18/09/2023

General Comment

The two big events the investment community expected last week were the announcement of inflation in the United States and the decision on interest rates by the European Central Bank. Both events were hiding a mini surprise. Inflation in the United States was announced for August at 3.7%, up significantly from the previous month’s 3.2% and above the 3.6% expected by markets. It was the second month in a row that inflation increased after the great de-escalation that we had seen all the previous period. Logically, this development has led markets to believe that the Fed’s cycle of raising interest rates is not over. However, this was not reflected in the probabilistic model reflected by the FedWatch tool because the probability of interest rates remaining unchanged at Wednesday’s meeting is too high and stable above 95%. Of course, there are other Fed meetings & decisions in the year, but the most likely scenario based on this model remains that interest rates will not rise anymore. Perhaps U.S. central bank officials think that larger increases may cause problems for the U.S. economy, or perhaps they think that already existing rates are enough to tame inflation. More we will find out on Wednesday at the FOMC and of course at Jerome Powell’s press conference to follow.

The second major event of the past week was the decision on interest rates and monetary policy by the European Central Bank. The ECB increased rates by 0.25%, which was a mini surprise after most banks in reports predicted that interest rates would remain unchanged. But based on ECB’s officials and the monetary policy statement from the ECB, the most likely scenario is that this increase may be the last. Europe’s economy has already begun to experience severe tremors; it is doubtful whether it will withstand higher money costs or plunge into recession. The projections for the European economy were revised for the worse, sounding the alarm.

As per the rest of the world, very interesting was an interview by the head of the Bank of Japan Ueda, who said that data was being collected to decide whether conditions are capable of a possible rate hike within the year. The Bank of Japan is the only one of the major central banks to maintain negative interest rates and very loose monetary policy for many years. Through this situation, Japan is a source of liquidity and a possible change in this policy will have significant consequences outside Japan as well.

As for China, an improved picture of the country’s economy continued last week after retail sales and industrial production were announced above market estimates. China is an important export destination for many major economies, but also a major production engine, which means that economic developments are affecting the global economy.

The week that has just begun is on fire in relation mainly to central bank decisions but also to announcements about inflation. On the same day as the FOMC in the United States, interest rates will be announced in China as well. The next day interest rate decisions are announced in the UK and Switzerland. Interest rates are announced in Japan on Friday. The Eurozone, the UK, and Japan will announce inflation rates his week. Finally, important is the announcement of PMI indicators for manufacturing at the end of the week by the main economies of the world. Volatility is expected to remain high.

SP500

With mild bearish trends, the US SP500 index closed last week, at 4,450 points and loss of 0.18%. The inflation announcement last Wednesday was very critical as it is an indication of the future actions of the Fed regarding the interest rates and the monetary policy of the United States. Although inflation keeps rising for the last 2 months (from 3% to 3.7% in total) the most likely scenario remains that the cycle of interest rate increases is over. There is a significant probability for a hike in November’s session but still, the total probability of an increase is below 50%. There’s still a big risk for inflation as the energy prices increase but these conclusions help the investing sentiment, especially on the stock markets. On the other hand, the very positive picture of the US economy is another factor that helps SP500 so the uptrend that started several months ago has not been seriously affected so far, despite some corrections. Retail sales on Thursday had a good performance, rising by 0.6% in August. The same good performance had the industrial production (+0.4%) but the Michigan consumer sentiment index dropped to 67.7 vs. 69.1 expected and caused a correction on Friday that gave a negative sign for the SP500 on a weekly basis. This week undoubtedly the big event is the FOMC on Wednesday and even if the probability of a hike in interest rates is very low, the statement and the press conference that will follow the decision announcement may add new data and cause higher volatility. We may try long positions this week.

DAX30

The German DAX40 index was bullish last week, closing at 15,894 points, with profits close to 1%. As the euro keeps on weakening, European stock markets are favored due to the highest competitiveness of the economies.  ECB hiked interest rates by 0.25% on Thursday and although it was a mini surprise for the markets, stock indices were not seriously affected; on the contrary, DAX40 outperformed the US stock indices because according to the monetary policy statement and according to many ECB officials, most likely there will be no more hikes. The outlook and the expectations of the Eurozone’s economy remain negative but countries like Germany that have an exporting economy are affected mostly by the global situation rather than the internal consumption. The economic sentiment in Germany is still negative, as it was announced by the ZEW survey and the 30-year bond auction had a higher yield than the previous auction but DAX40 had a profitable week. Critical will be the inflation announcement in the Eurozone and the PMIs that will be announced this week but it seems that for the moment, DAX40 is not easy to stand comfortably above 16,000 points so we’ll prefer short positions this week.

FTSE100

The British FTSE100 index moved heavily upward last week, closing at 7,711 points, earning about 3.10%. There was a series of negative economic data for the UK last week, including GDP, employment change, and industrial production but it seems that the investing community is looking to other aspects to decide. First of all, in the last few days, there were some dovish statements by BoE officials and this fact has encouraged some investors to conclude that the BoE will not be as aggressive as it was initially expected. The inflationary pressures are still very heavy but according to these statements, the risk of a serious recession caused by many interest rate hikes causes second thoughts. Another factor that helps the positive perception of the UK economy is the higher oil & energy prices in general. The UK has many companies linked to the energy sector. FTSE100 managed to reach the important resistance of 7,720 points ahead of a very important week that contains interest rate decisions, inflation announcements, retail sales & PMI announcements. We believe that ahead of these critical events, some investors will guarantee profits, and maybe the weakness of the UK will be better revealed so we may try short positions this week.

Gold

The previous week was slightly bullish for gold, with the next month’s futures closing at $1,945 and profits of 0.15%. Some contradictory factors affected gold prices causing a lack of a major trend last week. First of all, the continuous strength of the US dollar is a factor that presses the gold prices lower. Let’s not forget that the gold price is denominated in US dollars. Also, the rising bond yields do not favor gold because it is a competitive asset in the class of safe-haven and low-risk investing options. Last week, the US 10-year bond yield had a new rise from 4.28% to 4.34%. A factor that helps the gold prices rise is the high inflation. Inflation was announced in the USA at 3.7%, much higher than the previous month’s 3.2% and even higher than the 3.6% that the markets expected. Finally, the improved picture of the Chinese economy as it was expressed last week by the rise in industrial production & retail sales, helped the gold prices as China is a big gold consumer. There is a tight channel that gold is moving lately, from $1,915 to &1,980. For the moment, the price is somewhere in the middle. It is a question if the current week which contains many important events like interest rate decisions by several central banks, is able to make gold prices escape from this channel. We prefer long positions this week.

US Oil

Last week was bullish for oil with the next month’s futures closing at $91.17, with profits a bit above 4.50%. Both supply and demand factors favor the oil price increases during the last period. Major oil producers like Saudi Arabia and Russia have announced production cuts and the International Energy Agency has reported that these cuts may cause a market deficit within the current year. As per the demand, China which is the biggest oil consumer in the world has an improved picture of the economy so the market perception is that the Chinese demand will be higher. Also, in the United States reports show that the inventories are getting lower, another indication of higher demand. All eyes now are mainly on the central banks’ decisions this week because interest rates and monetary policy will define global economic growth and the potential oil demand. Currently, given the production cuts by some OPEC+ members and given the fact that many central banks (including the Fed and ECB) most likely have ended the interest rate hike cycle, there’s still room for higher oil prices so we may try long positions this week.

EURUSD (Euro – US Dollar)
Last week was bearish for EURUSD as it opened at 1.0714 and closed at 1.0658. For nine consecutive weeks, the exchange rate has been on a downtrend, after starting from a price range above 1.12 in mid-July. The U.S. dollar continues to strengthen due to the solid picture performed by the U.S. economy. The results announced are very positive now putting a third scenario on the table in relation to the outcome after the cycle of interest rate increases: in addition to “hard landing” and “soft landing”, there is now the scenario of “no landing“. Although the most likely scenario for the Fed is not to raise interest rates further, this does not lead to a rise in the EURUSD because, after Thursday’s recent announcement of a 0.25% rise in interest rates by the ECB, the most likely scenario is that interest rates will remain unchanged in the Eurozone as well. Given the weakness of the European economy and gloomy forecasts for the future, the euro continues to weaken. Developments will be important this week as well. The announcement of inflation in the Eurozone, the announcement of interest rates and monetary policy in the United States (FOMC), and PMI indicators may change the landscape for EURUSD. We may try buy positions this week.

GBPUSD (Great Britain Pound – US Dollar)

Bearish was the last week for GBPUSD, which opened at 1.2466 and closed at 1.2382. The exchange rate continued to fall for one more week, approaching the critical price zone of 1.23, which is the lowest price for about six months. The good state of the U.S. economy as reflected in the results announced helps the U.S. dollar continue its upward course. Sterling seems weak at the moment because, on the one hand, there are dovish statements from Bank of England officials, and, on the other hand, the bad results of the British economy cannot create an optimistic environment. In July, there was a negative balance of 207,000 jobs in the United Kingdom, causing unemployment to rise to 4.3%. In the same month, GDP fell by 0.5%, a rate that caused concerns because it was in a completely opposite picture from +0.5% of the previous month and below even expectations of -0.2%. Industrial production and manufacturing also contracted in the same month. The outlook of a troubled economy raises concerns among Bank of England executives and major doubt in the market about whether there will be new rate rises. The current week is very critical for both economies. The Fed and the Bank of England announce their decisions on interest rates and monetary policy while the UK also announces inflation and retail sales. If the sterling strengthens the GBPUSD can move away from the critical support zone of 1.23 so we’re keen to try buy positions this week.

USDJPY (US Dollar – Japanese Yen)

USDJPY was practically unchanged last week, opening and closing around 147.80. The new rise for the U.S. dollar combined with rising bond yields was able to cover the gap with which the exchange rate had opened early in the week. Markets are looking with interest at the Bank of Japan and its next decisions since close to the 150 price range there has been intervention in the foreign exchange market to support the yen and based on the recent statements of the head of the Central Bank of Japan Ueda, the data are being studied to decide whether there is a possibility of changing the very loose monetary policy and negative interest rates in the coming months. The Fed’s decision on interest rates and monetary policy on Wednesday is particularly important, but after what we mentioned above, Japan’s inflation announcement and the Bank of Japan’s decision on interest rates next Friday are also very important. After several years of weakening the yen, statements or hints to change policy in Japan could potentially boost the country’s currency to a very large extent. We may try sell positions this week.

EURJPY (Euro – Japanese Yen)
Bearish was last week for EURJPY which opened closed at 157.62, about 50 pips lower than the previous week’s close price. As the exchange rate moves slightly below 160 in a range that has been a high for several years, the yen looks extremely weak and there are fears that the Bank of Japan will either intervene in the foreign exchange market or revise loose monetary policy and negative interest rates. This was the case with the yen and the dollar, but the weakening of the euro after the ECB raised interest rates by 0.25%, the high probability that there will be no more increases, and negative projections for the development of the European economy, brought the correction last week. If this situation continues it is not excluded that we will see the exchange rate at much lower levels and for this reason, we will choose sell positions this week.

EURGBP (Euro – Great Britain Pound)

Last week was bullish for the EURGBP, as it opened at 0.8581 and closed at 0.8608. The UK and Eurozone economies have been under pressure lately with the possibility of a recession looming. The European Central Bank raised interest rates by 0.25% and this gave a temporary boost to the euro as opposed to sterling, which was pegged down due to some statements by Bank of England officials that were perceived by the market as dovish. Based on these developments, the exchange rate could rise above 0.86, completing two consecutive bullish weeks. The announcement of inflation in the Eurozone but especially the announcements coming from the UK (decision on interest rates, inflation, retail sales, PMIs) breathe new life into the exchange rate and we’re keen to try buy positions for one more week.

USDCAD (US Dollar – Canadian Dollar)

Bearish was the last week for USDCAD, as it closed at 1.3631 and closed at 1.3525. The U.S. dollar may have strengthened for another week, but the explosive rise in oil prices has helped Canada’s currency much more, and so we have seen a sharp correction for the exchange rate that we haven’t seen in several months. There was no other major news last week for Canada’s economy, so this sharp correction should be attributed primarily to oil prices. This week, however, in addition to the important decisions and announcements about the U.S. economy and especially the Fed’s decision on interest rates, also includes decisions and announcements about Canada’s economy. On Tuesday there is a critical inflation announcement in the country, and on Friday retail sales are announced. If, however, the dollar continues to strengthen and oil prices somewhat calm down, we may see a return to the uptrend for the USDCAD and therefore we will choose buy positions this week.

USDCHF (US Dollar – Swiss Franc)
The USDCHF had an upward course last week as the opening price was at 0.8909 and the closing price was at 0.8975. As the U.S. dollar continued to strengthen, the exchange rate managed to complete 9 consecutive weeks of growth, coming close to the critical price range of 0.90. USDCHF hasn’t been above 0.90 since early July. Last week there were no major announcements on Switzerland’s economy, so the US dollar dominated the pair continuing the upward trend. This week, however, there is the Fed’s decision on interest rates and monetary policy, but there is the decision by the Bank of Switzerland on interest rates on Thursday as well. Based on very low inflation in Switzerland, however, no action is expected from the Bank of Switzerland, but the monetary policy announced may increase volatility. If the dollar comes out strengthened through all this it might be ready to exceed 0.90 and for that, we may try buy positions this week.

AUDUSD (Australian Dollar – US Dollar)

Bullish was the last week for AUDUSD, which opened at 0.6385 and closed at 0.6429. The positive results for Australia’s economy and positive news coming from China boosted the Australian dollar and offset the strength of the US dollar. Australia showed a robust labor market last week after the jobs balance in August was positive and increased by 65,000 positions while markets expected an increase of around 23 thousand positions. China continued the positive announcements we had seen in the previous weeks after announcing well above market expectations its industrial production and retail sales for August. China’s economy significantly affects Australia’s economy due to the two countries ‘ close trade relations. Moving into the current week in addition to the announcement of the Australian bank’s minutes announced on Tuesday, the US dollar will be the dominant one at the pair due mainly to Fed decisions on interest rates and monetary policy. Buy positions is our selection for the current week.

Bitcoin

Last week, Bitcoin was heavily bearish and closed at $26,525 with profits of more than 2.70%. It was the first significantly bullish week of the last 3 months. The issues between the SEC and some crypto companies carry on. On Thursday, the SEC submitted a request aiming to compel the defendants to adhere to disclosure regulations and resist the BAM’s motion for a protective order (PO). The submission detailed instances where the defendants have been uncooperative in furnishing required information and granting access, such as the provision of accounting records and other financial data. There was some good news though for the crypto community. As central banks are close to ending the cycle of interest rate hikes and the global economy has not faced so far serious recession pressures, there’s a bigger appetite for risk by many investors and cryptos is an obvious choice of high risk. Also, Deutsche Bank announced that has joined forces with Taurus SA to collaborate on providing custody services for cryptocurrencies and tokenized assets to institutional clients. Maybe this bullish reaction has more “fuel” for Bitcoin and other cryptocurrencies and if the events of the current week (decisions by central banks & other economic data to be announced) allow, we may see more gains so we prefer long 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.