16/10/2023

 

U.S. INFLATION AND MIDDLE EAST WAR TRIGGERED NEW CORRECTIONS IN MARKETS

General Comment

The announcement of inflation in the United States, while not far from market expectations (3.7% vs. 3.6%), triggered a correction cycle in financial markets. At the beginning of the week, the climate was quite positive although in the Middle East, there is a war between Israel and Hamas in the Gaza Strip. It is obvious that the markets reacted with relative composure considering that the likelihood of the war spreading to the surrounding region is small.

On Wednesday, the Fed’s minutes were released, from which we learned most policymakers’ thoughts converged on not raising interest rates but maintaining high interest rates for longer in 2024. Based on the latest data, the most likely scenario is that there will be no more interest rate increases and the reduction will start from the second half of 2024 onwards. These developments were welcomed positively by the markets and the rise continued.

On Thursday, however, the inflation announcement was a turning point and the corrective pressures exerted were great. Given that inflation has not been moving at unrealistically high levels, it seems that we are experiencing a period in which negative news is snowballing and dragging the markets. The negative sentiment continued on Friday after Michigan’s consumer sentiment index, which plunged to 63 from 68.1 the previous month, was announced.

As far as the rest of the world is concerned, the Eurozone has had no major news and announcements, only some speeches by Christine Lagarde in which everything that has been said lately was repeated, namely that the European Central Bank intends to fight high inflation and that this is already happening. In China, the concerns continued after September inflation was announced at 0% raising concerns of a contraction in growth. Reductions in imports and exports in the country also continue, although the trade balance continues to be strongly positive.

In addition to the economic news, the international community’s eyes are also on the Middle East since Israel’s major ground operation in the Gaza Strip is about to begin, and concerns lie in the fact that the war is likely to spread and other countries such as Syria or Iran could be involved.

After the positive sentiment of the first half of the week and the negative sentiment from the announcement of inflation in the US, the sign of the stock indices in the United States was neutral while the sign in European markets was mixed as we will see below. The commodity market has been impressed by the big rise of gold while oil has moved to higher levels as well. High inflation in the U.S. again put the U.S. dollar in the driver’s seat as it continued to strengthen while the euro and sterling took losses. For the first time in five consecutive weeks of growth, bond yields showed a downturn with the U.S. 10-year closing the week at 4.61%. The large increase in bond yields lately is helping monetary tightening and is a factor reducing the likelihood of new rate hikes by central banks. Finally, Bitcoin and most cryptocurrencies have suffered significant losses in the past week.

In the week that has just begun all eyes are on the war in the Middle East and the economic news and announcements are minor. China’s GDP, industrial production, and retail sales figures stand out. In the US, the announcement of retail sales, industrial production, and building permits stands out. The eurozone is dominated by the announcement of inflation and some important announcements are expected for the UK such as the unemployment rate and retail sales.

 

 

SP500

The US SP500 index closed last week higher, at 4,328 points with profits of 0.45%. The week was divided into two parts.  In the first part (until Thursday), SP500 was bullish as there were just limited concerns about the upcoming war in the Gaza Strip and because according to the Fed minutes, most likely there will not be any other hike on interest rates and the point now is how long the existing rates will be maintained. In the second part, after Thursday’s announcement of the US inflation, SP500 performed heavy corrective trends but not to a degree that could change the profitable weekly sign. Insisting inflation created new concerns for extended monetary tightening and the Michigan consumer sentiment index announced on Friday helped bearish trends even more. During the last week, many companies, mainly from the financing sector announced the Q3 2023 results. JPMorgan Chase, Wells Fargo, and Citigroup witnessed an increase in their stock prices as they reported quarterly earnings that exceeded analysts’ expectations, boosted by elevated interest rates. Another factor that affects the SP500 is the bond yields that had a decline last week so the stock indices could take some deep breaths. All eyes now are on the Israel-Hamas war and on some bordering countries that may get involved. The U.S. economic calendar is relatively quiet, except for the retail sales and the building permits announcements but it seems that the markets are vulnerable to bearish trends so we may try short positions this week.

 

DAX30

The German DAX40 index was bearish last week, closing at 15,187 points, with losses of 0.28%. Until Wednesday, DAX40 had a strong uptrend and it was moving much above 15,500 points. The sentiment was positive as there was optimism regarding the conflict in the Middle East. From Thursday and onwards though, DAX40 was significantly affected by the U.S. inflation announcement and by the increased concerns regarding the war in the Middle East and it could not keep the profitable sign. As per the German economic data of last week, inflation in Germany was announced to 4.3% in September but the industrial production dropped by 0.2%, following the decreases that we had seen in the previous months. There’s a general concern that the European economies will face a recession in the next period, as a result of the monetary tightening by the ECB and of a possible energy crisis as the war in Ukraine carries on and new conflicts may occur in the Middle East. Short positions is our selection for the current week.

 

FTSE100

The British FTSE100 index moved downward last week, closing at 7,600 points, earning about 1.40%. Obviously, FTSE100 outperformed most of the major stock indices although it experienced a 0.52% decline on Friday, influenced by remarks from Bank of England Governor Andrew Bailey regarding the continuation of tight monetary policy. Nevertheless, the FTSE 100 had its most favorable weekly performance in the past month, driven chiefly by profits in the precious metals, oil, and gas industries. Escalating tensions in the Middle East have bolstered gold prices, offering investors a degree of solace. The potential from the commodity sector was enough to override the negative results of the UK economy: in August, industrial production dropped by 0.7%%, manufacturing production dropped by 0.4% and the trade balance was close to -5 bn pounds. Only, the GDP result of +0.2% was decent as it met the market expectations. Although the factors that helped FTSE100 to have a great performance last week still stand, it will be difficult to keep the positive sign if the global sentiment remains negative so we may try short positions this week.

 

Gold

The previous week was heavily bullish for gold, with the next month’s futures closing at $1,942 and profits of more than 5.20%. With the escalating Middle-Eastern conflict involving Israel and Hamas, traders are shifting their focus toward the safety offered by gold. Last Friday was one of the most profitable days for gold of the last period. Aside from geopolitical factors, the economic results in the U.S. are presenting favorable conditions for gold. The September U.S. inflation result surpassed the expectations and led many investors to the option of gold. Lately, there was speculation that the Fed might respond with a rate hike during their November meeting, but these expectations have since calmed down, which has contributed to the upward movement in gold prices. The rise in gold prices could be even stronger but the stronger U.S. dollar acted as a brake to a furious uptrend. Certainly, though, gold was favored by the declining bond yields as a non-yielding investing solution. It won’t be easy for gold to follow such a strong uptrend, especially if the dollar’s strength carries on so we may try short positions this week.

 

US Oil

Last week was bullish for oil with the next month’s futures closing at $87.66, with profits close to 6%. The oil started began the week with a heavy uptrend due to the intensification of the Israel-Hamas conflict, which raised concerns about a more extensive crisis in the Middle East that might disrupt the oil supply. Saudi Arabia aimed to calm market tensions by committing to price stabilization but it seems that it was not enough as the uptrend carried on, even stronger on Friday. The higher U.S. inflation announced on Thursday added one more factor of uncertainty as may occur high interest rates for a longer period, pressing the demand during 2024. Supply may have its own issues though because according to Reuters, on Thursday, the United States initiated sanctions against individuals who own tankers transporting Russian oil at prices exceeding the G7’s specified cap of $60 per barrel. There are bearish factors (a slowdown in growth or a possible recession) and bullish factors (war in the Middle East and a possible involvement of oil producer countries like Iran) for oil prices. It is a very unstable balance so we’d better stay out this week.

 

 

EURUSD (Euro US Dollar)
Last week was bearish for EURUSD as it opened at 1.0551 and closed at 1.0508. The exchange rate had opened with a gap of about 30 pips, so the real drop has been greater. The strong momentum of the U.S. dollar, especially on Thursday, was enough to make the exchange rate write a negative sign for the week. A decisive factor was the announcement of inflation in the US which brings to the fore a possible longer period with high interest rates. The euro, on the other hand, is under pressure because the European Central Bank does not seem particularly determined to take new drastic actions and because the euro as a higher-risk currency does not currently attract the preferences of investors. Also, the US macroeconomic results are far better than the European ones. In the economic announcements of the Eurozone, there will be a slight recovery in industrial production in August which increased by 0.6%, and beyond that there was nothing else significant. The war in the Middle East will affect investors ‘ risk appetite and will probably affect EURUSD as well. If the fall for the pair continues the first apparent support is near 1.0450. We will prefer sell positions this week too.

 

GBPUSD (Great Britain Pound – US Dollar)

Bearish was the last week for GBPUSD, which closed at 1.2140 about 95 pips lower compared to last week’s close price. Apart from the great strength of the US dollar, which determined the course of the exchange rate to a large extent, we also had significant developments on the part of the United Kingdom. The economic results for the UK were not positive, the only exception being August GDP which grew by 0.2%. Industrial production, manufacturing, and the trade balance have had results far worse than market expectations, and this has negatively affected sterling. Also important were the speeches made by the head of the Bank of England Bailey. In his first speech, Bailey stressed that he opposed changing the 2% inflation target and seemed quite willing to take new actions for tighter monetary policy and higher interest rates. He also seemed quite pessimistic about the course of the country’s economy after saying he was expecting new economic shocks. The exchange rate is not far from the critical price of 1.20 which can be done if the dollar strengthens, and we may try sell positions this week.

 

USDJPY (US DollarJapanese Yen)

USDJPY was bullish last week, opening at 149.08 and closing at 149.55. The exchange rate again approached the 150 price zone, based mainly on the great strength of the U.S. dollar. It seems that Japan’s recent potential intervention in the foreign exchange market did not have the necessary strength to reverse the yen’s weakness and only succeeded in a temporary downward movement for the exchange rate to the 147 range. The continued very loose monetary policy from the Bank of Japan continues to be a determinant of the Yen’s weakness although the closer we get to the 150 range the more any interventions are likely. According to S&P ratings, Japan is robust enough for rising interest rates and it may be in 2024. However, this does not seem to have affected the currency market so far and neither the USDJPY was not affected last week by the downturn in bond yields. As we have repeatedly stressed, the price range of 150 is a hot zone for the pair and therefore we will stay out this week.

 

EURJPY (EuroJapanese Yen)
Bearish was last week for EURJPY which closed at 157l.14 80 pips lower than the close of the previous week. It was the first major move for the pair after several weeks of sideways trending. Continued loose monetary policy from the Bank of Japan continues to weaken the yen, but last week in particular the euro proved even weaker. The risk aversion created by the war in the Middle East, the hesitancy shown by the European Central Bank, and the continuing negative economic results of the Eurozone are exacerbating the euro’s position. We may try buy positions this week.

 

EURGBP (Euro – Great Britain Pound)

Last week was neutral for the EURGBP, as it opened and closed around 0.8545 – 0.8550. For several months the pair cannot escape the narrow range between 0.85 and 0.87 it is moving. The euro and sterling are under pressure due to negative expectations for the two economies (the Eurozone and the UK) and the negative investment sentiment that has dominated markets lately. Perhaps sterling has one more reason to strengthen after the Bank of England seems more determined to take new action with possible interest rate hikes. For this reason, we’re keen to try sell positions this week.

 

USDCAD (US Dollar – Canadian Dollar)

Neutral was the last week for USDCAD, as it opened and closed around 1.3650 – 1.3660. The strengthening of the U.S. dollar, notably after the announcement of inflation on Thursday, was equaled by the significant strengthening of the Canadian dollar due mainly to rising oil prices. There are currently no oil-producing countries involved in the war in the Middle East, but fears are enough to drive up prices. Canada’s economy had no major announcements other than building permits, which grew 3.4% last month so the Canadian economy stayed out. The two keys to the pair remain the U.S. dollar and oil prices although Canada announces the inflation rate on Tuesday. If the dollar continues to strengthen then the exchange rate may be driven toward the resistance of 1.3850 and therefore, we may try buy positions this week.

 

USDCHF (US DollarSwiss Franc)
The USDCHF had a downward course last week as the opening price was at 0.9090 and the closing price was at 0.9024. The fall in the exchange rate continued for the second week in a row despite the US dollar strengthening. The week’s announcements would normally contribute to the weakening of the Swiss franc after the producer price index had a negative rate on a monthly & yearly basis. The catalyst for the strengthening of the Swiss currency has been the worsening of investment sentiment due to the war in the Middle East, which has boosted low-risk and safe-haven assets such as the Swiss franc. Thus, the exchange rate came very close to the critical price of 0.90. If the U.S. dollar continues to strengthen, it will be difficult for that price to break out so we will choose buy positions this week.

 

AUDUSD (Australian Dollar – US Dollar)

Bearish was the last week for AUDUSD, which opened at 0.6358 and closed at 0.6295. The influence of the US dollar was palpable on the pair given Australia’s economy had no major announcements or developments. Only Christopher Kent’s speech from the Reserve Bank of Australia was relatively significant after it was pointed out that the Reserve Bank of Australia is in a wait-and-see mode to find out if the interest rate hikes are enough to combat high inflation. Some news came from the China side though. The announcement of inflation at 0% levels and the continuing decline in China’s imports and exports are of concern and negatively affect Australia’s economy and its currency. This week the unemployment rate for Australia is announced. AUDUSD is right on top of the significant support of 0.6285, the lowest price we have seen in the last year. However, the momentum of the US dollar seems great and there may be new bearish pressures on the AUSUSD so we may try sell positions this week too.

Bitcoin

Last week, Bitcoin was bearish and closed at $27,174 with losses of more than 2.70%. The hot issue of the last period is the Bitcoin ETF approvals by the U.S. Securities and Exchange Commission. The SEC is not expected to seek a review of the decision regarding Grayscale’s spot Bitcoin ETF, potentially improving the prospects for the approval of a spot Bitcoin ETF. Despite this positive development, the increase in Bitcoin’s price was modest and could not be maintained. The approval of a spot Bitcoin ETF is the sole prospect with the potential to initiate a bullish trend for Bitcoin, weakening the bearish scenario which is the prevailing scenario for the moment. Generally speaking, the global negative investing sentiment due to the war in the Middle East and the market perception that we will face an important slowdown in economic growth, may push many investors away from high-risk investing solutions such as the cryptos. Early this week there was a heavy rise that has brought the Bitcoin to the $28K area but even under these circumstances, we may try short positions for the current 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.

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