if the results of the Eurozone were decent: GDP for the second quarter of 2023 increased by 0.3%, inflation fell further to 5.3% and the unemployment rate declined to 6.4%. This picture for the EURUSD changed dramatically on Friday after the US NFPs announcement. The poor image of the labor market in the USA made many investors believe that the Fed will not dare to raise interest rates again because that would worsen the situation even more. So, the dollar started to weaken, the pair moved higher and finally closed above the milestone price of 1.10. Investors are now awaiting the central event for this week which is none other than the US inflation announcement. A further de-escalation is expected but if there is a slowdown in this, the markets will bring back to the fore a possible new increase in interest rates and this will logically strengthen the dollar so we may try sell positions this week.

GBPUSD (Great Britain Pound – US Dollar)

Bearish was the last week for GBPUSD, which opened at 1.2839 and closed at 1.2743. The Bank of England on Thursday raised interest rates by 25 basis points, but this event could not help sterling much. The problem in the UK with high inflation remains and so many investors felt that a 50-basis point increase would be reasonable and possible, but this has been disproved so this has not helped sterling. Also, based on the latest statements from Bank of England officials, the country’s economy is expected to be under significant pressure in the near future and this fact is something that is now starting to override the balance between central bank interest rates. In the press conference that followed, the head of the BoE, Andrew Bailey, said that he expects a de-escalation of inflation by the of the year, but it is inevitable that the aggressive policy of raising interest rates will continue. Given the importance of the announcements of inflation in the US and GDP for the UK, volatility is expected to remain high or even increase. Sell positions is our selection for the current week.

USDJPY (US Dollar – Japanese Yen)

USDJPY moved upward last week, opening at 140.95 and closing at 141.68. The exchange rate started with strong upward trends at the beginning of the week due to the strengthening of the US dollar and due to the great weakness of the yen. On Wednesday the minutes of the Bank of Japan were announced through, and we learned that there is an intention to continue the very loose monetary policy. However, the yen weakened further after the Bank of Japan’s new bond-buying intervention. When the bank’s leaders saw that the yield on the 10-year bond began to move to very high levels (high price of the last 9 years) they intervened by declaring that they would buy an unlimited number of 5-year and 10-year bonds in order to control the yield curve. It was another factor that weakened the Japanese currency. However, the situation started to change from Thursday onwards with the yen regaining some of its lost strength and the dollar also weakening due to NFPs. The central event of this week is the US Inflation announcement which will largely determine the course of the exchange rate. We prefer buy positions this week.

EURJPY (Euro – Japanese Yen)
Bullish was last week for EURJPY which opened at 155.29 and closed at 155.99. The week started strongly on the upside after the news from the Bank of Japan was in the direction of the continuation of the very loose monetary policy but also the macroeconomic results announced in the Eurozone were decent. This picture began to change from mid-week onwards when the Japanese currency strengthened. The market spotlight will fall on the United States and the inflation to be announced and the rest of the economies will take a backseat since there are no major announcements for the Eurozone and Japan. We may try sell positions this week.

EURGBP (Euro – Great Britain Pound)

Last week was bullish for the EURGBP, as it opened at 0.8569 and closed at 0.8626. The two currencies, the euro, and sterling have been under pressure lately in front of the great strength of the US dollar. Also recently, the situations of the economies have come to the fore to affect their currencies and according to the data and the statements of officials of the two economies, the situation in the UK and the Eurozone does not bode well. The UK in particular has significantly high inflation which forced the Bank of England to raise interest rates last Thursday by 25 basis points and is likely to go ahead with further increases later this year. The picture of the economy in the Eurozone looks better and this gave more points to the euro as it was seen last week. The Bank of England still has a higher probability to hike interest rates so sell positions is our selection for the current week.

USDCAD (US Dollar – Canadian Dollar)

Bullish was the last week for USDCAD, which opened at 1.3228 and closed at 1.3376. The US dollar has been stronger against the Canadian dollar almost all week even if the factors affecting the exchange rate should not lead to such a strong rise. Oil prices rose and this should logically act as a counterweight, strengthening the Canadian dollar. Of course, the downgrading of the United States economy by Fitch played a big role, since it caused a general disturbance in the markets. The Bank of Canada has raised interest rates to 5%, which is the highest rate for several years, but this factor is not able to stand in the way of the rise in the USDCAD. Certainly, the Canadian dollar was affected by the negative results announced last week: the net change in employment for July was negative and that brought a small rise in the unemployment rate. Also, worse than expected, was the result of the PMI index. If the result of the United States inflation is such that it will strengthen the dollar, the exchange rate will make a new upward jump and therefore we will select buy positions this week.

USDCHF (US Dollar – Swiss Franc)
The USDCHF had an upward course last week as the opening price was at 0.8667 and the closing price was at 0.8727. While the US dollar strengthened last week mainly due to market jitters caused by Fitch’s downgrade of the United States economy, the Swiss Franc was unable to respond, so the pair moved higher for a third week in a row. Inflation in Switzerland for July was announced at 1.6% and this is a development that removes from the equation of central banks the possibility of an interest rate increase by the Bank of Switzerland. Thus, the Swiss Franc remains weak and due to its oversold condition (recently at multi-year lows), the USDCHF has this bullish reaction. Further strengthening of the dollar will mean a further rise in the exchange rate and so we will prefer buy positions this week.

AUDUSD (Australian Dollar – US Dollar)

Bearish was the last week for AUDUSD, which opened at 0.6656 and closed at 0.6563. The exchange rate continued with strong downward trends for the third week in a row, since the US dollar was strong enough, but the Australian dollar is also going through a period of strong weakness. The Reserve Bank of Australia left interest rates unchanged at 4.1% last Tuesday. This was a mini surprise to the markets as most had expected a 25-basis point hike and the result pressured the Australian dollar. On Friday, based on the statement of the monetary policy by the Reserve Bank of Australia, we saw that a further tightening of the monetary policy cannot be ruled out, as well as that the bank’s expectations are for a de-escalation of inflation. China’s economic image is also problematic, especially in manufacturing, for this, it is something that also negatively affects Australia’s currency. The recovery of AUD during the end of the last week creates expectations for a reaction continuation so we may try buy positions this week.

Bitcoin

Last week, Bitcoin was bearish and closed at $29,042 with light losses close to 0.80%. Bitcoin and most of the cryptocurrencies retain a miserable outlook of a bearish trend and very low volatility during the last 1.5 months. It seems that markers were stuck for one more week to the decision of the SEC regarding the BlackRock application for a Bitcoin ETF. The chances of the SEC approving a bitcoin-ETF application have risen to 65%, according to Bloomberg. The regulatory issues and the conflict between companies of the crypto ecosystem and regulatory authorities carry on:  last week the Australian Securities and Investments Commission sued the eToro over its for allowing speculation on cryptocurrencies. There are also open issues with the SEC against major crypto exchanges like Coinbase and Binance. We will learn more in the following weeks. The next major support for Bitcoin is the price area of $28,500 and if there’s a solid breakout below this level, the downtrend may accelerate so 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.