06/11/2023

General Comment

The past week contained a lot of developments, news, economic announcements, and decisions for many of the world’s major economies, so it makes sense that volatility was very high. Markets reacted upward and equity indices had one of the most profitable weeks in recent months.

Taking things from the start, on Wednesday the Fed left interest rates unchanged at 5.25 – 5.50%, which was something widely expected. The monetary policy statement and the speech of Jerome Powell at the press conference that followed confirmed the fact that the U.S. economy is strong, that the risk of a recession is low, and that the main goal is still the reduction of inflation to 2%.

The other big event of the week was the announcement of the labor market in the United States on Friday, with the result being negative after markets expected 180,000 new jobs and the result was 150,000. This negative development, however, did not dampen the markets, which continued to move upward.

Outside the United States, of particular importance was the Bank of England’s decision to leave interest rates unchanged. So, after the Fed and the European Central Bank, a third major central bank left interest rates unchanged, which may signal the end of the hike cycle and monetary policy tightening. Some signs of slowing growth in the global economy, coupled with the increased risk created by the war in the Middle East, may suggest this outcome.

In the Eurozone, a significant de-escalation of inflation was announced, but the other macroeconomic data appear to be deteriorating further, as we will see below in the EURUSD section. A further concern was caused in international markets due to the deterioration of China’s economy, as expressed by the results of the PMI indicators for manufacturing and services.

As we mentioned above, most equity indices in Europe and the United States had significant gains, while the U.S. dollar suffered important losses, the largest on a weekly level since last July. There was also a drop for most commodities such as gold and oil. The significant developments of the week should also be recorded in the big fall in bond yields, with the U.S. 10-year closing the week near 4.58% well below the 5% found recently. Finally, Bitcoin and most cryptocurrencies, after a week of strong growth, showed stabilizing trends.

The current week is clearly calmer, and volatility is expected to return to revert to its mean. The announcement of inflation in China stands out, which will better show the picture of its economy. In the United States, the speeches of Jerome Powell and other Fed officials will be of particular importance, in the Eurozone the announcement of the producer price index stands out, while the week is important for the United Kingdom as GDP, industrial production, manufacturing, and trade balance are announced.

SP500

With heavy bullish trends, the US SP500 index closed last week, at 4,358 points and profits of 5.85%. As we had estimated in last week’s report, volatility was significantly increased due to the important events that took place. The Fed left interest rates unchanged as it was widely expected by the markets but after the monetary policy statement release and the press conference of Jerome Powell that followed, the probability of a new hike is very small. According to the FedWatch tool, more than 90% is the probability of unchanged rates in the December session. It means that maybe the time to start lowering the rates is also shorter. As a confirmation of the above came the negative result of NFPs and the Fed has more reasons not to be too aggressive as the results of the tight monetary policy start to become visible. Another factor that helped SP500 to recover was the significant de-escalation of the bond yields; as the yield decreases some investors have motivation to choose more risky assets. As per the war in the Middle East, there’s still optimism that it can end without expanding to other areas or countries. Besides initial jobless claims and the Michigan consumer sentiment index, no other important economic data will be announced this week and a correction cannot be ruled out so we may try short positions.

DAX30

The German DAX40 index was bullish last week, closing at 15,189 points, with profits a bit more than 3.40%. Obviously, the DAX40 and most of the European stock indices were affected by the positive sentiment that came from the USA. Also, the prevailing scenario in the Eurozone is that no more interest rate hikes will take place. Two factors converge to this estimation: the inflation which has dropped significantly and the negative macroeconomic results that have been announced lately. In Germany, the annualized Q3 2023 GDP was negative at -0.3% but better than expected (-0.7%) and the inflation in October dropped to 3% from 4.3% in September. The retail sales had a negative performance of -0.8% in September but the trade balance was announced to +16.5 bn euros. As the main problems of the European economy remain, we prefer short positions this week. Some investors could also apply profit-taking.

FTSE100

The British FTSE100 index moved upward last week, closing at 7,418 points, earning about 1.75%. The UK index underperformed the other major stock indices in Europe & USA. Of course, the pause in interest rate hikes by the Bank of England last Thursday was a positive factor for stock markets in the UK. According to this development and according to the statements of many Bank of England officials, it appears that the Bank of England, much like several other central banks, has concluded its process of raising interest rates. The current focus is on how long it will maintain these elevated rates. Naturally, this holds immense significance during a period when interest rates are high and potentially quite restrictive. We cannot exclude the case that we may see a correction this week so short positions is our selection.

Gold

The previous week was slightly bullish for gold, with the next month’s futures closing at $1,991.5 and profits of 0.15%. One reason for this was the employment data that didn’t meet market expectations, leading investors to lean towards the belief that the Fed wouldn’t implement any other interest rate increases. With the slowdown in wage inflation, there is a possibility of a halt in the series of rate hikes, which could act as a favorable factor for gold prices. Another factor that favored gold price increases was the de-escalation of the bond yields as the US 10-year bond yield opened the week at 4.84% and closed at 4.58%. Non-yielding gold most of the time is favored when yielding assets decrease. Finally, the weak dollar added more momentum to the gold’s uptrend as it is its denomination currency. It seems that the price cannot exceed the milestone of $2,000 for good. It did on Friday but it was temporary and it quickly returned below this level. As long as the war in the Middle East is not expanding to other countries, the economic sentiment won’t be affected seriously so we may try short positions this week.

US Oil

Last week was bearish for oil with the next month’s futures closing at $80.84, with losses a bit above 5%. Oil markets had a volatile week with significant declines. The decrease in prices can be linked to a multifaceted combination of economic indicators and geopolitical events that increased demand concerns. Looking at the geopolitical perspective, previous worries about Middle East supply have diminished. Despite ongoing tensions, the market has adapted without significant interruptions in oil supply. In China, economic signals have presented a negative view as manufacturing activity unexpectedly contracted. Also, the weekly update from the Energy Information Administration brought an unexpected development as U.S. crude and gasoline inventories saw an uptick. The Middle East war developments and the interest rate hikes have calmed down the market concerns but the probability of a growth slowdown remains high. China has certain issues, especially in manufacturing and the other major economies will have expensive money for the following months, even with no new hikes in interest rates. As the oil prices though have approached $80, many investors would consider it an oversold case and an opportunity so we may try long positions this week.

EURUSD (Euro – US Dollar)
Last week was bullish for EURUSD as it opened at 1.0562 and closed at 1.0727. The exchange rate managed to achieve a strongly upward week even though the euro had no particular reasons to strengthen. Inflation in the Eurozone fell to 2.9% last month, further dampening hopes of more interest rate hikes by the European Central Bank. Eurozone GDP at the quarter level also fell by 0.1%, indicating that the European economy is already under pressure. This is also reflected in the unemployment rate which rose to 6.5%, from 6.4% in the previous month, and in the PMI indicator for manufacturing which was announced slightly above market expectations of 43.1 but remains well below 50. We will have a better picture of the European economy this week as the producer price index and retail sales are announced. It is obvious that with this pessimistic picture of the European economy, the rise in the exchange rate should be attributed mainly to the weakness of the dollar that we have seen throughout the week. Considering that the negative image of the European economy is given, if the dollar regains its strength, then the exchange rate will return to a downtrend and for this reason, we prefer sell positions this week.

GBPUSD (Great Britain Pound – US Dollar)

Bullish was the last week for GBPUSD, which opened at 1.2126 and closed at 1.2378. It was one of the biggest weekly rises for the pair we’ve seen in recent months. This rise is mainly attributed to the great weakening of the US dollar since the factors affecting the British pound were not such as to strengthen it. The central event to sterling last week was the decision on interest rates by the Bank of England, a decision that left interest rates unchanged at 5.25%. A factor that would weaken sterling is also the phrase of Andrew Bailey at his press conference, who stressed that too tight monetary policy cannot be sustained for too long. He also stressed that this would depend on the results of the next few months and did not fail to mention that there must be a reasonable use of the measures, which should be neither too many nor too few. The current week contains important announcements for the British economy after GDP, industrial production, manufacturing, and trade balance are announced on Friday. We may try buy positions this week.

USDJPY (US Dollar – Japanese Yen)

USDJPY was bearish last week, opening at 149.48 and closing at 149.29. The exchange rate on Tuesday had a sharp upward jump that brought it into the price range of 151.70. This was mainly due to the Bank of Japan’s decision to leave interest rates unchanged at -0.1% but also to refute some rumors that had circulated the previous day concerning the Yield Curve Control on the 10-year Japanese Government Bond (JGB). At the press conference, the head of BoJ Ueda said loose monetary policy would continue patiently. Based on this news, USDJPY reached its highest price in the last several years. However, from Wednesday onwards a brutal retracement began that pushed the pair below 150 again. The Fed’s decision to leave interest rates unchanged and the rest of the U.S. economic announcements were the key reason for the U.S. dollar to weaken. Another significant factor in the decline of the exchange rate was the large de-escalation in bond yields. We’d prefer buy positions this week.

EURJPY (Euro – Japanese Yen)
Bullish was last week for EURJPY which opened at 157.99 and closed at 160.18. Based on this rise, parity managed to surpass the price of 160 for the first time since the summer of 2008. Japan’s currency continues to weaken following the Bank of Japan’s decision to leave interest rates unchanged and to continue its very loose monetary policy. The euro, on the other hand, has strengthened not for reasons of the Eurozone and its economy but mainly as a counterweight to the great weakening of the US dollar. These very high price levels for EURJPY, combined with the problematic picture of the European economy, may lead to corrections and therefore we may try sell positions this week.

EURGBP (Euro – Great Britain Pound)

Last week was bearish for the EURGBP, as it opened at 0.8706 and closed at 0.8663. Due to weakness in the U.S. dollar and improved economic sentiment, higher-risk currencies such as the euro and sterling strengthened. However, investors seem to have preferred sterling over the euro because they give a better chance of a new rate hike from the Bank of England than from the European Central Bank. The sharp decline in inflation and the negative economic results in the Eurozone area point in this direction so we may try sell positions this week.

USDCAD (US Dollar – Canadian Dollar)

Heavily bearish was the last week for USDCAD, as it opened at 1.3854 and closed at 1.3652. The great weakness of the U.S. dollar was critical in this great fall in the exchange rate. Bank of Canada chief Tiff Macklem’s speeches last Tuesday and Thursday also played a significant role. Tiff Macklem said that if high inflation carries on, the bank is ready to apply new rate hikes. Since the most likely scenario for the Fed is not to raise interest rates further in the United States, such a statement strengthens Canada’s currency against the U.S. dollar. Canada’s other economic results were not encouraging as the unemployment rate rose to 5.7% from 5.5% and GDP was unchanged in August compared to the previous month. Oil prices also fell last week which didn’t let the Canadian dollar take any more breaths. We may try buy positions this week.

USDCHF (US Dollar – Swiss Franc)
The USDCHF had a light downward course last week as the opening price was at 0.9002 and the closing price was at 0.8992. The Swiss franc was one of the few major currencies that could not significantly benefit from the large weakness of the U.S. dollar. The improvement in global economic sentiment has led many investors to move away from safe havens such as Switzerland’s currency. Also, Switzerland’s inflation rate, announced last month at 1.7%, leaving little room for new actions by the Swiss National Bank. Jordan’s speech was in the opposite direction after stressing that the fight against inflation is not yet over and that new interventions by the bank cannot be ruled out. However, it appears that markets were not convinced enough, and the Swiss franc temporarily climbed as high as 0.91 but ended the week below the milestone price of 0.90. Sell positions is our selection for the current week.

AUDUSD (Australian Dollar – US Dollar)

Strongly bullish was the last week for AUDUSD, which opened at 0.6335 and closed at 0.6512. The significant weakening of the US dollar has combined with some positive results on the Australian economy and so we’ve had this impressive uptrend. In particular, retail sales in Australia jumped by 0.9% last month, while manufacturing was also announced above market expectations. A decisive factor, however, was the improvement in economic sentiment that helped the Australian dollar, which is a higher risk option. A drag on the Australian dollar, however, was China’s negative results after PMI indicators for manufacturing and services in China fell below market expectations. The situation in the global economy is not such as to allow for great optimism and if the US dollar starts to strengthen again, we will see the exchange rate revert to a downtrend therefore we’re keen to try sell positions this week.

Bitcoin

Last week, Bitcoin was bullish and closed at $35,045 with profits of 1.50%. It was the third bullish week in a row for Bitcoin but the weekly performance decreased significantly compared to the two previous weeks. The anticipation surrounding the approval of a Bitcoin spot ETF has been a topic of speculation for the last period. However, recent developments related to ETFs have gained momentum. The US Securities and Exchange Commission, responsible for approving or rejecting ETF products, has faced setbacks in several cryptocurrency-related legal battles, which have shifted the landscape. Based on information obtained from Glassnode, Bitcoin miners collectively possessed 1.832 million Bitcoins in reserves as of November 2nd. However, as the price surge began, they disposed of 2,190 Bitcoins, reducing their current total reserves to 1.830 million. It is obvious that during the last three weeks, an uptrend has been formed but we will stay out in the current week due to the uncertainty of the crypto & traditional markets.

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.