02/10/2023
General Comment
The downward mood of markets continued last week, with equity indices falling and performing significant losses even though there was an upward reaction towards the end of the week. The mood has been bad due to the Fed and markets ‘ perception that interest rates in the United States are set to rise further and that they will keep them high through 2024. To all this came to be added the issue of the government of the United States. The United States government was likely to shut down for the fourth time in the last decade due to a disagreement by some Republicans over passing some funding law. There were fears this could bring delays and instability to the US market.
The Senate on Saturday adopted an emergency measure allowing the federal state to continue temporarily funding, just three hours before the shutdown, so the suspension of various public services is avoided. It would have put thousands of workers technically unemployed and cut off food aid to part of the beneficiaries, among others. U.S. President Joe Biden welcomed the deal that allows the federal state to continue funding for 45 days, but he also urged Congress to approve aid to Ukraine as soon as possible, which was not included in the text. The point is that the turmoil in the markets last week had already arisen.
The economic announcements in the United States were not negative since the GDP increased in the second quarter by 2.1%, as much as the markets expected. Also, decreased was the rate of personal consumption expenditures, which helped the markets partially to recover since it is an indicator of inflation. We also saw a significant de-escalation of inflation in the Eurozone area and these developments helped markets to some extent without, however, preventing the negative sign of the week.
In the rest of the world, early this week, The Bank of Japan announced an unscheduled purchase of Japanese government bonds to curb the continuous increase in yields. This action followed a one basis point rise in the benchmark 10-year yield in early Asia, pushing it to its highest level since September of the previous year at 0.775%.
Apart from the stock indices that, as we said, moved correctively in Europe and the US, strongly corrective trends also had the gold while from the rest of the commodity world, stabilizing trends had the oil prices. The U.S. dollar continued to grow for another week and showed a solid strength as higher-risk currencies such as the euro and sterling continued to weaken. Bond yields continue to move in a frenetic rise with the U.S. 10-year bond yield moving to its highest price of about 16 years, closing the week at 4.58%. Within the week it had reached 4.70%. Finally, as far as the world of cryptocurrencies is concerned, the rise of Bitcoin and most cryptocurrencies has caused some impression.
The current week will be interesting enough as it contains important announcements and developments. The United States labor market (NFPs) announcement on Friday stands out, of course. Also important are the announcements of PMI indicators in the week for the world’s main economies for the manufacturing and service sectors. There are speeches by Jerome Powell and Christine Lagarde this week and a summit of European Union leaders on Friday which are also important.
SP500
With bearish trends, the US SP500 index closed last week, at 4,288 points, and loss of 0.74%. Several reasons have contributed to this mini-downtrend rally during the last four weeks. The hawkish Fed and the perception of the markets for higher interest rates for a longer period is indeed a reason for a bearish SP500. Under these considerations, the probability of a recession, even a soft one, is getting bigger. Also, the rally in the bond yields causes corrections to the stock markets. A low-risk option of a 4.60% annual performance attracts investors and capital vs. the risky stock markets. Another negative factor for SP500 was the possibility of a government shutdown which was finally avoided during the weekend but it had affected the markets throughout the week. Although, as we mentioned above, the probability of a recession increases, the US economy keeps on announcing solid financial data: durable goods orders rose by 0.2% in August, GDP rose by 2.1% in the 3rd quarter of 2023 and the personal consumption expenditures (an indicator of inflation) was announced at 0.4% vs 0.5% that markets expected. Given that some companies will start announcing their results this week and ahead of NFPs on Friday, we prefer short positions.
DAX30
The German DAX40 index was bearish last week, closing at 15,387 points, with losses a bit more than 1%. The European stock markets suffered losses for one more week as the economies, especially in the Eurozone area, are facing certain issues. The inflation in Germany, as expressed by the harmonized index of consumer prices, dropped to 4.3% in August but still it is too high. The unemployment rate in Germany remained unchanged at 5.7% but there was a big drop of 2.3% in retail sales. The ECB is afraid of a heavy recession and is not as aggressive as it could be, given that the inflation problem is still very severe. The already existing interest rates of 4% may be enough to cause a recession if it stays this way for a long time. Germany had a 10-year bond auction last week with a yield of 2.78% which would sound totally unreal two years ago. The PMI announcements this week will give us a better idea for manufacturing and services sectors in Germany but the DAX40 has proven very resilient in difficult times so we may try long positions this week.
FTSE100
The British FTSE100 index moved downward last week, closing at 7,6808 points, losing about 1%. It was the second bearish week in a row for FTSE100, although the UK economy had some good news. The GDP rose by 0.6% in the 2nd quarter of 2023, surpassing the market views that were estimated at a 0.4% growth. In the same quarter, the total business investments rose by 9.2% and the mortgage approvals in August also surpassed market expectations. The correction in FTSE100 could not be avoided though as the investing community assesses that sooner or later the Bank of England may apply new actions because the inflation remains too high. It means that the probability of a recession remains high too. Only the PMI indicators announcement is important for the UK economy this week along with Catherine Mann’s (Bank of England) speech. There was a bullish reaction that started on Thursday and by hoping that it may continue we prefer long positions this week.
Gold
The previous week was bearish for gold, with the next month’s futures closing at $1,864 and losses of 4.13%. It was indeed one of the most bearish weeks during the last months. All the factors that affect gold prices converge to the downtrend. The strong US dollar is indeed one dominating factor that pushes gold prices lower. Let’s not forget that the gold is denominated in US dollars. Another important factor is the rising bond yields. Both gold and bonds belong to the safe-haven assets family but since gold is a no-yielding asset, investors favor the bonds when the yield is high, as it is now with the US 10-year bond yield at 4.60%. Also, as we’re in a phase of economic instability and there’s a high probability of a global recession, due to high interest rates, the demand for gold decreases. High interest rates will cause an inflation de-escalation and this is another reason for investors not to buy gold under these circumstances. The only reason currently for gold to have a bullish reaction is oversold conditions and possible profit-taking for the investors that shorted gold. The downtrend is strong and maybe there’s room for more so we may try short positions for the current week too.
US Oil
Last week was slightly bullish for oil with the next month’s futures closing at $90.71, with profits of 0.44%. It was the second week in a row that oil prices had a very similar open and close price. This fact indicates a balance between the factors that affect gold that mainly have to do with supply and demand. Despite the recent decision of some OPEC+ members (Saudi Arabia and Russia), other countries like Brazil, Guyana, and the United States are ready to increase their production levels, which could potentially suppress any upward movement in prices. Regarding the demand, there are certain concerns that the demand may drop as the high interest rates increase the probability of a recession in the global economy. China which is the biggest oil importer in the world had weak economic data lately, especially in the manufacturing sector which also may hurt the demand. Beyond supply and demand, the strong US dollar of the last months weighs on the dollar-denominated oil prices. Before the two consolidating weeks the trend was heavily bullish and if it returns, we may see the resistance of the $95 in danger so we may try long positions this week.
EURUSD (Euro – US Dollar)
Last week was bearish for EURUSD as it opened at 1.0649 and closed at 1.0573. The U.S. dollar continues to strengthen after markets have become convinced to some extent that the Fed will continue aggressively raising interest rates and keeping them high throughout 2024. A contributor to the strong dollar is also the strong macroeconomic picture that the United States has been performing for a long time. Last week, the country’s GDP for the second quarter grew by 2.1%, as much as markets had expected, while durable goods orders rose last month. Personal consumption expenditures shrank, raising hopes of lower inflation. Europe, on the other hand, continues to have major problems. The attitude of the European Central Bank is of the wait-and-see style and the negative macroeconomic picture for the Eurozone continues. However, it was positive that the inflation announced last month declined to 4.3% from 5.2%. But the rest of the macroeconomic data in the Eurozone, and especially in Germany, continue to deteriorate. Technically speaking, support close to 1.0520 held up for the time being after the exchange rate reacted upward close to those levels and we’re keen to try buy positions this week.
GBPUSD (Great Britain Pound – US Dollar)
Bearish was the last week for GBPUSD, which opened at 1.2236 and closed at 1.2202. The U.S. dollar continues to strengthen after the hawkish Fed is likely to raise interest rates once more and keep them high throughout next year. U.S. macroeconomic results also indicate a good state of the U.S. economy and support the dollar. The fall during the week was larger and the exchange rate was close to 1.21 but some positive results for the UK economy supported sterling. GDP in the UK for the second quarter of the year grew by 0.6% on an annual level, above market estimates. The results were positive both for mortgage approvals and for total business investments. So GBPUSD managed to close the week above 1.22. Next Friday the announcement of the labor market in the United States will greatly affect the exchange rate whereas the UK side only awaits the announcements of PMI indicators. The downtrend is strong so sell positions is our selection for the current week.
USDJPY (US Dollar – Japanese Yen)
USDJPY was bullish last week, opening at 148.20 and closing at 149.33. The slump for the Japanese currency continued for another week after Bank of Japan Chief Ueda on Monday defended its very loose monetary policy by saying it would continue until inflation and other macroeconomic targets were met. On the other hand, from Japan’s Finance Ministry, Minister Suzuki several times this week said there was a possibility of intervention in the currency market if the destabilization of the yen continued. However, markets did not react because many analysts believe that such an intervention could not have long-term positive consequences for the Japanese currency given that loose monetary policy will continue. Inflation announced on Friday at 2.8%, slightly below market expectations is also along those lines while unemployment which worsened slightly and was announced for August at 2.7% is also a negative factor. Although close to 150 the intervention probability is high, the recent decision of the BoJ to purchase Japanese bonds may weaken the yen even more so we prefer buy positions this week.
EURJPY (Euro – Japanese Yen)
Neutral was last week for EURJPY which opened and closed around 157.85. There has been an equilibrium for the exchange rate for about a month and a half at these price levels, which shows the weakness of both the euro and the yen. The euro is weakening because there is uncertainty about the next moves by the European Central Bank and because the picture of the Eurozone economy does not look positive. On the other hand, the Japanese currency is weakening because the very loose monetary policy from the Bank of Japan continues. We may try buy positions this week.
EURGBP (Euro – Great Britain Pound)
Last week was bearish for the EURGBP, as it opened at 0.8680 and closed at 0.8659. The euro has been weak, and sterling has been weak too but last week some positive results from the UK boosted their currency and triggered a fall in the exchange rate after three consecutive weeks of rises. Europe, with its blurry picture of its monetary policy and its well-known problems in its macroeconomic outcomes, does not inspire confidence so the exchange rate cannot visibly escape above 0.86. The economy in the United Kingdom is not in better shape so the upward trend may come back and for this reason, we will choose buy positions this week.
USDCAD (US Dollar – Canadian Dollar)
Bullish was the last week for USDCAD, as it opened at 1.3465 and closed at 1.3576. There was no major economic news from Canada, and combined with stabilized oil prices there were no reasons for the Canadian dollar to strengthen. So, the rise in the exchange rate should be attributed mainly to the re-strengthening of the U.S. dollar, which has continued to grow stronger for several months. The most crucial day for the USDCAD is undoubtedly next Friday because both the results of the labor market in the United States and unemployment in Canada are announced. Our selection for the current week is buy positions.
USDCHF (US Dollar – Swiss Franc)
The USDCHF had an upward course last week as the opening price was at 0.9047 and the closing price was at 0.9146. Indeed, it is very rare for the USDCHF to have completed 11 consecutive weeks of uptrend. This mainly shows the strength of the U.S. dollar, which continues to strengthen due to the impression that the markets have of the Fed and the aggressive high-interest rate actions ahead. Switzerland has very low inflation, which keeps Swiss National Bank interest rates much lower than U.S. rates. This difference in interest rates is the main reason why the rate has been on this strong upward trend for several months but there are already overbought conditions for the USDCHF so we may try sell positions this week.
AUDUSD (Australian Dollar – US Dollar)
Slightly bearish was the last week for AUDUSD, which opened at 0.6439 and closed at 0.6427. The exchange rate resisted the great strength of the U.S. dollar and managed to have much smaller losses relative to other currencies. The economic picture of Australia lately has been positive and that continued last week. Retail sales rose while a rise in inflation from 4.9% to 5.2% raises the likelihood of additional interventions by the Reserve Bank of Australia. China has a positive contribution too as both economies are very connected. The NBS PMI indicator for manufacturing was announced in China at 50.2, above the 50 that markets predicted, and that is something that has helped the Australian dollar. Next Tuesday there is a decision on interest rates in Australia which will play a key role in the AUDUSD, along of course with the announcement of the labor market in the United States on Friday. We may try sell positions this week.
Bitcoin
Last week, Bitcoin was heavily bullish and closed at $27,995 with profits of more than 6.60%. Bitcoin reached its highest point in six weeks as it experienced increased inflows at the beginning of October, a month historically associated with positive price movements for the cryptocurrency. The surge in Bitcoin’s value has also received support from speculations that the US Securities and Exchange Commission (SEC) may ultimately give its approval to BlackRock Inc.’s Bitcoin ETF proposals. As per some other news regarding the crypto area, according to Reuters, on Monday, the Singapore branch of the cryptocurrency exchange Coinbase announced that it had acquired a Major Payment Institution (MPI) license from the Central Bank of Singapore. This license, issued by the Monetary Authority of Singapore (MAS), permits the largest cryptocurrency exchange in the United States to provide digital payment token services to both individuals and institutions within Singapore. Also, important is Sam Bankman-Fried’s trial which is scheduled to start on October 3. It’s a trial of great importance for the crypto community as the FTX exchange case was major. The rally carries on early this week and we’re keen to follow with long positions.
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.
