01/04/2024

General Comment

Last week, the United States confirmed that its economy is expanding healthily, even with high interest rates, as the latest revision of the Q4 Gross Domestic Product indicated a 3.4% annual growth rate. However, Federal Reserve officials appear more cautious regarding the interest rates. Governor Christopher Waller on Wednesday stated that the Fed is not in a rush to reduce the policy rate. His rationale is that recent data indicates the need for the central bank to prolong its current restrictive monetary policy to ensure inflation moves back to a sustainable 2% path.

As per the economic results, In February, the US reported a 1.4% month-on-month increase in Durable Goods Orders, surpassing expectations. Additionally, on Friday, the United States released the Personal Consumption Expenditures. According to the report, the core PCE Price Index, which excludes the volatile food and energy sectors, climbed 2.8% on a yearly basis, aligning with analysts’ predictions, and the monthly figure was also in line with expectations at 0.3%. It was another indication that the inflation remains under control.

According to the FedWatch tool, the probability of interest rates remaining unchanged by the Fed in May is approaching 96%. The dominant rate cut scenario continues to be June with the probability being consistently above 60%.

As per the Eurozone, European officials continue to hint at a potential interest rate cut in June. The news of economic announcements in the Eurozone remained at low levels last week since there was also the Holy Week of the Easter period that reduced interest in the markets.

Equity markets in the United States were mixed, with the SP500 index strengthening and the NASDAQ100 index taking some losses. European stock indices continued their upward trend. The U.S. dollar rose for the third week in a row against its main rivals, confirming that it remains on the throne of the currency markets. Commodity markets also had strong gains, with gold, oil, and copper performing notable gains (especially gold). As for the bond market, the fluctuations were small with the yield on the U.S. 10-year bond closing the week around 4.21%. Finally, after two corrective weeks of losses, Bitcoin and most cryptocurrencies returned to their upward trend.

The interest of the week that has just begun will turn mainly to the announcement of the labor market in the United States on Friday (NFPs). Strong labor market results might give the Fed the comfort of keeping interest rates high for longer. But on the other hand, it will give a strong signal that the United States economy remains resilient. The announcement of inflation in the Eurozone on Wednesday is also important, while the markets are expected to monitor various speeches of Fed executives during the week.

SP500

The US SP500 index was bullish last week as it closed at 5,254.34 points and profits of 0.39%. In the fourth quarter, the growth of the U.S. economy exceeded expectations, driven by strong consumer spending. The US Bureau of Economic Analysis announced that the country’s GDP expanded at an annual pace of 3.4% in the fourth quarter, according to its final assessment released on Thursday. This represents an upward revision from its prior estimate of a 3.2% real GDP growth. The health of the labor market was further demonstrated by favorable initial jobless claims figures. The weekly data released on Thursday indicated that there were 210K initial jobless claims for the previous week. This figure surpassed market predictions of 215K. Good news came from the inflation results as well. The U.S. inflation, measured by the Personal Consumption Expenditures Price Index, rose to 2.5% year-on-year in February, aligning with market expectations and slightly surpassing January’s figure. Jerome Powell during a conversation at the Macroeconomics and Monetary Policy Conference held in San Francisco was cautious regarding the Fed rate cuts as he underlined that lowering interest rates prematurely could cause significant disruption and given the strength of the economy, there is no immediate need to reduce rates. However, the prevailing rate cut scenario remains the case of June and markets seem comfortable with this idea so we prefer long positions for one more week.

DAX40

The German DAX40 index was bullish last week, closing at 18,492.49 points, with profits of 1.57%. No end to this crazy rally of DAX40 which has eight consecutive bullish weeks with total profits of 9.30%. The impressive fact is that this happens even if Germany announces negative economic results. Consumer confidence remains well below zero and retail sales dropped in February by 2.7%. The unemployment rate remained unchanged at 5.9% which is a high figure for the German data. It seems that the German stock markers have strong support from two other factors though. The Chinese economic recovery favors German exports as China is a big consumer of manufacturing products made in Germany. China shows signs of growth as can be indicated through the latest PMI results. A second reason has to do with the ECB and possible rate cuts. Investors closely monitor the commentary from the European Central Bank. If there’s backing for a rate cut by the ECB in June, this could potentially boost demand for stocks listed on the DAX40. In the current week, the CPI in the Eurozone will be announced and the result may be critical for the ECB’s future actions. PMI indicators, Eurozone retail sales, and unemployment rate are also important upcoming results. We may try long positions for one more week.

FTSE100

The British FTSE100 index moved heavily upward last week, closing at 7,964.90 points, earning about 0.47%. The FTSE 100 had one more profitable week reaching a price that we had not seen since the February of 2023. A significant factor in the short-term trend has been the weakness of the sterling, yet the outlook for long-term growth appears positive as international fund flows are returning to the UK markets, buoyed by a more optimistic view of the UK economy. Last week the current account of Q4 2023, the GDP in the same period, and the total business investment had decent results. The sterling performed some losses mainly due to some statements of Catherine Mann (Bank of England policymaker) who appeared hawkish enough by stating that the markets may have overestimated the number of possible rate cuts in the current year. The breakout of the 8,000 points may be a challenge for FTSE100 as it is a strong resistance so we may try short positions this week.

Gold

The previous week was heavily bullish for gold, with the next month’s futures closing at $2,238.4 and profits of 3.63%. Gold has surged to unprecedented levels, with forecasts suggesting further uptrends fueled by central banks’ speculations on their future actions. In light of easing inflationary pressures, traders are actively speculating on the likelihood of a rate reduction by the U.S. Federal Reserve. Traditionally, gold prices exhibit an inverse relationship with interest rates, rendering them more attractive during periods of declining rates. China’s central bank has ascended as the leading buyer of gold, spurred by robust individual investments. In addition to institutional purchases, retail activity has bolstered gold prices further. China dominates retail gold transactions, while India’s substantial consumer demand, particularly during the wedding season, remains a pivotal driver in the market. Weddings alone cater to nearly half of the annual demand for gold in India. The eyes of the markets will mainly be on the U.S. NFPs on Friday and the Eurozone inflation announcement on Wednesday. Next week is more critical as there’s the announcement of the U.S. inflation and the FOMC on April, 10. The rise of gold prices during the last 1.5 months was very sharp and we believe that we may see correction for technical reasons, mostly. We may try short positions this week.

US Oil

Last week was bullish for oil with the next month’s futures closing at $83.17, with profits of 3.15%. China’s expected economic recovery has given extra points to the oil prices lately, as it remains the biggest oil consumer in the world. The latest data from China, mainly from the manufacturing area, shows that this recovery is possible enough. An important development was the rise in U.S. oil stocks: American Petroleum Institute weekly crude oil stocks rose by 9.34 million barrels vs -1.51 million barrels in the previous week. Concurrently, a decrease in the number of oil rigs (Baker Hughes Rig Counts were 506 last week vs 509 in the previous one) also played a crucial role, suggesting a possible decrease in future production, leading to a scenario of tighter supply. Moreover, the adjusted U.S. GDP growth rate of 3.4% indicates a more robust economy, potentially resulting in higher oil consumption. Two other factors complete the oil price landscape in this period; OPEC’s decisions and the Ukrainian war. OPEC’s continued role in supporting oil prices through production cuts is significant. The market is keenly awaiting the upcoming OPEC meeting for any potential changes regarding oil production. As per the war between Russia and Ukraine, the focus is on attacks against Russian oil infrastructures, which has heightened worries about potential oil supply interruptions. It’s difficult to have a clear view in such a complex landscape but we may try short positions this week.

EURUSD (Euro – US Dollar)
Last week was mildly bearish for EURUSD as it opened at 1.0807 and closed at 1.0792. The third-in-a-row rise in the U.S. dollar also brought the third-in-a-row fall for the exchange rate. The U.S. Dollar began the week on a weaker note but began to climb higher from Tuesday and on, finally gaining significant momentum late Thursday following hawkish remarks from Fed officials. The macroeconomic results of the United States, such as fourth quarter GDP, durable goods orders, and personal consumption expenditures, proved for another week that the U.S. economy is in the direction of strong growth while inflationary pressures are diminishing. On the other hand, the Eurozone situation does not change much with the prevailing rate cut scenario being the month of June. There was no other major news for the Eurozone economy last week. The current week is of special interest mainly due to the announcement of the United States labor market on Friday but also inflation in the Eurozone on Wednesday. If the U.S. dollar’s strength continues, the exchange rate will likely drop lower toward the critical support close to 1.07. We may try sell positions for one more week.

GBPUSD (Great Britain Pound – US Dollar)

Slightly bullish was the last week for GBPUSD, as it opened at 1.2592 and closed around 1.2614. Sterling was able to resist the strength of the US dollar for two main reasons. On Tuesday, Bank of England policymaker Catherine Mann told Bloomberg TV, that “I think they’re pricing in too many cuts, that would be my personal view”. It was a clear hawkish indication to the markets that the Bank of England is not going to cut interest rates easily in the near term. Another reason for sterling’s strengthening was the positive results that the UK announced in the week. The current account was better than market expectations for the fourth quarter of 2023. During the same period, GDP in the UK was slightly negative, but this was something the markets had already predicted and somehow it had been consumed. The PMI indicators for the UK are the only major economic announcement of the week. Together with the announcement of the United States labour market (NFPs) and of course the market estimates for central banks, they will be the causes for the trend and volatility of the exchange rate. We will prefer sell positions this week.

USDJPY (US Dollar – Japanese Yen)

USDJPY was neutral last week, opening and closing around 151.30. There has been a balance in the exchange rate despite the continued strength of the U.S. dollar. The recent rate hike by the Bank of Japan does not appear to have convinced markets of the bank’s intentions to continue aggressively. Statements by officials from the Central Bank of Japan, including chairman Kazuo Ueda, were quite cautious, avoiding aggressive messages and lowering expectations. On the other hand, however, the exchange rate has reached several years ‘ highs and this fact creates overbought conditions for the USDJPY. Given that bond yields did not fluctuate much last week, the balance at the exchange rate was maintained more for technical reasons. On Japan’s economic announcements, inflation remained unchanged at 2.6%, with negative results for industrial production and unemployment. Trusting that JPY may weaken further, reflecting the disappointment of the markets, we may try buy positions this week.

EURJPY (Euro – Japanese Yen)
Bearish was last week for EURJPY which opened at 163.56 and closed at 163.22. The euro is not enjoying its best days as the Eurozone’s economic results remain negative and nothing has changed in relation to the markets ‘ belief that the European Central Bank will cut interest rates, as the dominant scenario next June. Concerns and nervousness are being manifested in the markets and by the Bank of Japan even though there has been a rise in interest rates recently. The bank’s cautious stance and restrained statements do not allow for much optimism about aggressive policy in the near future. However, the yen has strengthened but this is mainly for technical reasons since compared to other major currencies it has reached multi-year lows and therefore there are reactions. Considering that these reactions are weak so far, we prefer buy positions this week.

EURGBP (Euro – Great Britain Pound)

Last week was bearish for the EURGBP, as it opened at 0.8567 and closed at 0.8544. Both the euro and sterling have slumped lately in the face of the great strength of the U.S. dollar. Markets are trying to estimate the exact period when central banks (the European Central Bank and the Bank of England) will start reducing interest rates. But last week some statements from the Bank of England gave sterling more points. On Tuesday, speaking to Bloomberg TV, Bank of England policymaker Catherine Mann gave a distinct hawkish signal to the markets, indicating that the Bank of England does not intend to reduce interest rates readily in the short term. Keeping in mind the significant support close to 0.85, we will choose buy positions this week.

USDCAD (US Dollar – Canadian Dollar)

Bearish was the last week for USDCAD, as it opened at 1.3597 and closed at 1.3634. The Canadian dollar bypassed the strength of the U.S. dollar and so the exchange rate fell after two consecutive upward weeks. This has been helped by the strengthening of oil prices since oil usually has a positive correlation with the Canadian dollar. The Bank of Canada declared on Tuesday that there is an urgent need for businesses to ramp up their investments to boost productivity, which would help shield the economy from inflationary pressures. “I’m saying that it’s an emergency – it’s time to break the glass,” stated Senior Deputy Governor Carolyn Rogers during a speech to a business audience in Nova Scotia. Rogers mentioned that it’s premature to discuss potential timings for rate reductions, without specifying a timeline for any cuts, indicating a hawkish stance that helped the CAD. Canada also had positive macroeconomic results as the country’s GDP in January strengthened above market expectations. We prefer buy positions this week, considering the greenback can prevail again.

USDCHF (US Dollar – Swiss Franc)
The USDCHF was bullish last week as the opening price was at 0.8970 and the closing price was at 0.9007. The exchange rate was clearly affected by the third week in a row of the U.S. dollar’s strength and rose above 0.90 for the first time since last November. The Swiss KOF Leading Indicator fell slightly in March as markets gave more footing to statements coming from the Swiss National Bank. Swiss National Bank Vice President Martin Schlegel, on Wednesday, restated the SNB’s longstanding view concerning the Swiss franc, emphasizing that the central bank does not aim for a specific exchange rate, as reported by Bloomberg. This week in addition to the announcements on the United States economy that we saw above, the announcement of inflation in Switzerland is also important. We may try buy positions for one more week.

AUDUSD (Australian Dollar – US Dollar)

Neutral was the last week for AUDUSD, which opened and closed around 0.6515. The exchange rate was in equilibrium even though the U.S. dollar showed evidence of strengthening and recovering. In Australia, recent economic indicators disclosed for the week showed that monthly inflation fell short of expectations, and retail sales also did not meet predictions. The Australian Bureau of Statistics revealed that in February, retail sales experienced a modest increase of 0.3%, falling below the anticipated growth rate of 0.4% and the previous figure of 1.1%. As the economy starts to exhibit slowdown signs, it has heightened anticipation for possible interest rate reductions by the Reserve Bank of Australia in the latter part of 2024. This naturally gives an edge to the Australian dollar since, for the United States and the Fed, June remains the most likely rate-cut scenario. There is, of course, the expectation of a recovery in China’s economy which has traditionally favored Australia and its currency since the two economies are closely linked. We may try buy positions this week.

Bitcoin

Last week, Bitcoin was bullish and closed at $71,285 with profits of 6.10%. It was a clear and dynamic response to the losses of the two previous weeks. As long as the global economies remain robust with low probabilities of recession or hard landing, risk-on assets such as cryptocurrencies are favored. This positive sentiment was further strengthened by the expectations of interest rate cuts by the major central banks during the next few months. Besides the market sentiment, the upcoming Bitcoin halving is something that traditionally favors the prices of Bitcoin. According to the Halving Countdown tool (https://www.nicehash.com/countdown/btc-halving-2024-05-10-12-00), there are 20 more days before this halving takes place. Another factor that the crypto community focuses on in the current period is the case of the SEC approving the Ethereum ETF applications with a deadline in May. After the approval of the Bitcoin ETF applications markets will welcome a new possible approval of the Ethereum as well. Many investors prefer regulated markets with established counterparties to invest in cryptos. Long positions is our selection in the current 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.