09/10/2023

General Comment

The reaction of the markets hid a mini surprise at the end of the week following the announcement of the labor market (NFPs) in the United States. This surprise concerns an upward rally that we saw in the last hours of the week which was quite comforting since it was the most impressive bullish reaction for several weeks.

Taking things from the beginning, the past week almost all along has been a downtrend for markets, as a continuation of the negative sentiment that has been taking place in recent days. Statements from the Fed continued to move to a continued aggressive policy and maintenance of high interest rates through 2024 while the bond market rally continued with yields reaching several-year record levels.

On Friday the announcement of new United States jobs was nearly double that expected: markets were expecting 170,000 while the result was 334,000. The first reaction of markets was an intense strengthening of the dollar and a fall in stock indices, as the impression was that such a positive macroeconomic picture could give the Fed enough room to move even more aggressively. In less than an hour, however, things reversed, and stock indexes began to move strongly upwards while the dollar weakened. Markets focused more on the healthy U.S. job-creating economy than on looming Fed moves and high interest rates.

There has also been a flare-up in the Middle East region following a sudden and gigantic Hamas operation against Israel, with thousands of rockets fired and several killed. According to all statements by Israeli officials, the country is officially at war with what this could entail in the financial markets and especially in oil prices.

As for the rest of the news, apart from the NFPs, there was also an improved picture of the United States economy in relation to both PMI and factory orders. A decent picture also had the Eurozone with a negative parenthesis of the retail sales as we will see below. China, despite being on holiday for almost the entire week, has experienced a new downturn in manufacturing, raising some new concerns.

To recap, Friday’s strong rally was able to limit losses in most of the U.S. stock indices, and in some cases, it created profits. In Europe, stock indices closed negatively, although Friday’s rise was also affected positively, limiting the losses. The U.S. dollar weakened towards the end of the week and remained almost unchanged, while for the first time in several weeks, other currencies such as the euro and sterling were able to react upward. The rally in the bond market continued with the U.S. 10-year closing the week at 4.79%, approaching even 4.90% earlier. This rise in the bond market has caught the eye of the markets because the selloff that causes it, presages higher inflation and higher interest rates. Also, the price of the American 10-year yield is dangerously close to the psychological threshold of 5%. In terms of the commodity market impression has caused a big drop in prices of both gold and oil.

Given the importance of the war in the Middle East and Israel, the week that has just begun contains important news and announcements too. The announcement of the Fed’s minutes on Wednesday and the announcement of U.S. inflation on Thursday stand out. These announcements are particularly critical as they can determine the monetary and interest rate policy for the coming period. On Friday China announces inflation, imports, exports, and trade balance. On Monday, the bond markets in the United States will be inactive due to the Columbus Day holiday but both the New York Stock Exchange and the Nasdaq Stock Market will maintain their regular operating hours. Volatility is expected to remain high.

SP500

With bearish trends, the US SP500 index closed last week, at 4,308 points and profits of 0.46%. The bullish reaction on Friday was enough to turn the weekly sign of the SP500 to positive. Markets assessed that the healthy US economy is more important than some possible aggressive actions of the Fed, as a result of the impressive NFPs figures. The current week has opened with a big gap though and SP500 futures are in deep red as the markets are afraid that the war between Israel and Hamas may involve other countries, especially Iran. This week, some SP500 companies will start announcing the Q3 results. Anticipated total earnings are presently forecasted to decrease by -2.0% compared to the corresponding period in the previous year, despite a slight uptick of +0.6% in revenues. This will mark the fourth consecutive quarter of declining earnings for the index. Companies may face other issues as well: companies have about $425 billion of dollar-denominated junk debt due to mature before the end of 2025, and market yields for speculative-grade bonds are now at least 3% higher than the average coupon the borrowers are paying on their existing debt. The higher borrowing costs that many companies face could cut into profits and increase default risk. Rates staying higher for longer will likely have some kind of unexpected impact on the economy, Mohamed El-Erian, the chief economic adviser at Allianz SE, said in an interview with Bloomberg TV. We prefer short positions this week.

DAX30

The German DAX40 index was bearish last week, closing at 15,230 points, with losses a bit more than 1%. During the week, DAX40 dropped below 15,000 points for the first time since last March. On Friday though, there was a bullish rally that was unable to cut the big weekly losses. The rally was helped by the impressive comeback of the US indices about an hour after the NFPs announcement in the USA. As per the German economic data of the previous week, it was a mixed picture with positive and negative announcements. Manufacturing sectors kept being under pressure after the PMI was announced at 39.6. Services and composite PMIs had a better result with prices of 46.4 and 50.3 respectively. Factory orders rose by 3.9% in September and the trade balance was announced to +16.4 bn euros, above the 15 bn euros that the markets estimated. Earlier today, the industrial production announcement showed a mild decline of 0.2% in August. The futures of DAX40 opened this week with important losses as the conflict in Gaza between Israel and Hamas prevails. We may try short positions this week.

FTSE100

The British FTSE100 index moved downward last week, closing at 7,495 points, losing about 1.50%. Friday’s rally helped limit the weekly losses of FTSE100 but it was not enough to reverse the negative sign. The UK economy has an increased probability of performing a recession. Since the inflation is still too high, it makes sense for the Bank of England to apply new interest rate hikes. There’s a global fear that a recession is inevitable and as the UK may worsen the money cost even more, the case of a recession had an increased probability. So far, the macro results are not bad at all. Except for the global construction PMI, all the other results (manufacturing, composite, and services PMIs) were above market expectations. On Thursday, there’s a series of important economic data announcements in the UK but as the conflict between Israel and Hamas carries on, the investing community will focus on this area. Short positions is our selection for the current week.

Gold

The previous week was bearish for gold, with the next month’s futures closing at $1,846 and losses of 1%. Gold prices continued to drop as the US dollar gathered more traction last week. There was a bullish reaction for gold on Friday. Despite the robust Non-Farm Payrolls report, gold markets did not experience downward pressure. Instead, currency traders opted to view the news as a chance to secure some profits, following the recent strengthening of the US dollar. Earlier, prices had touched $1,823, threatening the important support of $1,811 which is the lowest price of the last 10 months. Now the focus is on the Israel-Hamas conflict and the possible results on the gold prices. Considering the newly available information and gold’s historical role as a safe-haven asset during geopolitical tensions, two major potential situations could influence gold prices. If the situation between Israel and Hamas intensifies, leading to increased geopolitical stress, investors could seek refuge in US Treasuries, potentially resulting in a decrease in both treasury and global yields. It may strengthen the attractiveness of gold, which doesn’t offer yields, as a safe-haven investment. On the other hand, a resolution in the conflict could potentially trigger a turnaround, prompting investors to shift away from safe-haven assets such as gold and return to riskier investments. Of course, the Fed’s next actions and the upcoming macro results will also play a role. We’ll trust the safe-haven property of gold so we’re keen to try long positions this week.

US Oil

Last week was heavily bearish for oil with the next month’s futures closing at $82.78, with losses close to 9%. The optimism observed in the oil market in the week before, quickly transformed into apprehension last week. WTI experienced a sharp decline, marking its most significant weekly drop of the last 7 months.  The plummet in oil prices was largely instigated by a sell-off in the US bond market, which raised concerns regarding a potential worldwide economic recession and a subsequent reduction in demand for oil. Bond market participants are growing more concerned about the expanding budget deficit of the U.S. government, a situation that is driving treasury prices down to multi-year lowest levels. Oil prices performed a mild bullish reaction on Friday, after positive NFPs that helped the investing sentiment and limited the concerns of a lower demand. The Fed minutes released on Wednesday and the US inflation announcement on Thursday are critical events but more critical is the development in the Middle-East. There are fears that the war may involve other oil-producer countries and this case could cause an explosion in oil prices. Oil ministers from Bahrain, Iraq, Kuwait, Oman, Saudi Arabia, and the United Arab Emirates convened during the U.N. MENA Climate Week event in Riyadh and they reiterated their dedication to both “collective and individual voluntary adjustments” in oil production. OPEC+ opted to maintain its current output policy, keeping the existing production cuts unchanged until the year 2024. We may try long positions this week.

EURUSD (Euro – US Dollar)
Last week was bullish for EURUSD as it opened at 1.0565 and closed at 1.0584. The exchange rate managed to react upward after 11 consecutive falling weeks. The root cause was the impressive weakening of the U.S. dollar towards the end of the week and after the announcement of NFPs in the United States. Markets have overlooked that a strengthened labor market may allow the Fed to move more aggressively and have given credence to the strong U.S. economy that is creating new jobs. Europe has not seen such a negative picture this week: PMI indicators were announced above market estimations, the producer price index appears to be decelerating rapidly, heralding a fall in inflation, but retail sales fell by 2.1% last month in the Eurozone and this was the most negative announcement of the week. According to most statements by European officials, the most likely scenario is that the European Central Bank will not make any more interest rate hikes even if the inflation problem persists. The big weakness of the US dollar on Friday helped EURUSD recover much above 1.05. The conflict between Israel and Hamas is able to bring back the dollar’s strength so we may try sell positions this week.

GBPUSD (Great Britain Pound – US Dollar)

Bullish was the last week for GBPUSD, which opened at 1.2175 and closed at 1.2235. The GBPUSD was helped enormously in its rise by the big fall in the US dollar that we saw in the last few hours of the week. It was a shift for the U.S. dollar after the announcement of the U.S. labor market. Sterling, on the other hand, performed perhaps better than its main dollar competitors, and that’s because the UK economy had a positive picture last week. More specifically, the PMI (manufacturing, services, and composite) indicators were all announced well above market expectations creating a positive impact. Another reason for sterling’s strengthening is the high inflation that persists in the UK and that will likely lead the Bank of England to fresh interventions and rate hikes. In addition to the major developments in the USA during the week (announcement of the Fed’s minutes and inflation) on Thursday the UK has several major announcements that include GDP, manufacturing, and industrial production. We prefer sell positions this week, as the war in the Middle East may help the safe currency options like the US dollar.

USDJPY (US Dollar – Japanese Yen)

USDJPY was neutral last week, opening and closing around 149.30. It was a strange week for the pair that included two key developments. On Tuesday there was a sharp downward spike and the investment community assumed Japan’s long-awaited intervention in the foreign exchange market was taking place. This had been mentioned verbally by many Japanese officials to support the national currency, which has been suffering lately due to continued very loose monetary policy by the Bank of Japan. The Japanese refused to comment on the sharp strengthening of the yen, stressing only that they are sticking to international agreements and that they are ready to do everything possible to support the country’s currency. However, several analyses have confirmed that a possible intervention by Japan in the foreign exchange market will not ultimately have much effect on the yen’s exchange rates as USDJPY’s losses were ultimately limited. The second development had to do with the big weakening of the US dollar in the final hours of Friday following the NFPs announcement. This announcement had the opposite impact on the USDJPY after helping it recover. The rise in the exchange rate was also helped by higher bond yields, which have been moving at record levels in recent years. We may try sell positions this week.

EURJPY (Euro – Japanese Yen)
Neutral was last week for EURJPY which opened and closed a few pips below 158. The exchange rate dipped well below 155 on Tuesday after a possible intervention in the foreign exchange market by Japan. However, this decline did not last long and EURJPY found itself soon above 156 again. Towards the end of the week, there was an upward rally for the euro, mainly due to the weakness of the dollar, which brought the rate back to the price area of 158. It should be pointed out that EURJPY has been close to these price levels for about two months, which shows a lack of trend and direction. The European Central Bank will probably not raise interest rates again, and according to all statements the Bank of Japan will continue its very loose monetary policy. There needs to be something more drastic in order for the pair to get a trend. We may try sell positions this week as the Japanese currency may gather traction due to the global geopolitical tensions.

EURGBP (Euro – Great Britain Pound)

Last week was bearish for the EURGBP, as it opened at 0.8559 and closed at 0.8545. Both the euro and sterling strengthened last week after benefiting from weakness in the US dollar. But it seems sterling has an extra edge because markets believe the Bank of England is likely to raise interest rates further as most statements from the Eurozone area converge that the European Central Bank will not do the same so we’re keen to try sell positions this week.

USDCAD (US Dollar – Canadian Dollar)

Bullish was the last week for USDCAD, as it opened at 1.3567 and closed at 1.3657. The big drop in the U.S. dollar towards the end of the week could not stem the weekly positive sign for the exchange rate. The Canadian dollar has been put under a lot of pressure because of the big drop in oil prices that we’ve seen throughout the week. The Canadian dollar is closely tied to oil prices because the country is an oil producer. The picture of macroeconomic results for Canada’s economy was positive as PMI indicators had a positive result above 50 and the labor market for the previous month had a positive balance of +64K positions which caused a marginal decrease in the unemployment rate to 5.5% from 5.6%. There are no major announcements for Canada this week, but announcements of Fed minutes and U.S. inflation are likely to generate high volatility and we prefer buy positions this week.

USDCHF (US Dollar – Swiss Franc)
The USDCHF had a downward course last week as the opening price was at 0.9142 and the closing price was at 0.99090. After 11 consecutive weeks of rising, the USDCHF had a corrective week, largely due to weakness in the US dollar in the final hours of Friday. The dollar has seriously strengthened lately, but after the NFPs on Friday, it took a sharp corrective trajectory after the investment community rated the unexpectedly positive result in the U.S. labor market as something positive even though it may prompt more action from the Fed. The Swiss franc, on the other hand, did not have much room for a reaction because, during the week, inflation was announced in Switzerland at 1.7%, below the 1.8% predicted by the markets, which does not give much chance for the Bank of Switzerland to make new interventions. Buy positions is our selection for the current week.

AUDUSD (Australian Dollar – US Dollar)

Bearish was the last week for AUDUSD, which opened at 0.6422 and closed at 0.6388. Although the US dollar performed weakness towards the end of the week, the exchange rate could not close on a positive sign as the weakness of the Australian dollar was also obvious. The main reason is that for the fourth meeting in a row, the Reserve Bank of Australia left interest rates unchanged at 4.1%, leaving the gap with the corresponding US interest rate stable, which may even rise by the end of the year. The Australian economy continues to perform positively after PMI indicators and trade balance were announced with satisfactory results. Also, through the Financial Stability Review, we learned that the projections and the state of the country’s economy are in positive territory. China, on the other hand, which almost always affects Australia’s economy, continues to have a problematic picture with the PMI in manufacturing again announced below market expectations (50.6 vs 51.2). The focus now comes on announcements about the U.S. economy, the Fed’s minutes on Wednesday, and inflation on Thursday, and that will be decisive factors for the exchange rate this week. We may try sell positions.

Bitcoin

Last week, Bitcoin was slightly bearish and closed at $27,933 with losses of 0.22%. The conflict between Israel and Hamas which started on Saturday, hardly affected the Bitcoin prices which remained unchanged at around $28K. Bitcoin and most of the crypto benefited from the NFPs report on Friday. This report showed an addition of 336,000 jobs in September, significantly surpassing the projected figure of 170,000. Consequently, this significant macroeconomic development surprised the market, leading to a rally in the US Dollar and prompting a temporary decline in risk-on markets. Very soon things changed totally; the US dollar weakened and the risk-on mood returned, helping the stock indices and the cryptos. Beyond the macro news and the price action, the issues in the crypto community remain open. The trial of Sam Bankman-Fried, the former CEO of FTX, in the case of the United States/SEC vs. Sam Bankman-Fried, is set to resume in court. Most likely, the geopolitical tensions, sooner or later, won’t favor the higher-risk asset classes so we prefer short positions for Bitcoin 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.