18/12/2023

General Comment

The decisions of central banks and the statements of central bankers that followed were undoubtedly the most important events of the past week. Of course, the Fed stood out for leaving interest rates unchanged at current levels. In the press conference that followed the bank’s head Jerome Powell, however, was quite dovish even if he tried to appear restrained. Now markets see as a dominant scenario that the rate cut will start next March and that by the end of 2024 interest rates will be more than one percentage point lower than current levels. This news was welcomed by the markets with great warmth and continued for another week the upward rally.

The European Central Bank also left interest rates unchanged and it revealed plans to begin reducing its Pandemic Emergency Purchase Programme (PEPP) portfolio starting in the second half of 2024. Economic projections by the staff indicated lower forecasts for GDP, inflation, and core inflation for 2023 and 2024. Nonetheless, ECB President Christine Lagarde emphasized that these forecasts were based on data gathered before the recent decline in rates, suggesting that actual growth and inflation figures might be higher. In any case, markets expect interest rates to start falling in the Eurozone in the spring of 2024.

The third major central bank that made similar decisions in the week was the Bank of England. The Bank of England also left interest rates unchanged but necessarily the tone is much more hawkish since inflation in the UK is still very high.

As for the rest of the week’s news, the announcement of inflation in the United States was significant, which was announced at 3.1% as the markets expected. Retail sales in the United States rose last month and that was another positive news for markets. Finally, positive news came from China with industrial production and retail sales strengthening significantly.

Stock indices in the United States are really galloping since the news from the Fed has been positive but also traditionally December is a month of positive sentiment for markets. In Europe things were different and stock indexes fell slightly. In the commodity market, we saw a small recovery in commodities such as gold and oil. The dovish Fed weakened the US dollar which fell against its main competitors. The important news of the week is certainly the de-escalation of bond yields and the U.S. 10-year bond yields falling below 4% for the first time since last August, closing the week near 3.91%. Bitcoin and most cryptocurrencies had some losses during the week.

The week that has just begun is clearly calmer in terms of news and financial results. Announcements of GDP and personal consumption expenditures in the United States stand out on Thursday and Friday. Interest rate decisions by the central banks of Japan and China are also important.

SP500

With bullish trends, the US SP500 index closed last week, at 4,719 points and profits of 2.50%. The most profitable day was Wednesday after the Fed left the interest rates unchanged at 5.25% – 5.50% and after the dovish stance of Jerome Powell in the following press conference. One key phrase of Jerome Powell that gave such a dovish perception was “We are very focused on not making the mistake of keeping rates too high too long”. The FedWatch tool gives a 67.5% probability that the Fed rate cut will begin in next March. Another encouraging factor for the U.S. stock markets was the further de-escalation of inflation as it was announced at 3.1% for November. It brings the target of 2% inflation into 2024 closer. Of course, stock indices like SP500 were also favored by the decline of bond yields: the less the yields are attractive, the more many investors would prefer riskier options such as stocks. SP500 is now very close to the all-time high price that we saw last March, above 3,800 points so a correction scenario cannot be ruled out. We may try short positions this week.

DAX30

The German DAX40 index was slightly bearish last week, closing at 15,751 points, with marginal losses of 0.05%. It was a reasonable correction as it followed six consecutive bullish weeks with new all-time highs. There is a perception in the markets that the European stocks are underestimated compared to the U.S. ones but we guess that to some degree, this fact has already been addressed to the prices. At least, the European economies have still many issues: GDP has turned negative, manufacturing suffers and other macroeconomic factors have declined. Especially for the German economy, last week all the PMIs (Manufacturing, Services, and Composite) were announced below market expectations and well below 50. Of course, the problem is more complicated regarding the German economy as the recovery of China has brought a new wave of optimism. Also, the dovish stance of the ECB is another factor that favors the stock markets. Technically speaking, the weekly Doji candlestick pattern may indicate a correction and along with all the fundamental reasons would make us prefer short positions this week.

FTSE100

The British FTSE100 index moved upward last week, closing at 7,546 points, earning about 0.30%. FTSE100 was above 7,700 points on Thursday but the strong correction of Friday limited the gains. Actually, the correction started late Thursday after the Bank of England left the interest rates unchanged at 5.25% but the three members with a hawkish stance have supported the bank’s commitment to additional tightening should inflation pressures continue. This stance has dampened expectations for early 2024 rate reductions, lending additional weakness to the FTSE100. The UK macros that were announced earlier, were all below market expectations: GDP dropped in October by 0.3%, industrial production dropped by 0.8%, manufacturing production dropped by 1.1% and the trade balance was announced close to -4.5 billion pounds, far from the 1.6 billion pounds that the markets estimated. We will prefer short positions this week too.

Gold

The previous week was bullish for gold, with the futures closing at $2,021 and profits of more than 1.15%. Last week there were considerable fluctuations in gold prices, primarily driven by announcements from the Fed. The remarks from Fed head Jerome Powell signaled a move to a less aggressive approach, hinting at the potential conclusion of the extended monetary policy tightening. This perspective was also reflected by most Fed officials, indicating a likelihood of reduced interest rates ahead. The bond market responded robustly to the Fed’s communications, witnessing notable shifts in yields. The yield on the 10-year bond saw its biggest weekly change since March, reflecting a market consensus leaning towards a relaxation of monetary policy. Last week’s decline in the dollar also significantly influenced gold prices. The dollar experienced a weekly decrease, impacted by the Fed’s shift to a more dovish approach and the market’s anticipation of upcoming rate reductions. The announcements of the U.S. GDP and PCE this week will be critical for the gold prices but investors will also take under consideration the interest rate decisions in Japan and China. We may try short positions this week.

US Oil

Last week was bullish for oil with the next month’s futures closing at $72.10, with profits a bit above 1.20%. There was some good news regarding the oil demand last week. The International Energy Agency has revised its global oil demand projection for 2024 upwards by 1.1 million barrels per day, reflecting an optimistic view on energy consumption. Meanwhile, adopting an even more bullish perspective, the OPEC projects a more substantial surge in oil demand. A significant influence on the market came from the Fed signaling a potential decrease in interest rates by 2024, which contributed to a softer dollar. This shift in monetary policy may stimulate an increase in demand. In recent developments regarding supply, there has been a reduction in the U.S. oil and gas rig count, with the number of oil rigs decreasing to 501. This drop, from a peak of 503 seen after the pandemic, reflects the industry’s reaction to declining oil and gas prices and might indicate potential alterations in upcoming production quantities. The market continues to be responsive to economic indicators, dollar movements, and global political developments, factors that could lead to variations in pricing. We see some signs of over-supply decreasing lately so we’d prefer short positions this week.

EURUSD (Euro – US Dollar)
Last week was bullish for EURUSD as it opened at 1.0755 and closed at 1.0894. The Fed’s dovish stance has weakened the U.S. dollar considerably since markets believe that in the first months of 2024, the rate cut will begin. The perception of the European Central Bank is not much different since markets estimate that the Eurozone will start cutting interest rates in the same period, but there are significant differences in the situation of the two economies. The U.S. economy appears to be quite robust with a recession scenario now having a limited chance while the Eurozone has significant problems. Industrial production fell 0.7% last month while PMI indicators were all announced below market expectations and below 50. Based on this situation and if the news from the United States (GDP and PCE) this week confirms the soundness of the U.S. economy maybe the dollar will start strengthening again and for this reason we may try sell positions this week.

GBPUSD (Great Britain Pound – US Dollar)

Bullish was the last week for GBPUSD, which opened at 1.2532 and closed at 1.2671. In addition to the weakening of the U.S. dollar due to the statements of Jerome Powell and the general sense of markets that interest rates will start to fall in the United States in the first months of 2024, the strengthening of sterling has also played an important role. The Bank of England has left interest rates unchanged but the high inflation in the UK does not allow for corresponding considerations. With the core inflation rate persistently exceeding 5%, the UK stands out among G10 countries with one of the highest inflationary rates. Given this factor, it may be challenging for the Bank of England to navigate the situation where markets are already anticipating initial rate cuts as early as June. It is this difference that mainly boosted the GBPUSD. Perhaps the rise should have been bigger but the results of the UK economy have been disappointing. The unemployment rate remained unchanged but GDP, industrial production, manufacturing, and the trade balance had negative results. This means that if the dollar begins to strengthen then the exchange rate may turn down and so we prefer sell positions this week.

USDJPY (US Dollar – Japanese Yen)

USDJPY was strongly bearish last week, opening at 144.89 and closing at 142.08. It was the fifth week in a row for the exchange rate since all the factors that influence it are consistent with this result. The U.S. dollar weakened after Jerome Powell’s statements last Wednesday, and bond yields that are correlated to the exchange rate fell significantly. Also growing are rumors and information that the Bank of Japan will change its very loose monetary policy and negative interest rates. The meeting of the Bank of Japan and its decision on interest rates next Tuesday is therefore of particular interest. The positive macroeconomic developments in Japan’s economy are also helping the country’s currency. Inflation remains at low levels while manufacturing and industrial production indicators were announced above market expectations. We will choose buy positions for this week.

EURJPY (Euro – Japanese Yen)
Bearish was last week for EURJPY which opened at 155.86 and closed at 154.89. The European Central Bank left interest rates unchanged while Christine Lagarde’s statements were interpreted as dovish by markets. This combined with the negative economic results in the Eurozone weakened the euro. On the other hand, the yen continues to strengthen significantly as a large share of the market believes that the time has come for the Bank of Japan to change its very loose monetary policy and negative interest rates. If the above approaches continue then we may see the pair even lower and for this reason but if the BoE keeps the current approach, we may have upward reactions. We prefer buy positions this week.

EURGBP (Euro – Great Britain Pound)

Last week was slightly bullish for the EURGBP, as it opened at 0.8568 and closed at 0.8594. At first sight, this rise for the pair seems a little absurd. Both central banks (the European Central Bank and the Bank of England) set interest rates unchanged last week but logic suggests the Bank of England will be slow to cut them due to high inflation in the UK. These developments should logically strengthen sterling against the euro. But the UK had a barrage of negative announcements last week that certainly negatively impacted sterling. The Eurozone is not in much better economic shape either but it is significantly better compared to the UK so we will choose buy positions this week.

USDCAD (US Dollar – Canadian Dollar)

Bearish was the last week for USDCAD, as it opened at 1.3579 and closed at 1.3373. The weakening of the U.S. dollar came after the Fed left interest rates unchanged and following Jerome Powell’s statements, combined with a strengthening of the Canadian dollar after oil prices rebounded. Bank of Canada Governor Tiff Macklem, in his year-end speech at the Canadian Club Toronto, stated that the central bank will contemplate reducing its policy interest rate once it is confident that the economy is firmly on the route to price stability. However, Macklem emphasized that it is still premature to consider interest rate cuts. He clarified that while it’s not necessary to wait for inflation to fully return to the 2% target before easing policy, there needs to be a clear trajectory towards reaching that 2% goal. This week Canada has major announcements on inflation and retail sales. But if the U.S. dollar comes back and recovers, maybe the exchange rate will move up and for that reason, 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 0.8800 and the closing price was at 0.8701. The weakening of the U.S. dollar was clear and given after the FOMC and Jerome Powell’s statements that followed. The meeting and decision on interest rates also had the Swiss National Bank which also left them unchanged at 1.75%. Jordan (head of the SNB) convoked that if the existing monetary policy is found to be inadequate for maintaining long-term price stability, there will be a need to adjust the interest rate again. He also mentioned his uncertainty about whether the final interest rate level has been achieved. These statements were interpreted as hawkish by the markets and thus the Swiss franc strengthened. However, the dominant factor for the exchange rate remains the US dollar, and if it returns to its strength, it will push the exchange rate higher. We may try buy positions this week.

AUDUSD (Australian Dollar – US Dollar)

Bullish was the last week for AUDUSD, which opened at 0.6566 and closed at 0.6701. The rise is mainly due to the weakening of the U.S. dollar, but the Australian dollar also had some reasons to strengthen significantly. First, Australia continues to have positive economic results with the balance of new jobs in the previous month being strongly positive. The result of PMI networks was also positive. Michele Bullock, the Governor of the Reserve Bank of Australia highlighted the RBA’s cautious approach to monetary policy. Bullock emphasized the importance of continually monitoring incoming data and expressed confidence that the RBA is not lagging in its efforts to combat inflation. This approach underscores the central bank’s vigilance and data-driven strategy in managing monetary policy. Finally, China had a positive economic impact on the AUD, with retail sales increasing by 10.1% and industrial production increasing by 6.6%, which is a record for several months. All these factors, combined with the positive investing sentiment may boost the Aussie so we’d prefer buy positions this week.

Bitcoin

Last week, Bitcoin was heavily bearish and closed at $41,345 with losses of 5.60%. Expectations for the launch of spot Bitcoin exchange-traded funds (ETFs) are growing, with industry specialists targeting the period until 10 as a key timeframe. This anticipation, coupled with the expected Bitcoin halving around April 2024, is leading crypto investors to moderate their selling activities in anticipation of a potential upcoming bull market. However, there was a development last week that overshadowed the ETF approval expectation and the upcoming halving. On Monday, December 11, Senator Warren made a statement announcing heightened backing for the Digital Asset Anti-Money Laundering Act. Per the announcement, five more senators have expressed support for the cryptocurrency bill, with three of them being members of the Banking Committee. This proposed legislation aims to implement anti-money laundering measures within the digital asset sector. The turbulence was strong enough that override even the good news from the Fed. On Wednesday, the Fed kept interest rates unchanged but the dovish stance of Jerome Powell boosted the investing sentiment and created an appetite for riskier asset classes such as the cryptos.  It is positive that the Bitcoin managed to stay above $40K. We also believe that in the previous weeks, the markets overreacted and the Bitcoin price was increased more than it should be so we may try sell positions this week, considering that the correction can carry on.

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.