11/03/2024

General Comment

Central bank decisions remain at the forefront of financial markets, especially as we approach summer. Fed chief Jerome Powell in a testimony last week to Congress conveyed a cautious optimal outlook, indicating that interest rates may have reached their zenith. He emphasized the desire for greater assurance that inflation steadily returns to the 2% target before easing monetary constraints. Powell also dismissed concerns over imminent recession risks, without specifying a date for potential rate reductions, yet hinting at their likelihood within the year.

The European Central Bank maintained its monetary policy stance, holding interest rates steady for the fourth straight meeting. In addition, the ECB updated its forecasts, revising growth and inflation predictions downward. President Christine Lagarde and her team indicated a path towards potential rate reductions later in the year, acknowledging significant progress in reducing inflation. The most likely reduction scenario for the Eurozone remains for next June.

On the economic results, for another month the United States labor market exceeded market expectations. In February, 275K new jobs were created in the United States, while markets expected 200K. The other results about the United States, however, were not so positive. The PMI Services indicator fell last month while the sign of factory orders was negative. The other indicators measuring unemployment (JOLTS, ADP) also found themselves below market expectations.

The economic picture in the Eurozone was somewhat better as shown in last week’s announcements, as GDP which was unchanged relieved markets after avoiding recession. Even more positive was the picture of China, as imports, exports, and trade balance skyrocketed, and inflation which has been in trouble lately as it has been in negative numbers soared from -0.8% in January to 0.7% in February.

Most equity indices in Europe and the United States continued their upward trend. Gold continued its impressive rally upward, while oil prices slumped. For the third week in a row, bond yields fell with the yield on the US 10-year bond closing just above 4.07%. The U.S. dollar suffered significant losses against its main rivals, while other higher-risk currencies such as the euro, the sterling, and the Australian dollar rose significantly. Finally, the rally in Bitcoin and most cryptocurrencies continued in an impressive way. Bitcoin surpassed $70K for the first time in its history.

Markets are looking forward to the announcement of inflation in the United States on Tuesday. There is also an inflation announcement on Thursday, as far as the producer price index is concerned. These announcements may prove decisive in relation to the Fed’s future decisions to cut interest rates. Other standout economic announcements through the week include industrial production in the Eurozone, Japan’s GDP, and foreign direct investment in China.

SP500

The US SP500 index was bearish last week as it closed at 5,123.69 points and loss of 0.26%. SP500 was keeping a positive sign but on Friday there was a significant correction that led to weekly losses. The jobs report for February depicted a solid economic landscape. With 275K new jobs, the figures exceeded forecasts, suggesting economic robustness. Nevertheless, a surprise uptick in the unemployment rate from 3.7% to 3.9% and weaker wage increases may indicate slowing inflation, which could influence the Fed’s interest rate policies. Besides Jerome Powell’s testimony in Congress, many other Fed officials like Mester and Williams appeared to be dovish but the SP500 could not take advantage of it. Most likely, the recent rally guided many investors to profit-taking by the end of the week so the correction had a technical leg as well. Maybe the negative economic results of the last few days helped in this direction. ISM Services PMI was announced at 52.6 vs 53 which markets were expecting. Factory orders dropped in January by 3.6% and job position metrics (ADP employment change, Job Openings and Labor Turnover Survey, and initial jobless claims) also could not meet expectations. The focus of the current week is on the inflation announcement on Tuesday. An inflation de-escalation could bring back the positive sentiment in the markets and we may try long positions this week.

DAX30

The German DAX40 index was bullish last week, closing at 17,814.51 points, with profits of 0.45%. Three major reasons caused a new all-time high for DAX40. The first one is the perception of the markets that the ECB will start soon (maybe in June) to decrease the interest rates. Until now there has been no important recession in the European economies so the rate cuts will be more than welcomed by the markets. The second reason has to do with the recovery signs in China. Germany has big export numbers in China and a recovery of the Chinese economy will favor the German economy as well. The third reason is the improved outlook of the German economy as it is expressed through last week’s announcements results. HCOB services and composite PMIs were improved and the German trade balance was announced well above market expectations, above 27 bn euros. Industrial production rose by 1% last month and only the factory orders were announced below market expectations. The current week opened with strong bearish pressures as losses followed the selling in the US on Friday as stocks came off record highs after the jobs report. Things do not justify all-time high prices and a correction cannot be ruled out so we may try short positions this week.

FTSE100

The British FTSE100 index moved downward last week, closing at 7,659.70 points, losing about 0.30%. Markets believe that the Bank of England has still a long way to go before cutting interest rates. There has been progress in inflation reduction but still, the inflation figures are high. Under these circumstances, the FTSE100 completed three consecutive weeks of losses. Last week there were no important economic data for the UK economy but in the current week, things are different. The UK’s announcements of the unemployment rate, manufacturing/industrial production, and trade balance statistics are key economic indicators that provide insights into the country’s economic health. Early this week, Elliott Investment Management is abandoning the battle for the acquisition of the British electronics group Currys. Having seen its offers repeatedly rejected, the American investment firm announced today, Monday, that it has decided not to submit a new improved proposal. In the wake of the news about the withdrawal of interest, Currys’ stock fell 10% on the London Stock Exchange. Short positions is our selection for the current week.

Gold

The previous week was bullish for gold, with the next month’s futures closing at $2,185.5 and profits close to 4.30%. Gold prices had an impressive rally that we had not seen on a weekly level in many months, reaching all-time highs. Jerome Powell, the head of the Fed, has hinted at potential future reductions in interest rates, though the exact timing remains unclear. Also, last week saw significant fluctuations in bond yields and the value of the U.S. Dollar. The U.S. 10-year bond yields fell significantly while the U.S. dollar dropped too. These market movements have enhanced the attractiveness of gold as an investment option. Recent labor market data from the U.S., which highlighted an increase in the unemployment rate and modest wage growth amidst strong job creation, has fueled expectations of a Fed rate cut by June. This anticipation has had a positive impact on the gold market. The current week’s focus will be on the inflation announcement on Tuesday. This important announcement, combined with the latest rally in gold prices makes us think that we should stay out this week.

US Oil

Last week was bearish for oil with the next month’s futures closing at $78.01, with losses of more than 2.45%. The main reason was the lackluster demand from China. In the first two months of the year, China’s crude oil imports dropped approximately 5.7% to 10.8 million barrels per day, down from 11.44 million barrels per day in December, as reported by S&P Global Commodity Insights. “The big burst of China demand recovery continues to just not pan out and without it, it’s going to be hard for these prices to sustain themselves and recover further and get WTI back above 80 bucks,” John Kilduff, founding partner at Again Capital, told CNBC. On the other hand, OPEC+ has committed to maintaining a substantial reduction in oil production through the second quarter of 2024. Spearheaded by Saudi Arabia and Russia, the coalition’s strategy involves Saudi Arabia continuing with its cut of 1M barrels per day and Russia agreeing to a further decrease of 471K barrels per day. Also, Jerome Powell, head of the Fed, has suggested the possibility of lowering interest rates in 2024, contingent upon the direction of inflation. News from China and the U.S. inflation announcement will be (most likely) the key factors from oil price movements in the next few days and we’re keen to try short positions this week too.

EURUSD (Euro – US Dollar)
Last week was bullish for EURUSD as it opened at 1.0835 and closed at 1.0937. The weakness of the U.S. dollar in recent years. The dollar has had its biggest weekly decline in the past three months. The closer we get to the Fed’s reduction decision in interest rates, the dollar is getting weaker. The most likely meeting of interest rate cuts continues to be in June, while in recent days the scenario of May has also strengthened. Markets do not expect an interest rate cut by the European Central Bank before June and this difference boosts EURUSD upwards. The economic results of the Eurozone announced last week were decent and this was another reason for the strengthening of the euro. PMI indicators strengthened significantly last month, while there was also a marginal increase in retail sales. European GDP remained unchanged for the last quarter of 2023, and we had a slight rise in employment. The exchange rate is beginning to develop an upward momentum, which may be enhanced if there is a clear breakout of 1.10. Focus will be put on the inflation announcement in the USA. We may try buy positions for one more week.

GBPUSD (Great Britain Pound – US Dollar)

Bullish was the last week for GBPUSD, as it opened at 1.2649 and closed around 1.2858. Driven by the weakness of the U.S. dollar, the exchange rate has managed to climb to levels not seen since July 2023. Markets expect the Fed to cut interest rates in the coming months, with the most likely scenario set in June. The rate cut scenario is likely to be delayed in the UK as inflation continues to be at particularly high levels. It is a very difficult scenario for the Bank of England to cut interest rates before the Fed. This week contains very important announcements for both economies. The announcement of inflation in the United States stands out, of course. The UK announces the unemployment rate, manufacturing/industrial production, and trade balance. Based on the technical analysis, there is room for the exchange rate to move further upward, towards the range of 1.30, and for this reason, we will prefer buy positions this week.

USDJPY (US Dollar – Japanese Yen)

USDJPY was heavily bearish last week, opening at 150.01 and closing at 147.05. The weakness of the U.S. dollar has been matched by a large decline in bond yields that traditionally affect the exchange rate. The Japanese currency has also strengthened, mainly based on statements by executives from the Bank of Japan. The head of the Bank of Japan said last week that it is entirely feasible to pursue a strategy of exiting from economic stimulus measures while aiming to reach a 2% inflation target. These statements were interpreted as hawkish by the markets which now estimate that the Bank of Japan will raise negative interest rates in the next 1-2 months. This week, investors will have one eye on the Bank of Japan and the other on the United States ‘ inflation announcement. We may try sell positions.

EURJPY (Euro – Japanese Yen)
Bearish was last week for EURJPY which opened at 162.53 and closed at 160.87. The euro was relatively strong last week after the European Central Bank did not forecast a rate cut before June. The economic results of the Eurozone were also decent. The exchange rate, however, was unable to resist the strong momentum of the Japanese currency after a series of statements from Bank of Japan officials that negative interest rates and very loose monetary policy are about to change in the next months. An obstacle to the further decline of the EURJPY is the significant support to 160 but this will not prevent us from choosing sell positions for one more week.

EURGBP (Euro – Great Britain Pound)

Last week was bearish for the EURGBP, as it opened at 0.8557 and closed at 0.8506. Higher-risk currencies such as the euro and sterling strengthened last week after economic sentiment was positive. However, sterling is currently picking up more points as high inflation in the UK does not allow thoughts of a rate cut by the Bank of England for the moment. On the contrary, this scenario is visible for the Eurozone and is positioned as a possibility in June. There is strong support just below 0.85 which will make it difficult for the rate to fall further but we will choose sell positions for one more week.

USDCAD (US Dollar – Canadian Dollar)

Bearish was the last week for USDCAD, as it opened at 1.3544 and closed at 1.3482. The downtrend of the U.S. dollar was a major reason for this downward move in the exchange rate. The move was not even affected by the large drop in oil prices, which typically has a strong correlation with the Canadian dollar. The Bank of Canada decided on Wednesday to leave interest rates unchanged at 5%. In its policy announcement, the Bank of Canada emphasized the necessity for more progress in consumer price indicators, considering it too soon to ease its current restrictive monetary policy stance. Bank of Canada chief Tiff Macklem said in the press conference that the Canadian Overnight Repo Rate Average pressures are not a sign of needing to end the monetary tightening early. These developments were interpreted by the markets as a no strong intention of cutting rates soon enough. With no major announcements on Canada’s economy in the current week and so the eyes of markets will turn to the announcement of inflation in the United States. We may try sell positions this week.

USDCHF (US Dollar – Swiss Franc)
The USDCHF was bearish last week as the opening price was at 0.8819 and the closing price was at 0.8776. The exchange rate followed the course of the U.S. dollar, which fell last week. So, we saw the first corrective week after five consecutive weeks of rising. The drop could have been even bigger but the announcement in Switzerland helped the Swiss franc. More specifically, inflation in Switzerland last month was announced at 1.2%, slightly above the 1.1% that markets had expected. The unemployment rate was unchanged at 2.2%, indicating economic stability. The United States inflation announcement on Tuesday is the key event for the current week and if it signals a new weakening of the dollar, we will probably see the exchange rate swing toward the 0.8550 range in a reasonable time. We prefer sell positions this week.

AUDUSD (Australian Dollar – US Dollar)

Bullish was the last week for AUDUSD, which opened at 0.6522 and closed at 0.6624. The weakness of the U.S. dollar is the main reason for this upward trend in the exchange rate. However, the Australian dollar had reasons to be boosted too. There have been hawkish statements from the Bank of Australia in the past period and the financial results announced this week have been encouraging. Australia’s GDP strengthened by 1.5% last quarter, surpassing market expectations. Positive news was also from China’s economy which usually affects the Australian dollar. China’s imports and exports rose significantly last month, generating a boosted trade balance that topped $ 125 billion. Early on Saturday, it was also announced that the inflation in China was positive after several months. If this situation continues it is not excluded that we will see the exchange rate moving much higher even towards the resistance of 0.6870 and from this perspective, we will prefer buy positions this week.

Bitcoin

Last week, Bitcoin was bullish and closed at $69,026 with profits of 9.32%. Bitcoin had one more impressive week with new all-time highs as its price exceeded $70K for the first time in its history. This rally carries on this week too as the price of Bitcoin is currently above $71,5K. The echo of the Bitcoin ETFs still favors the crypto markets. BlackRock’s spot BTC-ETF, has successfully accumulated nearly 200,000 Bitcoins within two months, establishing itself as one of the world’s largest holders. Also, Bloomberg’s data indicates that Bitcoin miners established a new monthly record for energy usage, consuming a historic high. Based on an estimate from Coin Metrics, miners consumed a record-breaking 19.6 gigawatts of electricity last month, which is a significant increase from the 12.1 gigawatts used during the same time in 2023. CoinGape’s calculations indicate this represents a surge of more than 61% in energy consumption. The good news doesn’t stop here though: an appeals court in the United States has reversed a decision that had previously dismissed a collective lawsuit brought by investors against the cryptocurrency exchange Binance. Per a filing on March 8 with the United States Court of Appeals for the Second Circuit, a decision made by the district court to reject the investors’ allegations regarding lack of transparency in Binance’s sale of supposed securities has been overturned, siding with the investors. The uptrend is super strong so we may try long positions for one more 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.