27/05/2024

General Comment

Relatively mild and with low volatility was the previous week for most major markets on the planet. It is obvious that the markets are waiting for the news in the coming weeks in order to take a position. The past week has been marked mainly by the announcement of the Fed’s meeting minutes as well as some speeches by its officials.

The minutes from the Federal Open Market Committee (FOMC) meeting underscored ongoing worries about persistent inflation, despite some advancements. Policymakers highlighted that inflation continues to exceed the 2% target and indicated their willingness to implement tighter monetary policies if needed. During the meeting, there was unanimous agreement to keep the benchmark interest rate at 5.25%-5.5%, underscoring the focus on sustaining robust economic growth while addressing inflation concerns.

Federal Reserve officials emphasized the detrimental effects of inflation on consumers. While acknowledging potential inflationary pressures from geopolitical events, they anticipated a gradual decline towards the 2% target, though the timeline remained uncertain. Governor Christopher Waller and Chair Jerome Powell highlighted the importance of a patient approach to policy adjustments.

In addition to the Fed, the macroeconomic results of the United States seem to have improved considerably. In May, the Manufacturing PMI rose to 50.9 from 50.0, indicating a slight expansion in the sector. The Service sector PMI increased significantly to 54.8 from 51.3, and the Composite PMI jumped to 54.4 from 51.3, reflecting overall economic growth. Additionally, weekly jobless claims fell to 215K, coming in below expectations and signaling a robust labor market.

Based on the CME FedWatch tool, the probability of a June rate cut is infinitesimal, while for July it is quite small of the order of 10%. Close to 50% is the probability of a rate cut in September while the probability of at least a cut in interest rates by November increases significantly.

As far as the Eurozone is concerned, all eyes are on the June 6 meeting on interest rates and monetary policy where markets expect a 0.25% rate cut. In an interview on Tuesday, European Central Bank President Christine Lagarde expressed strong confidence that Eurozone inflation is under control. She attributed this to the diminishing effects of the energy crisis and the resolution of supply-chain bottlenecks.

The global geopolitical landscape has been relatively calm lately, even though there are some outbreaks of tension mainly in the Middle East between Israel and Hamas, while of course, the war in Ukraine continues.

Most major equity markets in Europe and the United States had mild corrective trends with the exception of the NASDAQ100 which continued its uptrend rally. Bond yields rose slightly with the yield on the U.S. 10-year bond closing the week near 4.47%. Most major commodities such as copper, gold, and oil had significant losses in the previous week. As for the currency market, the dollar and sterling had gains while in the week’s losers, the euro and yen are included. Finally, for the second week in a row, Bitcoin and most cryptocurrencies performed an upward trend.

The eyes of the markets this week will turn to the announcements of the United States. The announcement of U.S. GDP on Thursday and personal consumption expenditures on Friday will be of particular interest. GDP will show the state of the U.S. economy while personal consumption expenditures are a strong indicator of inflation. These two announcements will largely determine the Fed’s stance in the coming period. Several Fed officials are giving speeches within the week and outside the United States, important announcements are the inflation in the Eurozone, Japan, and Australia, as well as the announcement of the PMI index in China for manufacturing.

SP500

The US SP500 index was neutral last week as it closed at 5,305.82 points and slight losses of 0.02%. The week was essentially split in two since until Thursday the trend was clearly downward while the upward rally on Friday covered the losses. Both the announcement of the Fed’s minutes and statements by officials this week have given markets a sense that interest rates are likely to remain at current levels until at least the autumn. This of course has to do with the high inflation that has been maintained in the United States for several months. The fact is also that the macroeconomic picture of the United States is showing positive results. All PMI indicators were above market expectations, while last month’s durable goods orders rose by 0.7% against expectations of a 0.8% decline. The Michigan Consumer Sentiment Index was also announced at a price of 69.1, well above the 67.4 that markets estimated. However, a significant portion of the market shifted its attention from Fed forecasts to the sustained high growth potential in the artificial intelligence sector, especially Nvidia. Investor excitement over Nvidia’s impressive earnings persisted, driving its stock price well above $1,000 and boosting other companies in the industry. The climate is looking very positive and although there has been a slight pause in the upward trend, it is not excluded that we will see new highs and for this reason, we prefer long positions this week.

DAX40

The German DAX40 index was mildly bearish last week, closing at 18,693.37 points, with marginal losses of 0.06%. For the second week in a row, DAX40 has consolidative and slightly downward trends, following an upward rally that has preceded it in recent months. The positive economic climate in the Eurozone seems to be confirmed as the European Central Bank will probably start cutting interest rates in the Eurozone from June onwards. Also encouraging is the economic picture of several Eurozone countries and of course Germany. The services sector continues to strengthen while manufacturing, which has been problematic in the recent past, appears to be recovering, as PMI indicators show. Also, German GDP strengthened by 0.2% in the first quarter of the year, indicating that a recession is a less likely scenario. Important announcements for the German economy this week are ahead: inflation, retail sales, and the unemployment rate. The nature of the upward trend has not yet been altered and therefore we will choose long positions this week.

FTSE100

The British FTSE100 index moved downward last week, closing at 8,316.9 points, losing about 1.35%. The losses for the FTSE100 were significant as diminishing expectations of interest rate cuts by the Bank of England soon enough while political uncertainty ahead of the rising general elections dampened investor sentiment. Inflation in the UK has fallen significantly but short of market expectations, giving the impression to markets that a rate cut by the Bank of England may be delayed. Also, on Wednesday, Prime Minister Rishi Sunak called a surprise general election for July 4. This announcement has created a layer of uncertainty for UK markets. The mood deteriorated further on Friday after the disappointing retail sales result for the previous month. The drop of 2.3% was outside and beyond all market expectations. The current week does not contain any major economic announcements for the UK economy so market interest will be focused again on the Bank of England’s estimations of next moves and in the run-up to the election. We may try short positions for one more week.

Gold

The previous week was heavily bearish for gold, with the next month’s futures closing at $2,334.5 and losses of 3.43%. The recent gold sell-off was triggered by profit-taking after prices hit an all-time high and was further exacerbated by hawkish signals from the Fed’s latest policy meeting minutes. The meeting minutes released on Wednesday showed that the policymakers do not intend to start cutting interest rates soon enough. Several Fed officials also voiced their hesitation to cut rates, stressing the necessity for more stable inflation data before any policy adjustments. When interest rates are at high levels, holding gold, which does not generate income, does not seem appropriate and advantageous. An important role in the downward movement of gold was also played by the new strengthening of the U.S. dollar. There is usually an inverse relationship between gold and the dollar as gold is denominated in American dollars. Some role in the recent gold movement was played by the slight rise in bond yields as a result of the hawkish climate that has prevailed lately. The fall was significant and if it breaks very critical support to $ 2,285, we may see even lower levels for gold prices. We may try short positions this week.

US Oil

Last week was bearish for oil with the next month’s futures closing at $77.72, with losses of 2.34%. Crude oil has been under pressure all week as Fed policymakers maintained a hawkish stance on interest rates. Fed officials express uncertainty about the progress in the inflation reduction. Policymakers are clear that rate cuts will only be considered if there is greater confidence that inflation will sustainably return to the 2% target. The Fed’s hawkish outlook on interest rates is detrimental to oil prices. Higher interest rates reduce liquidity in the economy, which in turn impacts overall oil demand. Discouraging were also the data on oil reserves in the United States. According to the American Petroleum Institute, oil stocks last week increased by 2.48 million barrels, while according to the U.S. Energy Information Administration, we had an increase of about 1.82 million barrels. Those increases in inventories suggest less demand. As per the supply, the next catalyst for oil prices will be the OPEC meeting scheduled for June 1, where members will discuss supply policy. In the previous meeting, OPEC decided to maintain the current voluntary oil output cut of 2.2 million barrels per day. The recent big decline in oil prices that has started since the beginning of April May create buying opportunities and for this reason, we may try long positions this week.

EURUSD (Euro – US Dollar)
Last week was bearish for EURUSD as it opened at 1.0866 and closed at 1.0845. The exchange rate had a mild rise throughout the week and a slight correction on Friday but was unable to change the positive sign. The dollar strengthened after the Fed’s minutes showed there was a wait-and-see stance to cut interest rates as inflation persists at high levels. In addition, the PMI indicators for the United States have had a very good result, confirming once again the good state of the American economy. In the Eurozone, all eyes are on the June 6 decision on interest rates and monetary policy, where markets expect interest rates to be cut by 0.25%. Manufacturing in the Eurozone has improved significantly but there has been a slight decline in services. Given the difference that already exists in interest rates and given the European Central Bank’s intention to start reducing them earlier than the Fed, a climate of weakness in Europe is growing that has not yet been witnessed in the exchange rate. Under this consideration, we will choose sell positions this week.

GBPUSD (Great Britain Pound – US Dollar)

Bullish was the last week for GBPUSD, as it opened at 1.2684 and closed at 1.2737. The U.S. dollar had a mild rise last week, but the exchange rate strengthened, of course, due to the strengthening of sterling. The week was full of news and developments for the UK economy. Bank of England head Andrew Bailey indicated that he anticipates the next rate adjustment to be a reduction, and he foresees a notable decrease in inflation data for April. The next day UK inflation was announced for April at 2.3%, well below March’s 3.2%, but it was below market expectations which was 2.1%. However, the producer price index, which is another measure of inflation, showed a faster decline. PMI indicators showed a better picture for manufacturing but more negative was the result of retail sales falling by 2.3% in April, well below what markets had estimated. We may try sell positions this week.

USDJPY (US Dollar – Japanese Yen)

USDJPY was bullish last week, opening at 155.55 and closing at 156.94. The exchange rate continues to rise, having covered most of the correction it had in late April when there was talk of an intervention by Japan to support the domestic currency. The dollar continues to strengthen, and the Japanese currency cannot resist as interest rates from the Bank of Japan remain very low. Also, based on the statements of officials from the Bank of Japan and the views of authoritative analysts there is no indication of any aggressive interest rate hikes by the Bank of Japan in the near future and so, the United States although it will cut its interest rates once or twice in the year, this is not reflected in the USDJPY. Japan’s economic results were mixed last week after imports and exports fell short of expectations, but machinery orders topped expectations. Manufacturing appears to be recovering after the relative PMI index was announced above 50 but inflation remains at particularly high levels for Japan and was announced at 2.5% on Friday. With all these considerations, it is not excluded that the upward trend will continue and for this reason, we prefer buy positions for one more week.

EURJPY (Euro – Japanese Yen)
Bullish was last week for EURJPY which opened at 169.03 and closed at 170.22. The Eurozone economy continues to show an improved picture, especially in manufacturing, which has had the biggest problem in the recent past. Markets also expect an interest rate cut by the European Central Bank in its June decision, and if this happens, no matter if it has already been reflected by markets in the price, it could cause weakness in the euro. Japan’s currency, however, continues to weaken even though there are rumors of some rate hikes this year because it does not seem to be strong and aggressive. As the interest rate decision at the European Central Bank approaches, the euro may weaken further and further so sell positions is our selection for the current week.

EURGBP (Euro – Great Britain Pound)

Last week was bearish for the EURGBP, as it opened at 0.8557 and closed at 0.8514. This exchange rate has been moving within a narrow range in recent months since there is a balance between the two currencies. However, last week, the pair touched the lower band of this zone, and this was done mainly for two reasons. The first reason has to do with the European Central Bank’s expected decision on June 6 to cut interest rates in the Eurozone. This is something that logically weakens the euro. On the other hand, UK inflation for April has been announced above market expectations and this may delay a relevant Bank of England decision on interest rates. As long as interest rates remain high in the UK, sterling is strengthening. We will continue to follow these thoughts in the current week by selecting sell positions.

USDCAD (US Dollar – Canadian Dollar)

Bullish was the last week for USDCAD, as it opened at 1.3623 and closed at 1.3663. The exchange rate largely followed the strengthening of the U.S. dollar as the announcements and results of Canada’s economy and oil prices created counterforces for the Canadian dollar. Canada’s inflation for April was announced at 2.7%, as much as the markets expected, but well below the 2.9% of the previous month. This weakens the Canadian dollar because it incentivizes the Bank of Canada to cut interest rates faster. The US inflation rate for April was 3.4%. But oil prices that fell last week didn’t let the Canadian dollar develop momentum. Oil is the main export commodity of Canada’s economy and is therefore directly related to its currency. On Friday, a rebound in oil prices gave the Canadian dollar a chance to recover as well but not to the extent that the sign for the exchange rate would change. The United States seems determined to keep interest rates high as long as inflation insists and if this is done will strengthen the US dollar therefore, we prefer buy positions this week.

USDCHF (US Dollar – Swiss Franc)
The USDCHF was bullish last week as the opening price was at 0.9087 and the closing price was at 0.9146. The US dollar dominated for another week at the USDCHF and after strengthening, it pushed the exchange rate higher. The impression in the markets is that the United States will not cut its interest rates before the autumn because inflation is still high. As far as the Swiss economy is concerned, the only significant development we have had in the past week is the speech by Swiss National Bank (SNB) chief Thomas Jordan. Thomas Jordan stated that the SNB should maintain its current practice of not publishing minutes of policymakers’ discussions. When asked if the SNB would consider following other central banks, such as the Fed, in releasing records of decision-making processes, Jordan affirmed that the institution should stick with its existing approach. So, the information we learned through the speech did not significantly change the image of the Swiss franc. We may try buy positions this week.

AUDUSD (Australian Dollar – US Dollar)

Bearish was the last week for AUDUSD, which opened at 0.6691 and closed at 0.6627. In addition to the developments on the US dollar that helped the exchange rate fall, some news and developments also came from the Australian and Chinese economies. Central to Australia’s economy was the announcement of the Reserve Bank of Australia’s meeting minutes. On Tuesday, the Reserve Bank of Australia (RBA) released the minutes from its May monetary policy meeting and these minutes revealed that board members debated raising interest rates but ultimately favored maintaining the current policy. The minutes also revealed that the board found it difficult to definitively determine the direction of future changes in the interest rates. As for China’s economy, the People’s Bank of China left interest rates unchanged at 3.45% but for several months the decline in foreign direct investment has been striking, in some cases even reaching 50%. It seems that there is a new trade war between China and the West that could hurt the Australian dollar. On Wednesday, China announced it would impose countermeasures against 12 US companies and their senior executives, escalating trade tensions. Our choice for the current week is to open sell positions.

Bitcoin

Last week, Bitcoin was bullish and closed at $68,489 with profits of 3.34%. Remarkably, the price of Bitcoin and most cryptocurrencies has risen in a week when the economic climate has deteriorated. This deterioration is mainly based on the belief that the Fed will not start cutting interest rates before the autumn. This situation reduces the risk appetite for high-risk options such as cryptocurrencies. The positive news, however, came in relation to developments for the Ethereum ETF. The U.S. Securities and Exchange Commission (SEC) announced on Thursday that it has approved crucial rule changes to permit exchange-traded funds (ETFs) holding Ethereum’s native token. This decision surprised many, as just last week, most analysts and prediction markets, believed the approval was unlikely. This development created an explosion of volatility, mainly in Ethereum, but there was no strong upward trend. Such a behaviour despite positive news exemplifies the typical “buy the rumor, sell the news” phenomenon. It is not excluded that it could trigger a new downward trend for cryptocurrencies and for this reason, 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.