21/08/2023

General Comment

Things with China are getting more tangled after two major Chinese companies ran into trouble last week. Real estate company Country Garden claimed unable to repay its loans. Zhongrong was also unable in paying bonds. These two outbreaks are combined with China’s weak economic picture, as shown in the latest announcements, creating concerns. Last week, industrial output for July was announced at 3.7%, well below the previous month’s 4.4%. In the same month, retail sales rose by 2.5%, almost half the 4.7% that markets had expected. Finally, in the same month, foreign direct investments in China fell by 4% compared to the previous month. The picture looks problematic but at the moment markets do not seem to be seriously concerned although they have been affected to some extent.

Another reason for the sharp correction last week was the announcement of the Fed’s minutes, according to which there is still a strong hawkish trend and so the possibility of a new rate hike remains open. The results in the United States continue to be positive after retail sales rose in July by 0.7%, housing starts rose by 3.7%, and industrial production by 1%. Still, the inflationary pressures that persist may not let Fed executives unwind the tight monetary policy and rate-raising policy. Markets are particularly concerned about inflation, especially after recent increases in energy prices.

In Europe, things are quite different. Despite pessimistic forecasts and estimates, economic data continue to be decent as Eurozone GDP grew by 0.3% in the second quarter and industrial output, on a monthly level, increased by 0.5% in June. But inflation seems to persist after it hit 5.3% in July and so new interventions by the European Central Bank should be taken for granted. At least this is what Christine Lagarde has repeatedly said, namely that decisions will be data dependent and since inflation persists decisions should probably be taken for granted.

The corrections in the stock indices were quite broad as we will see in detail below, while the negative climate also swept the commodity market, with a fall in the prices of gold and oil. The US dollar continued to strengthen for the fifth week in a row against its main rivals while only the sterling showed some signs of recovery. The bond market rally continued with the U.S. 10-year closing the week above 4.25%. Finally, strong corrective trends prevailed in the cryptocurrency market as we will see in detail below.

The Jackson Hall Symposium and especially Jerome Powell’s speech on Friday will be targeted this week. Announcements that stand out are PMI indicators for the world’s main economies on Wednesday, inflation in Japan and Germany’s GDP on Friday, and durable goods orders in the United States on Thursday.

SP500

With bearish trends, the US SP500 index closed last week, at 4,370 points, and loss of 2.10%. The main reasons for this downtrend are two: the announcement of the Fed’s minutes and the serious deterioration of the situation in China. The Fed in announcing its minutes on Wednesday essentially told the investment community that among its members there are strong concerns about the path of inflation and that there is a serious possibility that the cycle of raising interest rates is not yet over. China’s negative results on industrial production and retail sales on Tuesday triggered corrective action in most markets and the SP500. Several companies in China are also struggling to meet their debt obligations. China’s problems are a main concern for the financial markets in this period. The rise in bond yields, with the U.S. 10-year rate reaching 4.25%, also provides an alternative to investors with a high yield without much risk. All eyes will fall on the Jackson Hole Symposium which starts on Thursday, since there may be some economic announcements, especially from Jerome Powell’s speech on Friday. Perhaps there will be an attempt to assuage the concerns and given the great fall that has preceded it, we will prefer long positions this week.

DAX30

The German DAX40 index was bearish last week, closing at 15,574 points, with losses a bit more than 1.60%. The DAX40, like most major stock indices, has been heavily affected by the maelstrom of corrective trends created by China’s economic problems. Especially Germany, which is a country with strong export activity to China, is perhaps one of the most affected. Beyond China, international economic sentiment has been hurt as new interest rate hikes by central banks are not ruled out and the possibility of a recession continues to exist. As for the eurozone, Philip Lane, chief economist of the European Central Bank, was appeasing on Friday, saying a great recession has little chance of confirmation. There were no significant macroeconomic results in Germany and economic sentiment, as announced on Tuesday, was relatively improved. German GDP for the second quarter of the year is announced next Friday and by expecting some upward reaction we may try long positions this week.

FTSE100

The British FTSE100 index moved strongly downward last week, closing at 7,262 points, dropping about 3.50%. The substantial fall for the index began on Tuesday after the UK labor market announcement. As the data showed in June the job balance was negative with a decrease of 66,000 jobs against expectations for a 75,000 job growth. This resulted in a rise in unemployment from 4% to 4.2%. The fall continued on Wednesday with the UK’s inflation announcement of 6.9% last month, so it continues to be at very high levels. Quite logically, this gives rise to expectations in the markets that the Bank of England still has a long way to go for inflation to fall to acceptable levels. The last day of last week was also a correction due to a 1.2% drop in retail sales last month. The FTSE100 index has come very close to substantial support just above 7,200 points, which is also the lowest price for the last 10 months. So, an upward reaction would probably make sense and therefore we may try long positions this week.

Gold

The previous week was bearish for gold, with the next month’s futures closing at $1,918 and losses of more than 1.40%. Gold completed three downward weeks after the U.S. dollar continued to strengthen, pushing down gold prices. Another factor pushing down prices is a big rise in bond yields since they are for investors an alternative to the safe haven assets universe. The U.S. 10-year, which passed 4.25% last week, is a good low-risk solution, according to many analysts. Given what we have said, perhaps the fall for gold prices should be greater but the deterioration of the international economic climate due to China and expectations of new interest rate hikes by central banks is currently holding gold prices above $1,900. If there is a breakout of that level then gold will be at its lowest point since last March. Important for this week is the Jackson Hole Symposium and any announcements that will be made there. We may try long positions this week.

US Oil

Last week was bearish for oil with the next month’s futures closing at $81.36, with losses a bit above 2%. The fall during the week was bigger, as oil dropped below $79, but over the last two days, there has been a strong upward reaction. A big drop in the first three days of the week was driven by worsening economic sentiment in China and Fed minutes and the perception that the rate hike cycle is probably not over yet. Both of these developments affected the perception of markets in terms of demand, which based on these developments should be reduced. The increase in oil prices on Thursday and Friday is mainly related to oil production since in addition to announced reductions by some OPEC countries, the US reported on Friday that the weekly Baker Hughes rig counts were reduced. According to this factor, there is a decrease in production also on the part of the United States, and thus prices followed an upward trend. Concerns about demand remain, however, and this was reflected in the inability of oil to exceed $ 85 a barrel despite the production cuts recently announced. We would prefer short positions this week.

EURUSD (Euro vs US Dollar)
Last week was bearish for EURUSD as it opened at 1.0948 and closed at 1.0868. The deterioration in economic sentiment is driving a large portion of investors to safer currency solutions such as the US dollar. Economic sentiment has been hurt lately due to negative news that has come from China but also because of a general view that in many economies of the world, recession is not going to be avoided. Higher energy prices recently give more points in this scenario. The Fed’s minutes released on Wednesday showed there was still a willingness to continue the policy of raising interest rates, especially as inflation in the United States remains high. Europe has so far not seen a particularly negative picture, although forecasts are bleak, but the euro has been weak for nearly a month. Jerome Powell’s speech at the Jackson Hole Symposium will be the focus of markets this week as there are no major economic announcements in the Eurozone. After five declining weeks for EURUSD, there may be some bullish reactions and therefore we will choose buy positions this week.

GBPUSD (Great Britain Pound – US Dollar)

Bullish was the last week for GBPUSD, which opened at 1.2690 and closed at 1.2731. Although the U.S. dollar continued its upward trend, the exchange rate was able to react upward and sterling was the only exception to this, in all pairs of the dollar with major currencies. Sterling had significant reasons to recover, especially from Wednesday onwards, when there were inflationary announcements in the UK. The most important of these was the announcement of the consumer price index for July at 6.8%, a particularly high price that probably forces the Bank of England to continue with a few more interest rate hikes. Other indicators of inflation such as the producer price index and the retail sales index also found themselves above market expectations. In terms of macroeconomic results, there was a significant deterioration after the unemployment rate in July climbed to 4.2% from 4% and retail sales fell in the same month 1.2%. These announcements rattled the sterling, but hawkish market perception prevailed. It is not excluded that the upward reaction will continue this week and so we may try buy positions.

USDJPY (US Dollar – Japanese Yen)

USDJPY moved upward last week, opening at 144.90 and closing at 145.39. This rise was small compared to the strengthening of the US dollar and the rise in bond yields as the Japanese currency started to strengthen from the middle of the week onwards but did not manage to reverse the bullish sign for the exchange rate at the week level. The yen is beginning to attract a share of investors due to its nature as a safe haven asset since the international investment climate is beginning to deteriorate, mainly due to China. Another key reason is rumors and market expectations that Japan is going to intervene again in the foreign exchange market by either buying yen or buying bonds. This has happened a few times lately and statements by Japanese officials do not rule it out. As for the economic announcements in Japan, a positive surprise was GDP growth of 1.5% in the second quarter, while inflation was reported to have risen to 3.3% in July. Jerome Powell’s speech at the Jackson Hole Symposium on Friday will be of great interest and we will stick to sell positions for one more week.

EURJPY (Euro – Japanese Yen)
Bearish was last week for EURJPY which opened at 158.64 and closed at 158.02. The exchange rate has had a mild corrective reaction when we consider that it has climbed to a 15-year high price. Beyond this reasonable correction, other contributing reasons were the weakness of the euro last week and some rumors prevailing in markets about Japan’s intervention in the foreign exchange market. The official position of the Bank of Japan remains the continuation of the loose monetary policy that has been in place for a long time, having created a sharp downward spiral in the country’s currency. The economic climate which is negative if combined with the strengthening of rumors about Japanese foreign exchange intervention can lead to further correction and so we may try sell positions this week.

EURGBP (Euro – Great Britain Pound)

Last week was bearish for the EURGBP, as it opened at 0.8618 and closed at 0.8533. Sterling prevailed against the euro last week mainly because of the very high inflation announced in the United Kingdom, which has reignited the perception that the Bank of England will make further interest rate hikes. A slight upward reaction took place on Friday following the very negative result for the UK relative to retail sales. But it was shown once again that the price range of 0.85 is a very tough and difficult support for the EURGBP. Given this and considering that high inflation in the UK can be digested by your markets soon, we will choose buy positions this week.

USDCAD (US Dollar – Canadian Dollar)

Bullish was the last week for USDCAD, which opened at 1.3430 and closed at 1.3551. The strength of the U.S. dollar was universal throughout the week and led the exchange rate to its 5th consecutive upward week. In addition to the strength of the U.S. dollar, the correction in oil prices, which are very often related to the Canadian dollar, also contributed. Canada announced increased inflation for July relative to market expectations (3.3% versus 3% and 2.8% last month) and this factor should have boosted the Canadian dollar but was almost ignored by markets. The only noteworthy news about Canada’s economy is the announcement of retail sales on Wednesday, and of course, Jerome Powell’s speech at the Jackson Hole Symposium on Friday prevails. 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 0.8750 and the closing price was at 0.8823. With slow steps, the exchange rate is moving upward, having completed five consecutive upward weeks. Of course, the dominant cause is the strong recovery of the US dollar. The good picture of the U.S. economy and the relatively elevated inflation recently announced in the U.S. that may bring new rate hikes have boosted the U.S. currency lately. Switzerland, on the other hand, having very low inflation, below the 2% threshold, does not leave much room for the Swiss National Bank to do anything more. Low inflation was also confirmed last week after the producer and import price index fell by 0.6%. Industrial production was also down by 0.8% in July, but there was an improvement from the previous month’s 4.2%. Some corrections are reasonable after five consecutive upward weeks and so we may try sell positions this week.

AUDUSD (Australian Dollar – US Dollar)

Bearish was the last week for AUDUSD, which opened at 0.6494 and closed at 0.6402. The pressures on the exchange rate continued after the US dollar continued to strengthen. The deterioration of the situation in China also negatively affected the Australian dollar. China’s financial results have been well below expectations and there are fears that these companies may have problems repaying debt obligations and loans. As far as Australia and its central bank decisions are concerned, there was an announcement of the minutes last Tuesday with a somewhat neutral result since the conclusion is that any subsequent actions will depend on the economic data and results. In the rest of the Australian economy’s macroeconomic data, there was an increase in the unemployment rate in July compared to the previous month to 3.7% versus 3.5%. The fall for AUDUSD is quite steep and it is not ruled out that we will see upward reactions therefore we may try buy positions this week.

Bitcoin

Last week, Bitcoin was heavily bearish and closed at $26,192 with losses of more than 10.50%. It was certainly one of the biggest falls on a weekly level in recent months. During the week there was the news that Elon Musk’s SpaceX company has reduced its positions in Bitcoin, and this is something that affected the psychology of cryptocurrency investors since this businessman was a leader in the positive approach to cryptocurrencies and his investment moves had caused prices to rise in the past. Another reason cryptocurrencies have been under a lot of pressure lately is a looming battlefront that the SEC (regulator in the United States) seems to have opened with the world of digital currencies and cryptocurrencies. Judge Analisa Torres said on Thursday that she would allow the SEC to move forward with a request for interlocutory appeal in the case of Ripple Labs, which could eventually lead to a higher court overturning parts of her previous decision in July. A ruling against Ripple could have a negative impact on other pending cases, as SEC officials asked in a letter to Judge Analisa Torres. In all this, one must also consider the negative economic sentiment that has recently formed worldwide and that has negatively affected traditional markets. A downward breakout below $24,750 could accelerate the decline and therefore we prefer short positions for one more 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.