25/09/2023

General Comment

The decisions of many central banks on interest rates and monetary policy were the dominant events for the financial markets last week. Of course, the focus was the Fed which as expected left interest rates unchanged at 5.25%- 5.50% but both the monetary policy statement and Jerome Powell’s speech at the press conference that followed gave interesting signals to the markets. According to the Fed, inflation is expected to remain high and that implies at least one more rate hike until their final rate. Of great importance is the fact that the dominant scenario for 2024 is now a 0.50% reduction in interest rates. It is a great change compared to the 1% that was estimated in June’s session. There was also a review of economic figures such as growth and unemployment with Jerome Powell stating that a soft landing after the great storm of high interest rates and expensive money, is still a scenario but not the most basic one. The result of all the above was a significant correction of equity markets not only in the US but also in the rest of the world and a significant strengthening of the US dollar.

In the Eurozone and the European continent in general, there were no major announcements and so the situation remained as we knew it last week: small expectations for new interest rate increases and negative forecasts for the European economy.

In the rest of the world, decisions on interest rates and monetary policy were made by the Bank of England, the Bank of Japan, and the Swiss National Bank, as we will see in detail below in the individual sections.

Apart from the stock indices that, as we said above, had strong correction trends, the commodity market had stabilizing trends with gold and oil closing the week without noticeable changes. Currencies such as the euro and sterling continued to weaken mainly due to the universal prevalence of the US dollar. Bond yields continued to move strongly upward with the U.S. 10-year edging above 4.50% for the first time in several years and closing near 4.43%. Finally, there was little change in the last week for Bitcoin and most cryptocurrencies.

The week that has just begun is basically dominated by the announcement of U.S. GDP for the second quarter of the year which will show how close or far the U.S. economy is from a soft landing. The announcement of personal consumption expenditures is also important because it is an indicator of inflation. The Eurozone will announce on Friday the harmonized index of consumer prices, the most important indicator of inflation. Inflation will be also announced in Germany, Japan, and Australia. A calmer week is expected in relation to volatility and market nervousness. Of course, the aftermath of last week’s developments may continue to affect the current one.

SP500

With bearish trends, the US SP500 index closed last week, at 4,330 points, and a loss of 2.70%. At the FOMC, the decision was to keep the interest rates unchanged as the majority of the investing community expected. There were some other developments though that affected the markets. There was a review of the US economy projections regarding the growth and the unemployment rate in the following months and in 2024 but the most important is that most likely there will be one more (at least) interest rate hike before the cycle is over and that high interest rates will be maintained throughout 2024. Jerome Powell was hawkish enough, underlining that the inflation issue is still very hot and that should be fought in every way. The rising bond yields are another headache for the stock indices: US 10-year bond yields are moving to multi-year high rates around 4.5-% and it is a very good option for investors, instead of the risky equity markets. As per the rest economic data, there was a very good result in initial jobless claims (201K vs 225K expected), the manufacturing was improved but still, the PMI indicator is below 50 while there was a mild decline in the services area. The important events of the week are the durable goods orders on Wednesday, the GDP announcement & the Powell speech on Thursday, and personal consumption expenditures on Friday. There’s a good chance that the downtrend will carry on so we may try short positions this week.

DAX30

The German DAX40 index was bearish last week, closing at 15,572 points, with losses a bit more than 2%. The FOMC on Wednesday triggered a negative signal in the markets globally, affecting significantly the European markets as well. The economic news for the German economy had a better picture last week as the producer price index kept on declining (-12.6 % in August) and the PMI indicators (manufacturing, services, and composite) were all above the previous month and market expectations. Along with the hawkish signal after FOMC which means higher rates and more expensive money, Europe & Germany continue to face important issues. Inflation remains at very high rates; a recession is still possible in many European countries and the energy crisis can intensify as the winter approaches. The German inflation and the retail sales are the important announcements of the current week but it’s not easy to have a very improved sentiment so we will prefer short positions this week.

FTSE100

The British FTSE100 index moved downward last week, closing at 7,679 points, losing about 0.40%. Obviously, FTSE100 outperformed almost all the major stock indices in the USA & Europe and this is based on certain reasons. The UK stock markets took a breath after the decision of the Bank of England to keep the interest rates unchanged. Maybe the BoE voters consider that a very aggressive policy could lead to an out-of-control recession and maybe the result of the inflation in August (6.6% vs. 7.1% expected) encouraged them. It does not mean that the BoE is over with the interest rate hikes but after last week’s decision, there’s a sense that the target rate will be lower and that there’s a more comprehensive care of the UK economy and growth. After all, the UK had another negative week in economic results: retail sales dropped by 1.4% in August (on a yearly basis) and PMI indicators were announced well below 50. On Friday, there’s the important announcement of the UK GDP so we’ll have a better idea of the impact of the tight monetary policy on the economy. We may try short positions this week too.

Gold

The previous week was practically unchanged for gold, with the next month’s futures closing at $1,945 and marginal losses of 0.02%. Gold had an explosive rise until Wednesday, as it exceeded $1,968 but after FOMC, we saw strong bearish pressure as a direct result of a stronger US dollar. Finally, with a mild bullish recovery on Friday, gold prices managed to regain the weekly losses. Obviously, gold has been affected for a long time by the decisions of the central banks regarding the monetary policy and the interest rates. Especially the latest developments from the Fed which signaled a hawkish stance with higher interest rates for a longer time, is a bearish factor for the gold prices. Gold, typically considered a safe-haven asset during times of economic uncertainty, encounters difficulties due to increasing interest rates that affect the value of non-interest-bearing gold, denominated in US dollars. As the US dollar index is close to a 6-month high and US 10-year bond yields are at a multi-year high, there is a limited upward potential for gold. Short positions is our selection for the current week.

US Oil

Last week was bearish for oil with the next month’s futures closing at $90.31, with losses a bit above 0.30%. It was the first consolidating week after three consecutive weeks of intense bullish trends. There were certain issues regarding the oil supply, mostly caused by the latest decisions of some OPEC+ members. The coalition, led by Saudi Arabia and Russia, has been carefully managing oil production through deliberate cuts. They have recently extended a reduction of 1.3M barrels per day in supply until the end of the year, to stabilize oil prices and maximize export income for member countries. Another factor that reined back the oil prices was the hawkish Fed. Higher interest rates for a longer time most likely mean a growth slowing with immediate consequences in oil demand. Staying in demand, the biggest world consumer in oil which is China, has an improved picture during the last weeks. Some analysts anticipate a revival in China’s manufacturing sector in September while there’s been an increase in oil imports lately. Supply, demand, and US dollar price action will continue to affect oil but after the recent balance in prices, a possible breakout below $90 could trigger a bearish trend so we may try short positions this week.

EURUSD (Euro – US Dollar)
Last week was slightly bearish for EURUSD as it opened at 1.0658 and closed at 1.0643. The exchange rate completed 10 consecutive weeks of downward spiral, which shows both the great strength of the US dollar in recent times and the weakening of the Eurozone currency. The dollar has taken on fresh momentum after projections for the U.S. economy were announced on Wednesday following the interest rate decision and Jerome Powell’s speech at the press conference. The prevailing scenario now is more Fed action, with at least one more rate hike and a less aggressive rate cut in 2024. Europe was practically neutral last week with no major announcements, and so the landscape remains as we left it last week: low expectations from the European Central Bank and negative estimates for the European economy. The PMI indicators announced last Friday for the Eurozone and other European economies showed that the big problem in the manufacturing area remains and is intensifying. Although EURUSD approached 1.06 in the week, it eventually closed above its significant support of 1.0635. If the downtrend continues and this support breaks out solidly, it is not excluded that we will see the exchange rate threatening the next support at 1.0520 and that is why we may try sell positions this week.

GBPUSD (Great Britain Pound – US Dollar)

Bearish was the last week for GBPUSD, which opened at 1.2377 and closed at 1.2235. On Thursday we saw a mini surprise from the Bank of England which left interest rates unchanged at 5.25%, while the main scenario was a rise of 0.25%. This has had a reasonable negative effect on sterling. The result was marginal with five members voting for interest rates to remain unchanged and 4 voting for a 0.25% increase. The Bank of England chief Andrew Bailey’s speech that followed made no significant contribution since the central point was that the central bank monitors inflation and is prepared to take action according to the data. The most likely scenario for the November session remains an increase of 0.25%. Inflation was reported for the UK at 6.7%, well below the 7.1% predicted by the markets. All the above combined with the new strengthening of the US dollar had the effect that we saw on the exchange rate. The dollar continued to strengthen after both the monetary policy statement and Jerome Powell’s statements were hawkish. The trend is strongly downward and if it continues it is not excluded that we will see the pair near the range of 1.20 and therefore we prefer sell positions for one more week.

USDJPY (US Dollar – Japanese Yen)

USDJPY was bullish last week, opening at 147.69 and closing at 148.35. The exchange rate continues to strengthen since all factors affecting it point upwards. The U.S. dollar continued to strengthen even though interest rates remained unchanged but both Powell and forecasts for the U.S. economy were strongly hawkish. Another factor affecting USDJPY is bond yields which have continued to move strongly upward helping to lift the rate. Japan’s currency was unable to react because on Friday the Bank of Japan decided to leave interest rates unchanged at -0.1% and leave the very loose monetary policy unchanged. Ueda, the head of the Bank of Japan, said at the press conference that the data so far showed no change in monetary policy. He also stressed that this could be seen if the inflation target of 2% is caught. The fact is that markets expect either intervention or a change in Japan’s policy after the yen moves to a 15-year low. This so far has not been confirmed but cannot be ruled out until the end of the year. Since USDJPY has come close to the milestone price of 150, we’ll avoid taking positions this week.

EURJPY (Euro – Japanese Yen)
Bullish was last week for EURJPY which opened at 157.44 and closed at 157.89. The euro continues to weaken due to markets ‘ belief that the European Central Bank is likely to stop the rate hike cycle and the negative image of the European economy lately. However, the exchange rate continues to rise as the Japanese currency, affected by negative interest rates and very loose monetary policy, continues to plummet. As long as this is the case, the probability of intervention in the exchange market to support the yen increases. We would prefer low-risk & opportunistic sell positions this week.

EURGBP (Euro – Great Britain Pound)

Last week was bullish for the EURGBP, as it opened at 0.8597 and closed at 0.8695. The de-escalation in UK inflation that exceeded market expectations and the Bank of England’s decision to leave interest rates unchanged is clear to have negatively affected sterling. The euro is continuing to weaken, but since the Eurozone had no major announcements last week, the news from the United Kingdom prevailed and resulted in the exchange rate completing three consecutive weeks of uptrend. We may try sell positions this week.

USDCAD (US Dollar – Canadian Dollar)

Bearish was the last week for USDCAD, as it closed at 1.3246 and closed at 1.3481. The U.S. dollar continued to strengthen due to hawkish attitudes by the Fed and its head Jerome Powell, but the exchange rate continued to move downward for a second week in a row. Oil prices stabilized and so did not have much influence over the Canadian dollar. But Canada’s inflation announcement on Tuesday exceeded market expectations after it was announced at 4% against expectations of 3.8% and 3.3% the previous month.  Bank of Canada deputy governor Sharon Kozicki appeared quite hawkish after arguing that interest rates should stay high for long enough. This was the root cause of a strengthening of the Canadian dollar that brought the effect of the fall for the USDCAD. If the U.S. dollar continues to strengthen though, this trend is not easy to continue so we prefer buy positions this week.

USDCHF (US Dollar – Swiss Franc)
The USDCHF had an upward course last week as the opening price was at 0.8947 and the closing price was at 0.9069. In the last 10 weeks, all of which were bullish, the last week was the one that had the strongest rise. The reason was the strengthening of the U.S. dollar following developments by the FOMC that indicate that there may be another increase in interest rates and how interest rates will remain high in 2024. Swiss National Bank, in its decision on Thursday, left interest rates unchanged at 1.75% in contrast with the majority of the market estimated that there would be a 0.25% increase. Low inflation in Switzerland did not make such a change significant, but the Swiss franc weakened after that. The USDCHF was comfortably above the milestone price of 0.90 and may face the next resistance which is close to 0.9150. We may try buy positions for one more week.

AUDUSD (Australian Dollar – US Dollar)

Neutral was the last week for AUDUSD, which closed at 0.6439, just 10 pips above the previous week’s close price. The Australian dollar gained momentum early this week due to the announcement of the Reserve Bank of Australia’s meeting minutes. From these minutes we learned that it is within the bank’s intentions to maintain high interest rates and there may be further increases in interest rates in the near future. The signals for growth were also optimistic, as the improved picture of China as presented in recent weeks helps investing sentiment in Australia due to the close connection of the two economies. Significant is the announcement of inflation in Australia next Wednesday and the announcement of retail sales on Thursday but the upward momentum of the US dollar may drag the exchange rate to lower levels threatening significant support of 0.6350 so we may try sell positions this week.

Bitcoin

Last week, Bitcoin was bearish and closed at $26,248 with losses of 1.10%. During the last five weeks, Bitcoin prices cannot escape from the tight zone of $25K – $27K. Bitcoin was trying to keep a positive sign throughout the week but there were strong bearish trends on Sunday. Some more bad news for the crypto ecosystem continues to appear. Hong Kong authorities have arrested 11 individuals connected to the JPEX (crypto exchange) concerning suspected fraud. Following the initial report on September 18, subsequent developments have revealed a more sinister scheme aimed at targeting cryptocurrency enthusiasts in Hong Kong. This investigation comes in response to investor claims of losses amounting to $166M. This case is potentially one of the largest fraud cases in Hong Kong, as reported by local media and it also serves as a test of the city’s new financial regulations, as Hong Kong strives to establish itself as a global center for digital assets, according to Reuters. Beyond the new case of JPEX, the conflict between the SEC and some crypto companies like Binance, Coindesk, and Ripple is still active. Technically speaking, below $25K Bitcoin may accelerate its bearish course and we’re keen to 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.