22/04/2024

General Comment

The decline in financial markets continued for the third week in a row, reflecting major concerns about recent geopolitical developments and the perception of central bank actions.

Israel is reported to have struck an Iranian air base near the city of Isfahan, with confirmation from US officials. The strike, a response to Iran’s attack last weekend on Israel, likely marks another escalation in the Middle East conflict, with the risk of broader hostilities becoming more apparent. Currently, Tehran is downplaying the incident, claiming there were no damages and denying any foreign origin of the attack. These developments certainly create concern in the markets since a possible conflict in the wider region could create disruption and a rise in oil prices, at a time that is already quite sensitive due to high inflation and high energy costs.

Increased inflation, especially in the United States, poses significant problems for central banks in relation to the expected reduction in interest rates. A few months ago, markets considered that the Fed could make several rate cuts this year, but the high inflation that persists has sapped expectations. According to Fed officials this week, the central bank will be cautious about such moves, focused on its 2% inflation target. Minneapolis Fed President Neel Kashkari and New York Fed President John Williams both indicated that even further rate increases could occur if inflation continues. Their position has altered market forecasts, greatly decreasing the odds of rate cuts soon: the probability of a cut in June dropped to 18.5%, in July to 45.5%, and a cut in September now appears more likely.

Leaving the United States economy and going to the Eurozone, things look quite different. European Central Bank President Christine Lagarde discussed Europe’s comparatively slow growth and the modest signs of economic recovery. She emphasized that the fight against inflation hasn’t ended yet. Lagarde stated that the ECB might ease monetary policy restrictions if inflation targets are achieved. She also mentioned that the ECB’s Governing Council hasn’t established a specific course for interest rates, highlighting that the inflation risks are balanced. Markets still believe that the prevailing scenario for interest rate cuts in the Eurozone is June.

The other major giant of the world economy, which is China, continues to raise concerns with the economic results it announces. Last week’s announcements presented a complex picture of the Chinese economy. While China’s 2024 Q1 GDP growth of 5.3% surpassed expectations and raised hopes for achieving the yearly growth goals, other critical economic indicators did not perform as well. Retail sales in March grew by only 3.1%, much lower than expected, indicating weak domestic demand. Similarly, industrial production increased by just 4.5%, below market forecasts, which suggests continuing difficulties in the manufacturing sector.

The correction in most major equity indices in Europe and the United States was significant. The US dollar has continued to strengthen against its main competitors, while the Japanese Yen continues to weaken. A slight recovery has had the currency of Europe. Bond yields continued their upward trend, with the yield on the U.S. 10-year bond strengthening for the third week in a row and closing near 4.62%. A strong rally is held by several commodities such as gold and copper; on the contrary, last week oil prices de-escalated. Finally, Bitcoin and most cryptocurrencies, while they had quite high volatility, did not perform any particular changes or trends.

The week that has just begun may trigger new scenarios in relation to the Fed and the path of interest rates. On Thursday and Friday, personal consumption expenditures are announced, while on Thursday, U.S. GDP for the first quarter of the year is announced. The course of inflation and the state of the U.S. economy will provide fresh food for thought about the Fed’s future moves. Other announcements likely to be taken under consideration from the markets include the announcement of the interest rate decision in Japan, the PMI indicators for the world’s leading economies, and the inflation announcements in Japan and Australia.

SP500

The US SP500 index was strongly bearish last week as it closed at 4,967.62 points and losses of 3.06%. Tensions in the Middle East continue to dominate market concerns. Recent escalations between Iran and Israel have been somewhat contained following earlier confrontations this month. Any further escalations could potentially drive higher oil prices which may broaden economic impacts, contributing to inflationary pressures which could cause interest rates to stay elevated for an extended period. The cut date of the US interest rates is currently ambiguous, with some Fed officials suggesting even potential rate hikes if inflation persists. Market expectations are leaning towards a rate cut at the Fed’s July or September policy meeting, although the possibility of this occurring in November is also being considered. Besides the Fed and the interest rates, markets also paid attention to the companies’ earnings announced last week. The initial phase of the SP500’s first-quarter earnings season has shown mixed results. To date, 14% of the S&P 500 companies have reported their Q1 2024 results, with 74% of them posting Earnings Per Share figures that topped estimates. This performance matches the 10-year average but falls slightly below the 5-year average of 77%. This week, the equity markets are set to receive earnings reports from major technology firms, including Tesla, Microsoft, Meta, Visa, Intel, and Google. These updates from these companies are highly anticipated and could significantly influence market trends depending on their financial outcomes. This week, key economic indicators will capture the market’s attention with the U.S. GDP scheduled for release on Thursday, followed by the Personal Consumption Expenditures on Thursday & Friday. These data points are critical as they provide insights into the overall economic health and inflation trends in the United States, respectively, and are likely to impact financial markets significantly. We expect a bullish reaction after three consecutive falling weeks so we may try long positions this week.

DAX30

The German DAX40 index was bearish last week, closing at 17,737.36 points, with losses of 1.08%. DAX40 completed three consecutive weeks of losses but each week had fewer losses compared to the previous one. This fact shows that the DAX40 is resilient and it is able to outperform the rest of the major equity indices in this period. One source of optimism is the perception of the markets that the European Central Bank will start reducing interest rates in June. European Central Bank official Francois Villeroy de Galhau has stated that despite uncertainties surrounding oil prices, these will not deter the ECB from implementing a rate cut in June. Villeroy has emphasized that although the Middle East tensions persist, they currently do not pose a threat to the ECB’s objective of reducing inflation to 2% by 2025. As per the results of the German economy, there were no major or critical releases. The economic sentiment rose last month from 35.1 to 42.9 and the producer price index dropped by 2.9% which shows that the inflationary pressures keep on easing. In the current week, besides some announcements for the German economy (PMIs, business climate, and consumer confidence), the focus of the markets will be on ECB & interest rates as well as on the Middle East tensions. We prefer long positions this week.

FTSE100

The British FTSE100 index was neutral last week, closing at 7,932.3 points, with no significant changes compared to the previous week’s closing price. FTSE100 was bearish all along the previous week, following the trend of the rest major indices in Europe and the USA. On Friday, the FTSE100 experienced a rise following dovish remarks from Bank of England official Dave Ramsden, which increased expectations for an easing of monetary policy by the BoE in 2024. Ramsden’s comments suggested that inflation might stabilize at the central bank’s 2% target over the next three years, contradicting earlier projections by the BoE that predicted higher inflation rates later this year. Hints about interest rate cuts soon, favor the stock markets. Regarding the results of the UK economy, the annual inflation rate for March softened slightly, easing from the previous month, yet remained above market expectations. Retail Sales showed signs of stagnation, not meeting the anticipated month-on-month growth and instead remaining unchanged. In the current week, FTSE100 futures have opened positively as geopolitical tensions seem to ease. Neither Iran nor Israel seems keen on further escalating the unprecedented hostilities witnessed last week, and investors appear ready to reengage with riskier assets. Long positions is our selection for the current week.

Gold

The previous week was bullish for gold, with the next month’s futures closing at $2,413.8 and profits of 1.67%. The rapid escalation in regional tensions, prompted by Iran’s missile and drone strikes on Israel, caused investors to turn to the safe haven of gold. Although there was an initial surge in gold prices, they soon leveled off to a stable point as the Middle East tension seemed to be relieved. The U.S. dollar, a crucial factor for gold prices (gold is denominated in dollars), finished the week slightly higher. Meanwhile, the U.S. bond yields also ended the week higher, reflecting an increase in investor preference for yield over safety. However, over the long term, many analysts estimate that the upward trend in gold prices is expected to continue, as the Fed may delay rate cuts longer than the market currently anticipates. Fed officials have united around the view that there is no immediate need to cut interest rates, and some are even suggesting that an increase remains a possibility. Markets will keep on paying close attention to developments in the Middle East and the U.S. monetary policy & interest rates, as these elements are expected to play critical roles in shaping conditions in the next period. This week’s release of the U.S. GDP and PCE inflation results, scheduled for Thursday and Friday respectively, could trigger gold price trend and volatility. After four weeks in a row of strong profits (in total 11.75%) some corrections may occur, even for technical reasons so we prefer short positions this week.

US Oil

Last week was bearish for oil with the next month’s futures closing at $82.22, with losses of 4.02%. Rising tensions between Israel and Iran initially unsettled the markets, fueling fears of potential supply issues. After a significant explosion in Isfahan, there was a brief surge in crude prices. However, Iran’s measured response, indicating no plans for immediate retaliation, helped calm market fears, which facilitated a return to stable price levels. As per the oil demand, U.S. crude oil inventories rose by over four million barrels in the week ending April 12th, 2024, as reported by the American Petroleum Institute’s weekly statistical bulletin. This increase followed a rise of over three million barrels in the prior week and this fact creates concerns about the demand, pushing prices lower. These concerns come along with the potential delays of interest rate cuts by the Fed. Such delays may indicate more pressure on the U.S. economy and even lower demand. All these factors converge to lower oil prices but OPEC is closely watching the developments. OPEC still trying to balance the price as it has extended its voluntary production reductions, which total 2.2 million barrels per day, through the end of June. Markets will monitor possible future OPEC actions if lower demand presses the oil prices. Market participants will be also closely watching this week’s release of the U.S. GDP and PCE inflation data, set for Thursday and Friday, respectively. We may try short positions for one more week.

EURUSD (Euro – US Dollar)
Last week was bullish for EURUSD as it opened at 1.0627 and closed at 1.0656. The U.S. dollar continued to strengthen, with less intensity than in previous weeks, so the euro was able to resist and the exchange rate to rise during a period of downward trend. Markets expect the European Central Bank to start cutting interest rates first, with the most likely starting in June. By contrast, the most likely scenarios for the Fed are July or September, so the euro weakens relative to the dollar. Some statements by Christine Lagarde during the week that the battle with inflation has not yet been judged were interpreted as hawkish by the markets and so the euro performed an upward reaction. This week, in addition to possible developments in relation to central banks, the spotlight will fall on the U.S. economy and the expected announcements, as we have seen in the general commentary. Having trust in the dollar’s strength, we may try sell positions this week.

GBPUSD (Great Britain Pound – US Dollar)

Bearish was the last week for GBPUSD, as it opened at 1.2438 and closed at 1.2369. The exchange rate is in a clear downward trend lately that has led to prices that we have not seen since the middle of last November. The U.S. dollar continues to strengthen on the basis of a delayed rate cut following high inflation announced in the United States. Sterling resisted somewhat on Wednesday, with a bullish reaction following the announcement of UK inflation for March. Inflation in the UK is on a downtrend, though the decrease observed in March was less pronounced than anticipated. The annual inflation rate for March eased to 3.2%, a slight drop from 3.4% in February, yet still above the market expectation of 3.1%. However, from Thursday, downward pressure on the exchange rate has resumed, which strengthened further on Friday after some negative results of the UK economy and dovish statements by a BoE official Ramsen. Retail Sales exhibited signs of stagnation, failing to meet analyst expectations of a 0.3% month-on-month growth, and instead remaining flat at 0%. Apart from the announcement of PMI indicators, there are no other major announcements on the UK economy so the United States economy will be at the centre. Given confidence in the strength of the dollar, combined with the dovish BoE statements, leads us to consider sell positions this week.

USDJPY (US Dollar – Japanese Yen)

USDJPY was bullish last week, opening at 153.04 and closing at 154.63. The exchange rate continues its upward course and continues to break consecutive price records of several decades. All factors affecting USDJPY have been aligned towards its rise. The US dollar continues to strengthen, bond yields rise, and the yen continues to weaken. Bank of Japan head Kazuo Ueda said last week that the central bank might consider raising interest rates further if significant declines in the yen exacerbate inflation pressures. Apparently, the markets are not convinced of the Bank of Japan’s hawkish intentions, and as long as the large interest rate gap remains, the gap between the two currencies increases. On top of that, Japan’s inflation announcement on Friday showed a decline to 2.7%. In addition to the important announcements of the US economy, the eyes of the markets will turn to the announcements of Japan. On Friday, inflation is announced and later in the day, a decision on interest rates and monetary policy is announced by the Bank of Japan. The USDJPY is in an overbought state and given the high volatility, we cannot exclude a possible intervention of Japan in the FX markets so we may try sell positions this week.

EURJPY (Euro – Japanese Yen)
Bullish was last week for EURJPY which opened at 162.72 and closed at 164.78. The weakness of the Japanese currency is a given at the moment, as the Bank of Japan has been holding interest rates at 0% and the other central banks have for some time in order to combat high inflation. Japan’s steps to raise interest rates further are seen by markets as hesitant and cautious, which does not help the yen. Markets also expect the European Central Bank to start cutting interest rates from next June but some hawkish statements by Christine Lagarde during the week gave some breaths to the euro. The latest statements from ECB are dovish though so we may try sell positions this week.

EURGBP (Euro – Great Britain Pound)

Last week was strongly bullish for the EURGBP, as it opened at 0.8534 and closed at 0.8614. Such a rise for EURGBP on a weekly level was not seen in 2024. British sterling has been under pressure for some time and has been unable to breathe even though inflation in the UK was announced above market expectations. Christine Lagarde’s statement that the battle against inflation has not yet ended was enough to strengthen the euro and make sterling’s weakness even more apparent. Buy positions is our selection for the current week.

USDCAD (US Dollar – Canadian Dollar)

Bearish was the last week for USDCAD, as it opened at 1.3773 and closed at 1.3749. This fall for USDCAD sounds a bit odd since there was no obvious reason. The U.S. dollar continued to strengthen while oil prices, which typically favor the Canadian dollar, fell. For Canada, inflation announced for March had a slight rise from 2.8% to 2.9% but does not seem to change anything compared to the Bank of Canada’s plans. Speaking from an IMF meeting in Washington, Bank of Canada head Tiff Macklem reiterated to reporters that the central bank requires more evidence of sustainable declines in inflation before considering any rate cuts. He emphasized the need for clear indications that inflation is consistently moving towards target levels. Perhaps these statements were interpreted as hawkish by markets and helped the Canadian dollar recover. We prefer sell positions this week.

USDCHF (US Dollar – Swiss Franc)
The USDCHF was slightly bearish last week as the opening price was at 0.9118 and the closing price was at 0.9102. The U.S. dollar continued to strengthen, albeit with less intensity, and the Swiss franc was able to react mainly due to the positive economic results for the Swiss economy and because of the economic sentiment that seems to be getting worse after the tension that has been caused in the Middle East. In times of geopolitical crises and turbulence, many investors turn to safe havens such as the Swiss franc. Switzerland’s economy has been showing positive signs lately, which was confirmed by last week’s announcement that imports, exports, and trade balance were above what markets had estimated. By having confidence in the dollar’s robustness, we may try buy positions this week.

AUDUSD (Australian Dollar – US Dollar)

Bearish was the last week for AUDUSD, which opened at 0.6461 and closed at 0.6417. The United States dollar continued its upward trajectory without Australia’s currency being able to resist it. Australia’s economic results were not positive last week as the unemployment rate rose marginally from 3.7% to 3.8%. But clearly, the Australian dollar was also affected by some of China’s results. China announced increased GDP for the first quarter, but industrial production and retail sales announced for March were disappointed. Perhaps the fall would be even greater for this exchange rate, but it was supported by the rise in the price of some commodities such as gold and copper. This week, in addition to the important announcements of the United States, the markets will also pay attention to the announcement of inflation in Australia. Given last week’s decline in AUDUSD, we prefer buy positions this week as the AUD may recover from the overly bearish sentiment.

Bitcoin

Last week, Bitcoin was bearish and closed at $64,950 with losses of 1.22%. After the successful Bitcoin halving, markets will focus again on the fundamentals of the cryptos and news from the traditional markets. Usually, halving creates an uptrend for the Bitcoin as the reduced quantity of the produced Bitcoins means a lower supply which is a hint for higher prices. In such cases, most of the time, markets respond proactively to the upcoming event but as long as the event occurs, we often see the ‘buy the rumor, sell the news’ effect. The predominant explanation for this year’s rapid increase in prices is attributed to the SEC’s approval of Bitcoin ETFs in January, coupled with anticipations of rate cuts by central banks. ETF approval added a regulated way for investors to have positions in cryptos and the upcoming rate cuts improved the sentiment and the preference of the markets for assets of higher risk. Since reaching all-time highs last month, Bitcoin’s price has dropped and for the moment is not able to approach the zone of 70K. Interest rate cuts, according to all the latest reports, may be delayed: July, September, and even November are on the table. Also, the ETF flows are fading out as the latest data show. Last week, for two consecutive trading days, nine out of eleven recently introduced spot Bitcoin ETFs have reported no fund flows. Additionally, Grayscale’s GBTC has experienced continued fund outflows, causing the net aggregate position to turn negative once again for these days. 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.