22/01/2024

General Comment

Equity markets in the United States continue their upward rally. High interest rates and geopolitical turmoil do not seem to be dampening the markets and investment sentiment remains at very positive levels. Both the SP500 and NASDAQ100 closed very close to the week’s highs, marking a new record high. The confidence that markets have formed that the Fed will start cutting interest rates soon enough helps in these developments. A few days ago, the probability of starting a cut in interest rates from March was more than 77%, but it is now moving slightly above 50% while remaining the base scenario. The United States ‘ macroeconomic results announced last week were also positive. Retail sales of the previous month strengthened markedly, the same property market as regards new building permits, while the week ended with the announcement of the Michigan Consumer Sentiment Index with an impressive performance. Especially this performance made the markets run a rally in the last hours of the week.

In particular, equity markets in the United States have strong positive economic sentiment due to market expectations of additional growth through Artificial Intelligence. There was more positive news for the United States stock markets as we will see below.

In Europe, however, things are quite different. Most European equity indices were unable to follow the returns of their respective U.S. indices. Europe continues to have significant economic problems as reflected in the announcements we saw last week. Christine Lagarde, however, revealed that the European Central Bank plans to start cutting interest rates from next summer.

China’s economy remains at the heart of the markets, which seems to have yet to overcome its problems. China announced a 0.2% year-over-year decrease in new home prices for November, marking the fifth consecutive month of decline. Since May 2022, prices have largely been dropping, with only one instance of increase observed. This trend has raised concerns about the possibility of a severe economic downturn in China and its adverse effects on other significant global economies.

As far as the geopolitical landscape is concerned, concerns seem to be growing because the Houthis continue to attack while other countries occasionally strike, which intensifies fears that the crisis could spread. However, it seems that the situation at the moment at least is under control without this meaning that there are already no effects on international trade and commodity prices.

To sum up, the week was particularly positive for U.S. equity markets, while in Europe and Asia, there were intense corrective pressures. The signs in commodity markets were mixed, with gold falling while oil prices rose. Bond markets also closed bullishly the week, with the yield of the US 10-year treasury closing at 4.14% on Friday. As far as the currency market is concerned, the U.S. dollar was dominant and made significant gains against its main competitors. Finally, it continued for a second week the correction in bitcoin and most cryptocurrencies.

Particularly important is the week that has just begun regarding the expected economic news and announcements. In the United States GDP and personal consumption expenditures are announced. in the Eurozone, there is the announcement on interest rates to be followed by Christine Lagarde’s press conference. Markets do not expect a change in Eurozone interest rates though. The Bank of Japan’s interest rate announcement will also attract the eyes of the investing community.

SP500

The US SP500 index was bullish last week as it closed at 4,840 points and profits of 1.17%. The uptrend rally carried on for one more week, leading the SP500 to a new all-time high price. Very indicative is the fact that during the last twelve weeks, only one was bearish. The optimism is obvious and the market sentiment is heavily positive. Markets expect the interest rate cut to begin soon, most likely in March. After a long period of high interest rates, the macros do not point to a gloomy picture. Indicatively, last week’s economic data releases confirmed the resilience of the U.S. economy for one more time. Retail sales rose by 0.6% last month, industrial production rose by 0.1%, housing starts, and building permits exceeded by far the market expectations, and the Michigan consumer sentiment index was announced at the impressive 78.8 vs 70 that the markets estimated. Beyond the macros and the Fed, markets have a very positive view of the new hot thing which is the generative AI technology. Some researchers conclude that this new set of technologies may add a significant rise to the world’s GDP. Traders overlooked the increase in treasury yields, maintaining their attention on stocks related to artificial intelligence. This week marks the release of earnings reports for the previous quarter from major players in the Technology, Financial, Consumer Goods, and Consumer Services sectors. Some of these companies are Netflix, IBM, General Electric, Tesla, Intel, and Visa. It’s important to recognize that this earnings season is a vital time for investors to assess the recent performance of companies. There are also important economic announcements for the U.S. economy like the 2023 Q3 GDP on Thursday and the PCE on Friday. It’s not easy to go against this heavy uptrend so we may try long positions for one more week.

DAX30

The German DAX40 index was bearish last week, closing at 16,555 points, with losses of 0.90%. There was a clear divergence between DAX40 and the U.S. stock indices which shows that the markets have a much better view of the American economy. On Monday, the GDP growth released by the Statistisches Bundesamt Deutschland had a disappointing figure of -0.3%. The inflation remains significantly high and it was announced for December at 3.8%. The European Central Bank’s hawkish stance has also contributed, leading to the DAX targeting a decline for the week. German markets seem to worry a lot about the latest news from China. The deflation of the last period leads to a lower consumption and it means that the exports of German companies may suffer. DAX40 tried a bullish recovery on Friday after the big drop in the PPI but the week remained bearish. We’ll have a better idea about the situation of the German economy after the PMI releases on Wednesday for the manufacturing and services sectors. We may try short positions this week too.

FTSE100

The British FTSE100 index moved heavily downward last week, closing at 7,462 points, losing about 2.15%. The week was disappointing for the UK equity markets. The announcement of 4% inflation in December cut the high hopes that the Bank of England would align with the Fed and other major central banks and start cutting interest rates in the following months. Many analysts estimate that the UK will face a potential mild recession. The economic data released last week were also disappointing. Retail sales dropped by 3.2% in December (MoM), indicating a substantial decline – the most pronounced monthly decrease since January 2021. On Wednesday, the UK will release the PMI indicators for the manufacturing and the services sector and we’ll be able to understand more but we’ll prefer short positions for the current week.

Gold

The previous week was bearish for gold, with the next month’s futures closing at $2,026.5 and losses close to 1%. This bearish movement was impacted by circumspect comments from Fed officials. The statement from Fed Governor Christopher Waller advocating a careful strategy for rate reductions resonated with views shared by Chicago Fed President Austan Goolsbee and Atlanta Fed President Raphael Bostic. Both Goolsbee and Bostic stressed the importance of additional inflation data before contemplating rate changes, suggesting possible postponements in the expected rate reductions and influencing investor outlook. The impact of these statements was that the probability, according to FedWatch tool, for a rate cut in March, dropped from 77% to the price area of 50%. Over the week, the U.S. dollar performed significant profits. Simultaneously, the yield on the 10-year U.S. treasury had also an increase. This surge in treasury yields, coupled with a strengthening dollar, applied negative pressure on the prices of gold. This week, markets will put their focus on the U.S. announcements (GDP and PCE) as well as on the China economy. China is a big gold consumer and as we approach the Chinese New Year, we will see how the deflation in China will affect the gold consumption. We may try short positions this week.

US Oil

Last week was bullish for oil with the next month’s futures closing at $73.41, with profits of more than 1%. OPEC released its monthly market report on Wednesday and maintains a positive outlook on the growth of future oil demand, in stark contrast to the International Energy Agency, which foresees a more moderate demand. The economic deceleration and deflation in China have sparked inquiries regarding its prospective oil consumption. China is the world’s biggest oil consumer and the Chinese demand is a barometer for the global demand. As per the USA, the interplay among the dollar, Fed policies, and oil prices continues to be a principal driver in the market. An appreciating dollar renders oil costlier for those using other currencies, which could lead to a decrease in demand. Additionally, the interest rate decisions of the Federal Reserve are crucial, as they affect the overall economic landscape, thereby impacting the oil demand. The Energy Information Administration noted a significant reduction in U.S. crude oil inventories last week, close to 2.5M barrels. Finally, another factor that has affected oil prices lately, is the geopolitical conflicts in the Middle East and the Houthis attacks in the Red Sea. We believe that the projections of a lower demand due to economic issues will dominate over any possible supply fears so we prefer short positions this week.

EURUSD (Euro – US Dollar)
Last week was bearish for EURUSD as it opened at 1.0947 and closed at 1.0897. The main reason for this downward move was clearly the great strength of the U.S. dollar. There is a lot of optimism and a strongly positive investment sentiment about the United States economy. This is evident through the resilience of the U.S. economy, from recent announcements. A reduction in interest rates by the Fed shortly should logically weaken the dollar, but this does not happen for two reasons. The first has to do with the soundness of the U.S. economy as we have seen above, while the second reason is that similar interest rate cuts are expected from other central banks such as the ECB in the Eurozone. Reports on the Eurozone economy were not positive. Industrial production contracted by 6.8% in November. Inflation remained unchanged at 2.9% for December though. Important are the announcements and developments for the current week. The announcement of U.S. GDP and personal consumption expenditures dominates while markets await the ECB’s decision on interest rates and especially statements at the press conference that will follow. The strength of the U.S. dollar seems overwhelming at the moment so we will choose sell positions for one more week.

GBPUSD (Great Britain Pound – US Dollar)

Bearish was the last week for GBPUSD, as it opened at 1.2727 and closed at 1.2703. The US dollar was certainly very strong and we would expect the fall for the exchange rate to be bigger. However, the British sterling has resisted strongly since the inflation announcement helped in this direction. Inflation in the UK picked up last month, from 3.8% to 4%. This development was logical to make the markets believe the Bank of England is still long enough with high interest rates and any reductions will be delayed. These conclusions led to the strengthening of sterling. On the other hand, other economic announcements for the United Kingdom were not positive. The unemployment rate may have remained unchanged at 4.2% but the retail sales plunged 3.2%. The only notable announcements for the current week in the UK have to do with PMI indicators, so the US dollar and the United States announcements will be in the spotlight. We may try sell positions.

USDJPY (US Dollar – Japanese Yen)

USDJPY was strongly bullish last week, opening at 144.84 and closing at 148.09. The main factors affecting the exchange rate converged towards its rise. The U.S. dollar was strong mainly due to positive estimates and expectations for the U.S. economy. Bond yields also rose, which has a positive correlation with the exchange rate. Important reasons had also the Japanese currency weakened noticeably. Investors consider that the Bank of Japan might postpone its change from the extremely loose monetary policy because of the slower pace of wage increases. At the same time, producers are facing challenges in increasing the prices of goods and services at the factory level, owing to the weak demand. Under these developments, the interest rate announcement from the Bank of Japan next Tuesday is of particular importance. The inflation announcement on Friday is also important. These announcements combined with the United States announcements may keep volatility for the exchange rate high. We will choose buy positions for one more week.

EURJPY (Euro – Japanese Yen)
Heavily bullish was last week for EURJPY which opened at 158.61 and closed at 161.45. The euro had no particular reasons for strengthening, so this rise in the exchange rate should be attributed mainly to the weakness of the Japanese currency. As long as the Bank of Japan shows no signs of changing its very loose monetary policy and negative interest rates, the yen will weaken. Of course, we cannot rule out a sudden change of policy, and that is why we must be particularly careful when decisions on interest rates and monetary policy come from the Bank of Japan, as is happening next Tuesday. The likelihood of such a surprise remains small, but we should also take into account the interest rate announcement from the European Central Bank and conclude that volatility is likely to remain high. Buy positions is our selection for the current week.

EURGBP (Euro – Great Britain Pound)

Last week was bearish for the EURGBP, as it opened at 0.8585 and closed around 0.8575. British sterling had a lead against the euro mainly due to the announcement of inflation in the UK. Inflation in the UK persists at 4% and it doesn’t let markets conclude that the Bank of England may soon start cutting interest rates. By contrast, through Christine Lagarde and her speech last week, markets expect interest rate cuts in the Eurozone to start next summer. On the basis of these beliefs, the EURGBP had three consecutive weeks of decline, which cannot be ruled out that it can continue in the current week too. We may try sell positions.

USDCAD (US Dollar – Canadian Dollar)

Bullish was the last week for USDCAD, as it opened at 1.3401 and closed at 1.3428. The rise for the exchange rate in the week was much greater since it exceeded 1.35 by the middle of the week and then began corrective trends but could not change the positive sign. Canada’s inflation announcement was of great importance to the path of the exchange rate. Inflation was announced for last month at 3.4%, enough more than 3.1% in November but that price was within market expectations. This event combined with the strength of the U.S. dollar created a bullish rally for the pair. There was a series of negative announcements about Canada’s economy. Industrial production in December fell 1.5%. Retail sales also declined by 0.2%. Markets assessed the soaring oil prices as of more importance and the dollar of Canada performed a strong come-back. Believing in the U.S. dollar’s strength, 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 0.8514 and the closing price was at 0.8680. No doubt the exchange rate was visibly affected by the great strength of the US dollar last week. The U.S. economy is showing clear signs of strength and resilience, and so the dollar has regained much of its strength. On the other hand, the Swiss franc has weakened, mainly due to statements from the Swiss National Bank. Remarks from Thomas Jordan, the Chief of the Swiss National Bank, indicating that the Swiss franc’s strength will be a key factor in shaping the bank’s monetary policy, are posing challenges for any substantial recovery of the Swiss currency. This week, the US dollar will once again play a dominant role through the important economic announcements we have seen above. We prefer buy positions for one more week.

AUDUSD (Australian Dollar – US Dollar)

Bearish was the last week for AUDUSD, which opened at 0.6685 and closed at 0.6595. Of course, the US dollar has made a big contribution to this downward trend for the exchange rate. The confidence that the U.S. economy is resilient is a catalyst for a strong U.S. dollar. The Australian dollar also weakened. In December there was a sharply negative jobs balance of -65000 positions. This has raised concerns about the state of Australia’s economy. The weakness of the Australian dollar has also been a factor in China’s economy. There is strong concern worldwide about China’s economy as reflected in the Hang Seng Index, which is at a 4-year low. Strong concern also arises from the housing market in China and GDP, which has strengthened but not as much as markets had expected. Also, foreign direct investment fell 8% annually last month. All these considerations could drive the rate even lower and for that reason, we may try sell positions this week.

Bitcoin

Last week, Bitcoin was bearish and closed at $41,560 with losses of 0.37%. Over the last ten years, Grayscale, a major crypto asset management firm and issuer of Bitcoin spot ETFs, steadily increased its Bitcoin holdings, reaching an impressive net asset value of $30 billion earlier this month. However, a significant shift occurred on January 10, when the SEC approved Grayscale’s transition into an ETF. This marked a historic change as Grayscale, for the first time, began to systematically sell Bitcoin, and offloaded 60,000 Bitcoins. While it might appear straightforward that Grayscale’s sale of Bitcoin contributed to increased selling pressure, analysts offer a different perspective. They suggest that the downward movement in Bitcoin’s price could be primarily attributed to profit-taking actions by large wallet investors. The $40K price remains a crucial point for Bitcoin. It appears to have sustained as a support level, at least in the short term but early this week it has been approached so we will continue to prefer short positions.

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.