08/01/2024

General Comment

In the first week of 2024, the markets had a negative performance. The macroeconomic results were not particularly negative, but it seems that markets are counting on all parameters and in particular the possibility of a general conflict in the Middle East.

The labor market in the United States was announced above market expectations. Markets expected 170,000 new jobs in December while the announcement was for 216,000. Both the ADP employment change and the initial jobless claims were better than expected, indicating that the U.S. labor market is showing resilience. In contrast, manufacturing and services, as expressed by PMI indicators, were not particularly encouraging.

However, it seems that recent developments in the Middle East, both in the Gaza Strip and a barrage of bombings in various countries, have alarmed markets since a general conflagration in the region, especially involving countries such as Iran, could be particularly negative for the energy market, inflation and the global economy in general.

An important factor in correcting equity markets in the United States was also played by Barclays’ downgrade of Apple’s stock. Apple is the biggest contributor to the SP500 index.

In the recent release, the Federal Open Market Committee (FOMC) disclosed the minutes from their December meeting. In the document, officials indicated that probably the rate hike cycle is over. Furthermore, the minutes revealed that committee members think a reduction in the rate could happen in 2024, although specific details regarding the timing or method of such a cut were not provided.

In Europe, PMI indicators appear to be recovering but are still below 50. Inflation in the Eurozone jumped in December compared to the previous month but so far markets ‘ belief has not changed. Most likely the European Central Bank will start lowering interest rates in the first half of 2024.

In China, the major Caixin PMI manufacturing index exceeded market expectations and so negative sentiment is slowly starting to rectify. Markets expect a fiscal expansion in China, especially if the deflation in the country carries on.

As we said at the beginning, the picture of the stock markets in Europe and the United States was negative. As far as the commodity market is concerned, there were losses in gold and copper, while oil had profits. Bond yields jumped with the U.S. 10-year bond yield closing the week above the 4% threshold, at 4.05%. The U.S. dollar rose significantly, which hasn’t been done for several weeks. Finally, strong upside was the week for bitcoin and most cryptocurrencies as we will see in detail below.

The current week is definitely dominated by the announcement of inflation in the United States on Thursday. Friday is also an important day, as the producer price index in the United States and inflation in China are announced. In Europe, announcements of retail sales and unemployment are important.

SP500

The US SP500 index was bearish last week as it closed at 4,697 points and losses of 1.53%. The December jobs report, surpassing expectations, has solidified the view of a robust labor market. Consequently, this has prompted changes in market anticipations regarding the Fed’s potential interest rate reductions. The results of ADP employment change and initial jobless claims were also positive. The PMI index for manufacturing was announced at 47.4, above the 47.1 that markets had expected but remains below 50. By contrast, the PMI for services index was announced above 50, at 50.4 but well below what markets were seeing at 52.6. A negative development for the U.S. stock market was the downgrading of Apple’s stock by Barclays. The move came as a consequence of concerns that demand for iPhone and Mac computers will remain weak in 2024. Barclays downgraded the stock to “underweight” from “neutral” and cut its 12-month price target by $1 to $160. Technically speaking, last week was the first bearish after 9 consecutive bullish weeks. The index was close to all-time highs, but it seems the market is not ready for that yet. We may try short positions this week too.

DAX30

The German DAX40 index was bearish last week, closing at 16,594 points, with losses of 0.94%. There was a clear deterioration of the economic data in Germany based on the announcements in the first week of the new year. The most important of all was the increase in inflation, which was found in December at 3.7%, much higher than the 3.2% in the previous month. This development is a question mark over whether the European Central Bank will start cutting interest rates in the first half of 2024. It seems for now that the rise in inflation has not changed things dramatically. The results were negative for Germany’s economy regarding retail sales, which fell by 2.4% last month. The unemployment rate was unchanged at 5.9% while PMI indicators were announced, better than market expectations but below 50. We may try short positions for one more week.

FTSE100

The British FTSE100 index moved downward last week, closing at 7,690 points, losing about 0.55%. The UK index performed better than other indices in Europe and the United States. The recent major drop in inflation in the UK has raised expectations that the Bank of England will stop being so aggressive in its decisions on interest rates and monetary policy. In particular, confidence is beginning to form in the markets that the Bank of England will start cutting interest rates up and down in the same period as the other major central banks. Markets, of course, are also waiting for the macroeconomic results to be announced this week for the UK and they have to do with GDP, manufacturing, and industrial production. However, it is not excluded that the correction will continue and for this reason, we may try short positions this week.

Gold

The previous week was bearish for gold, with the next month’s futures closing at $2,042.4 and losses close to 1%. This week, a key influence was the unanticipated rise of the U.S. labor market. The NFP report indicated a job increase significantly surpassing market predictions, leading to skepticism about an imminent rate cut by the Federal Reserve in March. This strong growth in jobs negatively impacted gold prices. Recent market dynamics have been significantly influenced by speculation regarding the Federal Reserve’s rate decisions. Initially, there was an anticipation of more aggressive rate cuts. However, the latest data from the labor market has resulted in more tempered expectations regarding these rate adjustments. The rise of the U.S. dollar and bond yields were also key factors in the decline of gold prices. Gold is denominated in dollars so there’s a negative correlation between the two assets. Also, there’s a negative correlation between gold prices and bond yields as these two assets are competitors in the safe-haven asset class. We may try short positions this week too.

US Oil

Last week was bullish for oil with the next month’s futures closing at $73.81, with profits of more than 3%. The crude oil market began 2024 experiencing notable fluctuations, driven by a mix of economic and geopolitical factors. However, the current week started with Aramco announcing a decrease in its Official Selling Prices for February, marking the largest cut in 13 months. This move aligns with market expectations, as refiners have been advocating for more competitive pricing from Saudi Arabia in comparison to crude oil from other Middle Eastern producers and arbitrage cargoes from the Atlantic Basin as Reuters wrote earlier today. Besides this new development, key geopolitical events in the Middle East, especially in the Red Sea region, Libya, and the Gaza Strip, played a pivotal role in influencing the market’s activity. Market trends are significantly influenced by developments like the activities of the Yemeni Houthis in the Red Sea and statements from political figures in the U.S. and Israel, which are crucial in determining the market’s direction. Regarding last week’s announcements for inventories, there was a mixed picture with a reduction in oil inventories and an increase in gasoline inventories. The main downtrend of the last months has not changed although there were some fluctuations during the last weeks, so we’ll prefer short positions this week.

EURUSD (Euro – US Dollar)
Last week was bearish for EURUSD as it opened at 1.1044 and closed at 1.0941. The U.S. dollar appeared particularly strengthened in the first week of the new year. The labor market as expressed by the new job positions (NFPs) created in December was positive. Manufacturing and services, however, were not particularly encouraging, which has put markets on second thoughts about the Fed’s future moves. There has been a strong impression that the Fed will start cutting interest rates in the first quarter of the new year, but that was not made clear by the Fed’s announcement of minutes we saw last Wednesday. Maybe the markets have overestimated the Fed’s plans. On the other hand, the resurgence of inflation in the Eurozone clearly raises concerns that should logically strengthen the euro, but overall, the strength of the dollar prevailed. The PMI indicators in the Eurozone remain below 50 indicating that the European economy is still weak. Sell positions is our selection for the current week.

GBPUSD (Great Britain Pound – US Dollar)

Neutral was the last week for GBPUSD, as it opened and closed around 1.2720. The United Kingdom maintains higher inflation than the United States although the latest de-escalation has been great. This gives the impression to the markets that the Bank of England will delay cutting interest rates relative to the Fed. Thus, although the U.S. dollar strengthened significantly last week, the exchange rate was unable to develop a downward trend. This week the announcements of inflation in the United States dominate the economic calendar. But the UK also has major announcements on Friday that include GDP, industrial production, manufacturing, and the trade balance. If the U.S. dollar continues to strengthen, it will be very difficult for sterling to resist any longer, and therefore we will choose sell positions this week.

USDJPY (US Dollar – Japanese Yen)

USDJPY was strongly bullish last week, opening at 140.82 and closing at 144.55. It was the strongest upward reaction for the pair, on a weekly level, in several months. Many factors advocated this vigorous movement. First, the great strength of the U.S. dollar as it outperformed almost all its main competitors. An important factor was also the rise in bond yields, with the yield on the U.S. 10-year bond exceeding 4% again. The Japanese currency was also weak. On Thursday, Kazuo Ueda, the Governor of the Bank of Japan, expressed his aspiration for a balanced increase in both wages and inflation within Japan’s economy. These statements were interpreted as dovish by the markets. The investment community, however, expects that soon enough the Bank of Japan will change monetary policy, and this has been reflected in the sharp fall in the exchange rate since mid-November. This trend has not yet been altered and so we will choose sell positions this week.

EURJPY (Euro – Japanese Yen)
Heavily bullish was last week for EURJPY which opened at 155.54 and closed at 158.22. The resurgence of inflation in the Eurozone has put markets on second thoughts about when the European Central Bank will start cutting interest rates. Last month’s inflation was announced at 2.9%, which is a significant increase. The markets had some hopes that the rate cuts could start in the spring, but this is now doubtful. On the other hand, statements by the head of the Bank of Japan were in a dovish direction, which significantly weakened the yen. Sooner or later, however, the Bank of Japan will be forced to change its monetary policy so the country’s currency will strengthen. We may try sell positions this week.

EURGBP (Euro – Great Britain Pound)

Last week was bearish for the EURGBP, as it opened at 0.8674 and closed around 0.8602. Sterling took a clear lead over the euro last week even though rising inflation in the Eurozone should lead to a strengthening of the euro. Inflation in the UK seems to be decelerating rapidly but remains well above the Eurozone’s inflation. This leads markets to think that the European Central Bank will start cutting interest rates earlier than the Bank of England. It is this impression that has driven the exchange rate into the price range of 0.86. However, the latest alignment of the inflation between the UK and the Eurozone may balance the EURGBP so we’ll prefer buy positions this week.

USDCAD (US Dollar – Canadian Dollar)

Bullish was the last week for USDCAD, as it opened at 1.3228 and closed at 1.3354. The exchange rate was pushed up by the robust strength of the U.S. dollar. Markets are having second thoughts about when the Fed will start cutting interest rates, and it looks as if the prevailing March session is beginning to be in doubt. This is the main cause that strengthened the U.S. dollar. The Canadian dollar has not been able to resist even the rise in oil prices should have helped it. Another cause was Canada’s weak labor market, as announced on Friday. Markets were expecting a balance of 13.5K jobs last month but this balance was announced close to zero. In addition to the major announcements of inflation in the United States, there are also announcements of imports and exports to Canada. The U.S. dollar strength may carry on so we may try buy positions this week.

USDCHF (US Dollar – Swiss Franc)
The USDCHF had an upward course last week as the opening price was at 0.8394 and the closing price was at 0.8501. Given that there was a lack of major economic news and announcements from the Swiss economy, this uptrend should be attributed mainly to the strong recovery of the U.S. dollar. The only relatively significant announcement for Switzerland was the SVME index for manufacturing which was announced slightly above market expectations. The dollar has returned to strength after many declining weeks as markets are beginning to question whether the Fed will begin its reductions in interest rates too early. This week is dominated by inflation announcements in both the United States and Switzerland. It is not excluded that the upward reaction for the dollar will continue and so we prefer buy positions this week.

AUDUSD (Australian Dollar – US Dollar)

Bearish was the last week for AUDUSD, which opened at 0.6808 and closed at 0.6712. The significant strengthening of the U.S. dollar was the main reason for this fall in the exchange rate. Australia’s economic calendar had little to contribute last week. China, which is usually closely linked to Australia’s currency, had a stronger manufacturing picture, according to the Caixin PMI indicator. Markets were expecting a price of 50.4 while the actual price was 50.8. This may have prevented the exchange rate from falling further. A slight rebound we saw on Friday after the United States labor market announcement. In addition to the announcements of the U.S. inflation that will be the most decisive for the exchange rate this week, markets will pay great attention to the announcements of Australian inflation and the trade balance as well. We may try sell positions this week.

Bitcoin

Last week, Bitcoin was bullish and closed at $43,944 with profits of 4%. This week holds exceptional significance because of the deadline for the approval of a Bitcoin spot ETF. It marks the culmination of years of anticipation by investors for the U.S. Securities and Exchange Commission to approve a Bitcoin ETF. Analysts anticipate that the decision on the Bitcoin spot ETF will be announced either late Tuesday or on Wednesday. This critical event could introduce unprecedented volatility in the market. The previous week though was positive to this expectation since there was a remarkable uptrend. As per the news from the traditional markets, on Thursday, the Fed is set to release December’s inflation figures. Should the actual inflation number be equal to or lower than November’s figure, it could suggest that the Fed’s strategy of maintaining higher interest rates for an extended period is effective. Conversely, if the inflation rate aligns with the forecast and rises, it would reinforce the Fed’s hawkish position. Markets have already taken for granted the SEC approval on the Bitcoin ETF so any possible surprise will be on a downturn. We may try short 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.