20/11/2023

 

MARKET SENTIMENT IMPROVED AFTER SOFT INFLATION IN THE USA AND THE UPTREND CONTINUED

General Comment

With no doubt, the central event of the week that passed was the announcement of inflation for October in the United States. Markets followed with relief a de-escalation of inflation to 3.2% compared to the 3.7% of the previous month and 3.3% estimated by markets. The thoughts and perceptions of the markets that followed were reasonable since the likelihood of a new rate hike by the Fed is now considerably reduced since inflation seems to be falling drastically. Of course, the issue of how long the current interest rates will be maintained concerns the markets, but there is also optimism that there will start to be a reduction from the spring onwards.

The next day, the announcement of the producer price index (another measure for inflation), confirmed the above estimates while the retail sales were announced as better than expected further confirmed even more the positive climate. On Thursday there was little concern due to the deterioration in the initial jobless claims and industrial production, but the good climate was maintained.

As for Europe, markets also believe that the cycle of rising interest rates is over, but the macroeconomic picture of the Eurozone is completely different from that of the United States. Eurozone GDP for the third quarter of the year was reported to have shrunk marginally to -0.1% while industrial production and trade balance fell significantly. Christine Lagarde appeared hawkish, saying current interest rates would take time to fight inflation, which also appears to be easing as it was announced at 2.9% for October.

In China, there was also a relief as last month retail sales and industrial production rebounded sharply. Of course, many concerns remain in manufacturing, foreign direct investment, and trade balance. As per the geopolitics, Israel’s military operations in the Gaza Strip continue with unabated intensity, but as long as other countries are not involved in this war, markets seem to have calmed down. On Wednesday, President Biden conducted a summit with President Xi Jinping of the People’s Republic of China in Woodside, California. During this meeting, the two leaders engaged in an open and positive conversation covering various bilateral and global topics. They explored potential areas for collaboration while also sharing perspectives on points of divergence. This meeting did not affect the financial markets significantly.

Equity indices in Europe and the United States performed significant gains as a result of the above positive sentiment. The commodity market was buoyed by the rise of gold and copper, while the fall in oil prices continued. Bond yields continued to de-escalate with the U.S. 10-year yield closing the week at 4.44%. Inflation news and expectations from the Fed weakened the U.S. dollar while other currencies such as the euro had gains. Finally, the bullish rally for Bitcoin and most of the cryptocurrencies carried on last week, even if it was softer.

The week just begun contains the release of the Fed’s minutes next Tuesday, on the 1st of November interest rate decision. Besides this, the announcements of PMI indicators for most of the world’s major economies stand out, whereas Thursday is a holiday in the United States because of Thanksgiving.

 

 

SP500

With bullish trends, the US SP500 index closed last week, at 4,514 points and profits of 2.24%. It was the third consecutive upward week for SP500. The main boost came after the U.S. inflation announcement. Inflation dropped to 3.2% in October from 3.7% in September and after this, the probability of a new rate hike by the Fed reduced very much. On Thursday, some negative data including initial jobless claims and industrial production stopped the bullish rally to some extent but the positive sentiment returned on Friday after the housing starts and the building permits exceeded the markets’ expectations. For the moment, markets are concerned about how long the current interest rates will be maintained and they believe that the date of starting the cuts will be next spring. These developments have caused a de-escalation to the bond yields too which is something that favors the stock markets: less attractive yields make the risky stock markets more attractive. Since there was no bad news from the Middle East war and the meeting between President Biden and Chinese President Xi, the stock markets did not have pressures from the geopolitical area. The sentiment has become positive but still, there’s the case of profit-taking or some other reasons that can cause corrections so we may try short positions this week.

 

DAX30

The German DAX40 index was strongly bullish last week, closing at 15,919 points, with profits of 4.50%. As inflation is dropping quickly in the Eurozone area, markets have the perception that the ECB will not apply new interest rate hikes and this is good news for the stock markets. Bond yields also started falling and last Wednesday on the bond auction that took place, the yield of the 30-year German bond dropped to 2.76% from 3.04% of the previous auction. The positive sentiment for DAX40 was also affected by the good news from the USA and the de-escalation of inflation. Early this week, Germany announced the producer price index which dropped impressively by 11% in October, on an annual basis. The German earnings reporting period has concluded with a strong finish. Siemens, the final DAX-listed company to disclose its financial results, greatly impressed investors. The company reported a bottom-line profit of 8.5 billion euros for the previous year, nearly doubling its earnings from the preceding year. During the last 3 weeks, the bullish rally of the DAX40 has been strong and we expect that the markets will need some ‘breaths’ so we may try short positions this week.

 

FTSE100

The British FTSE100 index moved upward last week, closing at 7,504 points, earning about 1.95%. Generally, the FTSE100 was positively affected by the other major stock indices and mainly by the U.S. ones, after the good news for the inflation in the USA. FTSE100 had a strongly corrective day on Thursday, probably following the speech of Bank of England Deputy Governor Ramsden who said that the recent increase in wages is not in line with the 2% inflation target. Regarding the UK news, the most important development took place on Tuesday and has to do with the UK inflation. Inflation in the UK had a very impressive drop last month as it was announced at 4.6% much lower compared to the 6.7% of September. Reasonably the markets consider that the Bank of England won’t apply many new interest rate hikes without excluding that the hike cycle is already done. Andrew Bailey, head of the Bank of England has a speech later today and the PMIs that will be announced this week are also important. We may try short positions, considering that a correction has a good chance this week.

 

Gold

The previous week was bullish for gold, with the next month’s futures closing at $1,981.6 and profits of 2.54%. Gold had a week characterized by optimism, as investors assessed the impact of the U.S. inflation announcement and signals from the Fed regarding its policies. Lower inflation led to speculation that the Fed might pause its interest rate hikes, favoring gold prices. As the week concluded, gold prices saw a modest increase, solidifying a positive weekly sign. This positive movement was influenced by the declining dollar and reduced bond yields as well. The trend of the U.S. dollar and forthcoming economic data, capable of influencing Fed policy decisions, are expected to be primary factors influencing gold prices. With the prevailing expectation among traders of no rate hikes in December’s decision session and the possibility of rate cuts commencing next spring, gold may continue to be viewed as a counterweight against high inflation and economic uncertainty. However, in the short-term we may see some corrections so we may try short positions this week.

 

US Oil

Last week was bearish for oil with the next month’s futures closing at $75.89, with losses a bit above 1.65%. Oil has rebounded from a three-month low of $72.22. The imposition of sanctions by the U.S. on Russian oil shippers, coupled with traders securing profits, provided support to oil prices. More specifically, on Thursday, the U.S. Treasury Department implemented sanctions on firms and vessels engaged in shipping oil above the G7’s $60 price limit to diminish Russian profits supporting its actions in Ukraine. Additionally, an increase in U.S. crude oil inventories contributed to the decline in oil prices from its weekly highs. Also, the Baker Hughes rig count in the U.S. showed an increase in rigs from 494 to 500 last week. Despite indicating a rise in production, this development did not exert downward pressure on the price of oil. Some analysts consider that OPEC+, particularly led by Saudi Arabia and Russia, might prolong output reductions into 2024 to support oil prices. This expectation aligns with the imminent OPEC+ meeting where discussions on additional supply cuts will be held. Oil has dropped from the $95 area in late September to the area of $75 which indicates losses of more than 20% so, some buyers may appear and we’d prefer long positions this week.

 

EURUSD (Euro US Dollar)
Last week was bullish for EURUSD as it opened at 1.0683 and closed at 1.0911. The U.S. dollar has continued to weaken since, following a major de-escalation in inflation last month, the chances of new rate hikes by the Fed have been significantly reduced. Also, if inflation continues to fall, the Fed may start cutting interest rates earlier than expected, and that belief weakens the dollar even further. Furthermore, the overall improvement in economic sentiment favors higher-risk currencies such as the euro, although the most likely scenario is that there will be no further interest rate increases in the euro area and the macroeconomic picture in the Eurozone is not good. The announcement of the Fed’s minutes will give us more insight into the future, while the announcements of PMI indicators for manufacturing and services will play an important role both in the Eurozone and its countries and in the United States. It is reasonable to see an uptrend slowdown close to 1.10 as it is a milestone price but it is difficult to oppose such a strong upward trend and therefore we will choose buy positions for one more week.

 

GBPUSD (Great Britain Pound – US Dollar)

Bullish was the last week for GBPUSD, which opened at 1.2203 and closed at 1.2462. Without a doubt, the US dollar, which lost a lot of ground last week due to reduced inflation, was the main factor in the rise of the exchange rate. This is easy to see since sterling had no particular reasons for strengthening last week. Inflation in the UK fell sharply last month from 6.7% to 4.6%, boosting market optimism and limiting the likelihood of many more actions by the Bank of England. Of course, the negative picture of the UK economy continues as we saw a significant decrease in retail sales for October while the unemployment rate remained unchanged at 4.2%. In addition to the announcement of the Fed’s minutes, the Bank of England chief Andrew Bailey’s speech will also be of particular importance for the exchange rate. Technically speaking, there is room for a further rise since the next resistance is close to 1.27, so we will prefer buy positions this week.

 

USDJPY (US DollarJapanese Yen)

USDJPY was bearish last week, opening at 151.42 and closing at 149.58. Two were the main reasons the exchange rate dropped below the milestone price of 150. The first reason has to do with the weakness of the U.S. dollar as markets believe the Fed will not raise interest rates further as inflation is falling drastically. The second reason has to do with the significant decline in bond yields which have a strong positive correlation with USDJPY. As far as Japan is concerned, the picture of the economy is not particularly positive as GDP fell in the third quarter by 0.5% while at an annual level industrial production decreased significantly in the previous month. It was the biggest weekly drop for the exchange rate since last July, and it remains to be seen whether it marks a change in trend. We may try sell positions this week.

 

EURJPY (EuroJapanese Yen)
Bullish was last week for EURJPY which opened at 161.82 and closed at 163.27. The improvement of the international economic sentiment has favored the euro lately as it is a high-risk option in contrast to the yen, which has traditionally been considered a safe haven for investment. The picture of the Eurozone economy is not particularly positive but as the very loose monetary policy from the Bank of Japan continues the yen so far has surrendered to a state of great weakness. Thus, the exchange rate has managed to climb to a high of many years but these conditions often create expectations for corrections and therefore we will choose sell positions this week.

 

EURGBP (Euro – Great Britain Pound)

Last week was bullish for the EURGBP, as it opened at 0.8730 and closed at 0.8755. Both the euro and sterling are strengthening in this period due to improved economic sentiment. Last week, however, the euro strengthened further after the large drop in inflation that we saw in the UK reduced the likelihood of major new actions from the Bank of England. Thus, the exchange rate continued the upward trend that has built up since the end of August. We may try sell positions this week.

 

USDCAD (US Dollar – Canadian Dollar)

Bearish was the last week for USDCAD, as it opened at 1.3795 and closed at 1.3717. The fall in the U.S. dollar due to sharply declining inflation in the United States was the main reason for the rate’s downward trend last week. In fact, this cause was so strong that it was able to outweigh the new fall in oil prices that should logically weaken the Canadian dollar. As far as Canada’s economic results last week are concerned, these are considered positive as wholesale and manufacturing sales moved upward. If the downtrend of the U.S. carries on, in combination with a bullish reaction in oil prices, the USDCAD may move lower so we’d prefer sell positions this week.

 

USDCHF (US DollarSwiss Franc)
The USDCHF had a downward course last week as the opening price was at 0.9015 and the closing price was at 0.8856. The main cause of the fall in the exchange rate was the weakening of the U.S. dollar that we saw after the announcement of the United States inflation. Another reason is an improvement in economic sentiment that is sending away some investors from the Swiss franc, which has traditionally been considered a low-risk option. But there was also a third reason to do with the speech of Swiss National Bank chief Thomas Jordan, who seemed relatively decisive in saying that he would not hesitate to make a tighter monetary policy if necessary. Otherwise, Switzerland’s economy looks to be doing well with industrial production growing by 2% last month. The exchange rate lost the critical price of 0.90 and it is not excluded that we will see a further fall, therefore we may try sell positions this week.

 

AUDUSD (Australian Dollar – US Dollar)

Strongly bullish was the last week for AUDUSD, which opened at 0.6349 and closed at 0.6514. The fall in the US dollar affected this exchange rate which had a strong rise which was also based on the rise of the Australian dollar. The Australian dollar strengthened due to improved economic sentiment and the rise of certain commodities such as gold and copper, as it is a currency that has a strong connection and correlation with the commodity market. The picture of Australia’s economy was also positive as 55,000 new jobs were created in the country last month, which far exceeded expectations. China’s improved picture in terms of retail sales and industrial output was another factor contributing to the exchange rate’s rise. If the U.S. dollar keeps on weakening, the AUDUSD may move higher so buy positions is our selection for the current week.

 

Bitcoin

Last week, Bitcoin was bullish and closed at $37,426 with profits of 0.92%. Industry experts propose that the approval of a spot ETF is probable by January 10, 2024. If this comes to fruition, it is anticipated to create an exceedingly positive scenario for the entire ecosystem. The considerable influx of capital, driven by the potential approval, has induced increased volatility in the market once again. However, the SEC announced that it will delay the decision on the approval of some ETFs including Global X, Franklin Templeton, and Hashdex. This recurring pattern of delays indicates the SEC’s ongoing caution in approving Bitcoin ETFs, driven by apprehensions related to market manipulation. Despite the delays, Bloomberg analysts still predict a 90% chance of approval for a Bitcoin ETF by January. Coinbase, a cryptocurrency exchange, has signaled its readiness to promptly adapt in the event of a spot Bitcoin ETF approval. Technically speaking, there’s room for Bitcoin to extend its profits much more. A case of $46K which is the next major resistance, cannot be ruled out during the following period so we may try 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.

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