23/10/2023

General Comment

Last week did not contain any major economic announcements, but markets continued to fall, mainly influenced by two factors. The first factor has to do with the uncertainty created by the war between Israel and Hamas and the possibility of involvement of other countries with possible effects on energy prices. This would mean a possible resurgence of inflation, and this would be a great harm as monetary tightening efforts are being made in order to combat high inflation during the last two years.

The second factor has to do with Jerome Powell’s speech last Thursday. While Powell did not rule out new quantitative tightening and possible new interest rate hikes, he said the latest big rise in bond yields was helping with tight monetary policy, suggesting it might take the place of rate hikes. These statements in their dovish character put pressure on the U.S. dollar which could not benefit from the rise in bond yields that they traditionally favor. It is worth dwelling on bond yields since the U.S. 10-year exceeded 5% last week, reaching 15-year highs. Obviously, there is a lot of concern, but this rise in yields may hide the fact that the United States has increased borrowing needs in the near future and will do several bond auctions.

The United States, however, continues to have impressive macroeconomic results. Retail sales were significantly boosted last month while initial jobless claims fell after too long below 200,000 in the past week.

As for Europe, Christine Lagarde in a speech reiterated the fact that the biggest problem remains high inflation, stressing also that the level of wages is very high.

To sum up the above, stock indices in the United States and Europe had significant losses, while significant gains were performed by most commodities such as gold and oil. Bond yields, as we said above, continued their upward course. The US dollar suffered losses while notable was the bullish reaction of other currencies such as the euro and the Australian dollar. Finally, last week Bitcoin and most cryptocurrencies had an impressive uptrend, as we will see in detail below.

The current week is much richer in terms of economic announcements and news. Of course, the announcements for U.S. GDP on Thursday and for personal consumption expenditures on Friday stand out. of particular importance is the decision on interest rates in the Eurozone and Christine Lagarde’s press conference that will follow. On Tuesday the PMI indicators for the world’s main economies are announced and within the week Canada announces its decision on interest rates. U.S. durable goods orders close the cycle of major announcements for next week.

SP500

US SP500 index closed last week with a bearish trend, at 4,224 points and losses of 2.40%. A series of factors contributed to this important correction. First of all, the new rally in bond yields. When a low-risk of the annual performance of 5% is available and there are certain risks for recession (high interest rates, the war in Israel, etc.), it makes perfect sense for some investors not to choose the risky stock markets. Traders also assessed Fed chair Jerome Powell’s comments regarding enduring inflation and the probable decision to maintain high interest rates until mid-2024. Of course, the war between Israel in Hamas is also a reason for concern since there’s a clear danger that other forces (e.g., Hezbollah) could get involved and cause an escalation. Technically speaking, the SP500 is very close to the strong support of 4216 points which is also a 5-month low price. Except from the developments of the war, the U.S. announcements of GDP and personal consumption expenditures will also be critical. Also, many important companies are going to announce their Q3 2023 earnings this week, including Microsoft, Meta, Mastercard, and Amazon. We will prefer short positions for one more week.

DAX30

The German DAX40 index was heavily bearish last week, closing at 14,798 points, with losses of 2.56%. The main German stock index dropped below 15,000 points for the first time in the last 7 months. The fears of a recession caused by the tight monetary policy, the continuous war in Ukraine, and the new war between Israel and Hamas have prevailed in the European stock markets. Friday’s data on German producer prices intensified concerns of an economic downturn. In September, producer prices unexpectedly decreased by 0.2%, in contrast to expectations of a 0.4% increase. This decrease, besides a possible inflation easing, also mirrors a subdued demand environment, reinforcing anticipations of an impending economic recession. On Thursday, Germany had a new 10-year bond auction and the yield climbed to 2.90%, much higher than the 2.78% of the previous auction. Let us not forget that not so long ago, this yield was negative. The next technical support is at 14,560 points and we’re keen to go after it with short positions.

FTSE100

The British FTSE100 index moved strongly downward last week, closing at 7,402 points, losing about 2.60%. FTSE100, more or less, had the same symptoms as the other major indices: fears of a recession due to high interest rates & tight monetary policy and geopolitical fears since the war between Israel and Hamas has just begun with possible unpredictable consequences. High inflation insists in the UK. It was announced at 6.7% in September, the same rate as in August while the markets estimated a drop to 6.5%. It makes sense for the markets to anticipate that more interest rate hikes are necessary which can bring more bears to the UK stock markets. Also, retail sales dropped in September by 0.9%, exceeding the estimations of a 0.1% decrease. The diminishing consumer confidence in the UK is another cause for concern as it dropped to -30 from -21 in August. There is an important support for FTSE100, just above 7,200 points but since there’s some way to go until this level, we may try short positions this week.

Gold

The previous week was heavily bullish for gold, with the next month’s futures closing at $1,982.5 and profits of 2.85%. It was the second week in a row with such an impressive uptrend for gold prices. The escalating tensions in the Middle East between Israel and Hamas are significantly influencing the prices of gold. Investors, in their search for safe-haven investing options, are turning to gold, driving its prices higher. It is worth mentioning that gold performs so impressively with three factors taking place that normally press the prices lower. First of all, the rising bond yields are a pivotal factor for the non-yielding gold. Secondly, it seems, that no matter if there will be more interest rate hikes by the Fed or not, the high rates will be maintained throughout 2024. When interest rates are high, the opportunity cost of holding non-interest-bearing assets like gold is also high. In such situations, investors may prefer interest-bearing assets over gold. Finally, the U.S. dollar keeps on strengthening, a fact that normally causes downtrends to the dollar-denominated gold prices. All these factors may weigh on the gold prices, especially after it approaches the critical zone of $2,000 so we may try short positions this week.

US Oil

Last week was bullish for oil with the next month’s futures closing at $88.33, with profits of 2.17%. Oil prices had a volatile week, partly influenced by the changing situation between Israel and Palestine. Optimism for a de-escalation arose when Hamas released two American hostages. On the other hand, the uncertainty before the ground invasion of the Israeli army in the Gaza Strip keeps the geopolitical risk high. As per the supply, the recent production cuts by some OPEC+ members still have an impact on oil prices and notable reductions in U.S. inventories indicated a market shortage, which bolstered the idea of an undersupplied market. Regarding the demand, hopes for a higher demand have occurred after the Venezuelan state-owned oil firm PDVSA initiated communication with clients holding contracts for crude supply. This action comes as a result of the temporary removal of U.S. sanctions, signifying a step toward reinitiating the sale of crude oil to international refiners, as Reuters reported on Thursday. Of course, the expectation of high interest rates for a long time is a factor that potentially would reduce the demand and everybody understands how complex is the supply/demand equation nowadays. We will prefer long positions for one more week.

EURUSD (Euro – US Dollar)
Last week was bullish for EURUSD as it opened at 1.0507 and closed at 1.0594. The exchange rate had an upward reaction not so much because of the strengthening of the euro but due to the weakness of the U.S. dollar. The European economy continues to be hit by high inflation and next week there is an announcement on interest rates in the Eurozone, but markets are not expecting an increase. Also, the latest macroeconomic results in the Eurozone are problematic and inflation was announced last month at 4.5%. The interest rate difference between the two central banks and the Eurozone’s poor economic picture does not allow the euro to reap strong gains, but the US dollar suffered losses, even as US bond yields continued to climb. The main reason for the losses was the speech by Jerome Powell, who stressed that bond yields were to some extent replacing tight monetary policy and did not give high hopes for a new rate hike. However, the performance of the U.S. economy and the security provided by the U.S. currency may bring the U.S. dollar back on the upward trajectory and thus we prefer sell positions this week.

GBPUSD (Great Britain Pound – US Dollar)

Bullish was the last week for GBPUSD, which opened at 1.2137 and closed at 1.2162. Sterling could not take advantage of the weak dollar and perform noticeable gains. Conditions favored doing so after inflation in the UK was announced last month at 6.7%, above the 6.5% that markets had expected. That likely means the Bank of England will be forced to make new rate hikes, which should help sterling as it is doubtful if the United States will do the same. But it seems that the poor economic profile in the UK is something that prevails. This was confirmed last week, with retail sales dropping by 0.9%m=, while in September public borrowing exceeded 13 billion sterling. The fall for the GBPUSD could continue without obstacles at least up to the 1.20 range and for this reason, we may try sell positions this week.

USDJPY (US Dollar – Japanese Yen)

USDJPY was bullish last week, opening at 149.34 and closing at 149.86. The rise for USDJPY continued for another week, approaching the very critical zone of 150. Above 150 there is an increased likelihood of Japan intervening in the foreign exchange market in order to support the domestic currency. That may have been in the past few weeks and was hinted at as a possibility by Bank of Japan Chief Ueda’s speech, but it is now doubtful whether it convinces markets of its effectiveness. Ueda said there was still a long way to go to end the very loose monetary policy, which undoubtedly weakens the Japanese currency and supersedes all other events. Inflation in Japan contracted to 3% from 3.2% last month, so there is no significant problem of continuing loose monetary policy. If there is a surpass of 150, the chance of a spike down is increased, and we will therefore stay out this week.

EURJPY (Euro – Japanese Yen)
Bullish was last week for EURJPY which opened at 157.02 and closed at 158.72 80. Although the European currency has no particular reasons to strengthen since the course of the European economy is not satisfactory and the European Central Bank will probably not make any more interest rate increases, the exchange rate moved strongly upward. The reason was again the big weakness performed by the Japanese yen since very loose monetary policy continues based on statements by central banker Ueda. EURJPY again approached dangerously to the 160 zone, and it is not excluded that we will see downward reactions therefore we prefer sell positions this week.

EURGBP (Euro – Great Britain Pound)

Last week was bullish for the EURGBP, as it opened at 0.8646 and closed at 0.8708. Due to the weakness of the U.S. dollar, higher-risk currencies such as the euro and sterling were able to recover but the European currency prevailed significantly, and the exchange rate was able to surpass 0.87 for the first time since last May. Market expectations are more positive for the European economy than for the UK which continues to report negative macroeconomic results. However, there is always the possibility that there will be a downward turn for the exchange rate towards the equilibrium point of the last few months, which is around 0.86, and therefore we will prefer sell positions this week.

USDCAD (US Dollar – Canadian Dollar)

Bullish was the last week for USDCAD, as it opened at 1.3651 and closed at 1.3713. Even though the U.S. dollar weakened, the exchange rate continued to move upward apparently on the weakness of the Canadian dollar. Canada’s inflation declined last month from 4% to 3.8%, limiting the chances of new actions by the Bank of Canada such as interest rate hikes. This development outweighed both the rise in oil prices that typically favor the Canadian dollar and the positive macroeconomic results that the country’s economy has had. More specifically, housing starts rose last month and retail sales picked up. If the U.S. dollar returns to its familiar strength, then we may see new rises for the exchange rate and so we may try buy positions this week.

USDCHF (US Dollar – Swiss Franc)
The USDCHF had a downward course last week as the opening price was at 0.9001 and the closing price was at 0.8923. It was the third bullish week in a row for the exchange rate as in addition to the weakening of the U.S. dollar, the Swiss franc continues to strengthen. The war between Israel and Hamas has exacerbated international economic sentiment, and so a large portion of investors are turning to safe investment solutions, such as Switzerland’s currency. Switzerland’s economy also had an impressive result last week after its trade balance topped 6 billion for September, a figure that was almost double market expectations. The determining factor for the exchange rate, however, remains the US dollar, which if it returns to its known strength, we may see the exchange rate react upward. We may try buy positions this week.

AUDUSD (Australian Dollar – US Dollar)

Slightly bullish was the last week for AUDUSD, which opened at 0.6301 and closed at 0.6312. Last Tuesday the Reserve Bank of Australia announced the meeting minutes that had a hawkish tone after reading how although there was no rate hike at the last meeting, some members of the bank had suggested it. The problem of inflation was also highlighted and a further increase in interest rates was not ruled out in the near future. From Wednesday onwards, however, the exchange rate showed downward trends and thus the weekly gains were significantly reduced. Australia’s jobs balance was reported well below expected and a sharp drop in China’s foreign direct investment fell by more than 8% last month also caused pressure on AUD. Although AUDUSD is close to the significant support of 0.6285, it is not excluded that we will see new downward trends especially if the US currency strengthens and therefore, we may try sell positions this week.

Bitcoin

Last week, Bitcoin was heavily bullish and closed at $30,002 with profits of more than 10.40%. The last time that we saw such an impressive performance for Bitcoin was last June. The ongoing positive sentiment regarding the SEC’s potential approval of Bitcoin ETF applications continued to fuel interest among buyers. Notably, Bloomberg Intelligence ETF Analyst James Seyffart estimated a 90% likelihood of the SEC approving the Ark Invest Bitcoin ETF. Another factor that strengthened Bitcoin is the reduced probability of another interest rate hike in the USA. High rates are likely to be maintained for a long time but higher rates are unlikely to happen. The FedWatch tool gives a 98.4% probability of unchanged interest rates in the next week’s decision. There is another issue that has occurred recently regarding Bitcoin and cryptocurrencies. The use of cryptocurrency in funding militant groups and terrorism has come under renewed scrutiny after the developments in the Middle East. Israel has taken action by seizing cryptocurrency accounts it believes are linked to Hamas. U.S. lawmakers have also called for stricter measures to prevent the use of cryptocurrencies by Hamas and its affiliated groups in financing their activities. It seems that the cryptos have gathered a strong momentum that we may follow with 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.