03/06/2024

General Comment

The big issues of inflation, interest rates, and future central bank decisions continue to be the dominant topics of concern to financial markets. Last week the information we got in relation to inflation in the United States has to do with Personal Consumption Expenditures which is another measure of inflation. On Friday, the United States released the April Personal Consumption Expenditures Price Index with the annual rate remaining stable at 2.7%. The monthly rate increased by 0.3%, which was anticipated, although the core inflation rate was marginally lower than expected. The April PCE inflation report in the US offered slight comfort to financial markets, yet it seems that it remains insufficient to convince Fed officials. According to the CME FedWatch tool, November is the most likely month the Fed could start cutting interest rates, and this estimation is aligned with most of the Fed officials’ statements.

The previous day, there were also important announcements concerning the course of the US economy in the first quarter of 2024. The US Gross Domestic Product for the first quarter showed the Price Index holding steady at 3.1%. The headline GDP growth was revised down to 1.3% from the initially estimated 1.6% expansion. There is therefore a general perception that the growth of the US economy has been limited lately, but this does not mean that we are close to a recession. In this sense, the financial results that will follow in the coming weeks are considered crucial.

In the Eurozone, we saw that in the last month, there has been a marginal resurgence in inflation, at 2.6%. Markets are not worried though about the outcome of the European Central Bank’s decision on June 6. The confidence of the markets continues to remain that at this meeting interest rates in the Eurozone will be reduced by 0.25%. The euro area, however, continues to show improved results, and as we saw last week the unemployment rate fell marginally to 6.4%.

In the other economic pillar of the planet, China, last week’s results were not encouraging. China’s Manufacturing PMI fell from 50.4 in April to 49.5 in May. This reading significantly missed the market consensus of 50.5. The PMI’s drop below the 50 mark indicates a shift from expansion to contraction.

Most major equity markets in Europe and the United States had a mild correction last week. Bond yields were on the rise for the third week in a row, with the yield on the US 10-year bond closing on Friday marginally above 4.5%. Commodity markets also took a corrective turn, with commodities such as gold, copper, and oil taking losses. The US dollar also suffered small losses, and this is a rare case: the dollar and equity markets have the same negative sign. The euro and sterling strengthened marginally but Japan’s currency continued its losses. Finally, it was a corrective week for both Bitcoin and most cryptocurrencies.

Important announcements are contained in the week that has just begun. The new job positions announcement for the United States on Friday (Non-Farm Payrolls) stands out. This announcement will show the state of the US labor market and will not rule out influencing the Fed’s subsequent decisions. In the past few days, there will be other job market announcements in the United States such as ADP employment change and JOLTS. But it is also an important week for the Eurozone after the European Central Bank will announce its decision on interest rates and monetary policy on Thursday. As we said above, the markets have already discounted a 0.25% cut in interest rates. The following press conference of Christine Lagarde will also be quite informative for the markets. However, the environment in the Eurozone has a significant ambiguity since in the next few days there will be elections for the European Parliament and the correlation of forces cannot be excluded from changing.

SP500

The US SP500 index was bearish last week as it closed at 5,277.50 points and loss of 0.51%. SP500 index keeps on being affected by the perception of the markets regarding the Fed’s plans on interest rate cuts and monetary policy. According to the FedWatch tool and according to many Fed officials’ statements, the first rate cut should not be expected before the autumn, on September or November sessions. The high rates that remain for a longer time are not favorable for the stock markets so most of the indices performed corrections last week. Moreover, some economic data were released last week that caused extra concerns. The initially estimated GDP growth for the first quarter of 1.6% was revised down to 1.3%. The PCE Price Index remained steady at 2.7% in April, matching analyst expectations. The Core PCE Price Index also held steady at 2.8%. Personal income rose by 0.3% month-over-month in April, aligning with the analyst consensus of a 0.3% increase. Personal spending increased by 0.2%. The PCE Index which is the preferred Fed measurement of inflation caused some kind of relief but not to the extent of changing the plans: Autumn Fed sessions are still the most likely dates for rate cuts. During the last hours of the weekly session, there was a strong uptrend rally on SP500, not capable of creating weekly profits though. One significant reason was the continued decline in Treasury yields, which bolstered investor confidence. Also, the PCE result seems to be consumed by the markets from a different point of view than at first sight. The US Non-Farm Payrolls report, scheduled for release on Friday is expected to show employment growth with Bloomberg’s median estimate predicting 180,000 new jobs added in May. The correction of the last two weeks was not that strong that could indicate a change in trend and if the announcements help, we may see the bulls returning so we may try long positions this week.

DAX40

The German DAX40 index was bearish last week, closing at 18,497.94 points, with losses of 1.05%. It was the third consecutive week of losses for DAX40, after reaching new all-time highs. The markets still anticipate that the ECB will cut interest rates by 0.25% on Thursday but now there are some concerns regarding the future rate cuts. Many analysts had the opinion that the ECB will continue cutting the rates aggressively in the next sessions but the inflation results last week has shifted somehow these opinions. In the Eurozone, there has been a slight increase in inflation over the past month, with the rate rising to 2.6%. This marginal resurgence indicates a deviation from the previous trend of stable or decreasing inflation rates, and it will be closely monitored by economists and policymakers for any further developments. The same picture is in Germany as the inflation was announced at 2.8% vs 2.7% which the markets expected but well higher than the 2.4% of the previous month. The monthly Wholesale Price Index also increased by 0.4% vs the consensus of 0.1% while the Import Price Index was announced at 0.7% vs 0.5% expected. Other news for the German economy was not encouraging: retail sales dropped by 0.6% last month and the business climate failed to meet the expectations. However, if the ECB confirms its dovish stance for the following months the uptrend may return so we prefer long positions this week.

FTSE100

The British FTSE100 index had a neutral week, closing at 8,310.7 points, losing about 0.07%. The first three days of the week were bearish while on Thursday & Friday, the bullish trends prevailed so the result was kind of neutral. The UK economy did not have any significant releases of economic data last week so all the focus was shifted to the inflation issues, the future plans & intentions of the Bank of England, and the upcoming elections. The UK is one month away from a General Election, with polls indicating that the center-left Labour Party may return to power after 14 years. Analysts disagree if this development will be market-friendly or not.  In a note released on Wednesday, Citi analyzed stock movements from 1979 onward and found that UK stocks have typically been “relatively flat to down” in the six months following elections. This analysis excluded extraordinary periods of volatile financial conditions. However, markets do not seem to have serious concerns as Labour’s leadership has consistently emphasized over the past year their commitment to fiscal discipline. They have pledged to reduce the national debt as a share of the Gross Domestic Product, highlighting a focus on responsible economic management and sustainable fiscal policies. As per the inflation and Bank of England, the UK’s annual inflation rate has eased to 2.3%, moving closer to the Bank of England’s target of 2% but slightly above the forecasted 2.1%. Consequently, investors are now expecting the BoE to implement its first rate cut in September, a shift from the previous consensus of June. The FTSE100 recovery of the two last days of the previous week was strong and creates hopes for more profits so we may try long positions this week.

Gold

The previous week was slightly bearish for gold, with the next month’s futures closing at $2,345.8 and marginal losses. The PCE Price Index remained stable at 2.7% in April and although it provided some relief, it was not significant enough to alter Fed expectations. Investors still anticipate that the most likely timing for rate cuts will be during the Fed’s autumn sessions. Also, the initially estimated GDP growth for the first quarter was revised down from 1.6% to 1.3% which was interpreted as an indication of growth slowdown. US bond yields remained largely unchanged, signaling cautious sentiment among investors. This stability reflects a wait-and-see approach as market participants anticipate upcoming economic data and Federal Reserve policy decisions. The correction in gold prices though is not significant so far as gold’s attractiveness as a safe-haven asset continues to be bolstered by persistent geopolitical risks and the potential for central bank purchases. These factors sustain investor interest in gold. Traders are now closely watching the upcoming US Non-Farm Payrolls data. Concurrently, the European Central Bank ECB is anticipated to lower interest rates this week. However, doubts about additional rate cuts beyond June have increased after inflation rose more than expected in May. While short-term bearish pressures on gold may persist due to market fluctuations and temporary economic conditions, the overall market sentiment remains bullish for gold in the long term. This long-term bullish outlook is supported by ongoing geopolitical risks, potential central bank purchases, and the role of gold as a safe-haven asset during periods of economic uncertainty. We may try long positions this week.​

US Oil

Last week was bearish for oil with the next month’s futures closing at $77.02, with losses of 0.94%. Crude oil ended a second consecutive week in decline as traders remain worried about the imbalance between supply and demand which has contributed to the bearish sentiment in the oil market. According to the American Petroleum Institute, US crude oil stocks were reduced by 6.49 million barrels last week while the Energy Information Administration announced that US crude oil supplies contracted by 4.15 million barrels. It is a clear indication that the oil demand has been increased lately. On the other hand, as the likelihood of U.S. borrowing costs remaining high, the anticipation of sustained high interest rates has dampened economic growth prospects, which in turn affects oil demand. High borrowing costs lead to reduced consumer and business spending, lowering the oil demand​. Regarding the geopolitical tensions, on Friday, US President Joe Biden announced that a potential ceasefire agreement between Israel and Palestinian Hamas is nearing completion, which could lead to a multi-month truce between the conflicting parties. This development has the potential to ease tensions in the Middle East, diminishing the fears that the conflict might escalate and affect neighboring countries critical to global oil production. As per the supply, we had some interesting news, coming from OPEC. OPEC announced on Sunday that it would extend the oil output cuts well into 2025. This decision comes as the group aims to stabilize the market in the face of sluggish demand growth, elevated interest rates, and increasing US oil production. The extended cuts are part of OPEC’s strategy to manage the global oil supply and support prices amid these challenging economic conditions. The point is that, early in the current week, we don’t see a bullish reaction as it would make sense to happen. However, the price area of just above $76 seems like strong support for the moment for oil prices as it is the lowest price since last February. Many traders may see this price level as a buying opportunity. We may try long positions this week.

s 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 slightly bullish for EURUSD as it opened at 1.0844 and closed at 1.0849. The EURUSD had downtrends until the first half of the week, primarily due to the absence of significant macroeconomic data and remarks from various Fed officials. Fed officials continued to dampen expectations for interest rate cuts, strengthening the dollar. From Thursday onwards, however, both the slight decline in inflation in the United States and the revised GDP weakened the US dollar, and thus the exchange rate managed to close with a slightly positive sign. The general belief of markets is that the European Central Bank on Thursday will begin the cycle of cutting interest rates in the Eurozone. This to a large extent has already been discounted by the markets but Christine Lagarde’s press conference that will follow the decision will give additional evidence of the ECB’s intentions from July onwards. Markets will of course be watching other announcements about the Eurozone economy such as PMI indicators, the producer price index, and GDP. It makes sense that the interest rate cuts in the Eurozone, combined with the extension of high interest rates in the United States will push the exchange rate lower, and for this reason, we will prefer sell positions this week.

GBPUSD (Great Britain Pound – US Dollar)

Bullish was the last week for GBPUSD, as it opened at 1.2728 and closed at 1.2742. There are changes and reshuffles in the UK political landscape clearly affecting the country’s economy and currency. The UK election on July 4 is expected to favor the Labour party. This signals a major political shift after nearly 15 years of conservative-led governments. However, analysts are skeptical that this will significantly change the economic outlook but sometimes the uncertainty causes anxiety. Of course, the eyes of the markets are on inflation and the Bank of England and the likely decisions it will make. The UK’s annual inflation rate declined to 2.3%, approaching the Bank of England’s 2% target but higher than the 2.1% expected by markets. Consequently, markets now expect the BoE’s first rate cut to occur in September, moving away from the previous consensus of June. Also, the elections in July remove even further the possibility of a rate cut in June. As for the US dollar, the slight decline in inflation has given some optimism to markets, but it is still unlikely that we will see interest rate cuts by the Fed before the fall. We prefer sell positions this week.

USDJPY (US Dollar – Japanese Yen)

USDJPY was bullish last week, opening at 156.86 and closing at 157.25. Although the U.S. dollar declined slightly, Japan’s currency was unable to take advantage and the exchange rate continued to rise. Markets continue to gauge the Bank of Japan’s interest rate and monetary policy intentions. At the beginning of the week, the head of BoJ Ueda stated that certain challenges are uniquely difficult for the BoJ. He emphasized that the BoJ will proceed cautiously, similar to other central banks with inflation-targeting frameworks. Also, BoJ board member Adachi indicated that the central bank might consider raising interest rates if significant declines in the yen result in increased inflation. This cautious and timid stance is interpreted as dovish by markets, putting pressure on the yen. According to announcements last week, inflation in Tokyo climbed to 2.2% and the unemployment rate was unchanged at 2.6%. Industrial production shrank marginally by 0.1% and retail sales rose by 2.4% last month. Interest rate cuts in the United States are not expected to begin until the fall, but that will likely not prevent the USDJPY from moving even higher. We may try buy positions for one more week.

EURJPY (Euro – Japanese Yen)
Bullish was last week for EURJPY which opened at 170.18 and closed at 170.62. The Eurozone shared currency is not at its strongest position, with an interest rate cut likely in the coming days by the European Central Bank and perhaps further interest rate cuts in the near future. However, the very low interest rates from the Bank of Japan, and the cautious stance they appear to be taking through statements from officials, continue to weaken the yen. The exchange rate has approached a very significant resistance close to 171.60 though, which is the highest price for many years and so it is not excluded that we will see corrective downward trends. We may try sell positions for the current week.

EURGBP (Euro – Great Britain Pound)

Last week was neutral for the EURGBP, as it opened and closed around 0.8514. Sterling is currently stronger than the euro because it is likely that the Bank of England will delay interest rate cuts longer than the European Central Bank, which may cut interest rates at its meeting on Thursday. However, the exchange rate has reacted by performing a bullish recovery throughout the week, mainly for technical reasons. The EURGBP has been moving in a narrow price range for several months and in this period has approached the lower limit. Close to 0.8480, there is strong support as this price zone is the lowest since autumn 2022. Yet the data points to sterling’s favor and for that reason, we prefer sell positions this week.

USDCAD (US Dollar – Canadian Dollar)

Bearish was the last week for USDCAD, as it opened at 1.3664 and closed at 1.3626. The US dollar weakened slightly last week, but that was not the only reason the exchange rate had this downward movement. The Canadian dollar on Thursday and more on Friday performed a strong recovery. Canada’s GDP for the first quarter of the year strengthened by 1.7% as it was announced on Friday. That figure may have been lower than expectations of 2.2% but it still suggests strong growth and a big difference from the 0.1% of the Q4 2023 and so the markets supported the CAD. This was preceded by other positive news in the week, such as industrial production, which increased by 1.5% last month, and the current account, which showed an improved picture compared to market expectations. On Wednesday, Canada will announce its decision on interest rates and monetary policy, with markets divided on whether or not there will be a cut in interest rates. Markets also expect the United States will not cut the rates before September, so we are keen to try buy positions this week.

USDCHF (US Dollar – Swiss Franc)
The USDCHF was bearish last week as the opening price was at 0.9128 and the closing price was at 0.9022. The temporary weakness of the US dollar was not enough for the exchange rate to have such a strong downward movement. Swiss National Bank head Thomas Jordan stated early Thursday that there is a slight upward risk to the bank’s inflation forecast, adding that there are reasons to believe the natural rate of interest has increased or may well rise. Switzerland also had a series of positive economic announcements: the country’s GDP grew by 0.5% in the first quarter of the year and the trade balance exceeded market expectations. A big positive surprise was the increase in retail sales of 2.7% last month. However, if the dollar returns to the strength, it has been showing lately, it is not excluded that the exchange rate will surrender to it and for this reason, we may try buy positions this week.

AUDUSD (Australian Dollar – US Dollar)

Bullish was the last week for AUDUSD, which opened at 0.6622 and closed at 0.6653. Higher-than-anticipated Australian inflation figures have increased the likelihood that the Reserve Bank of Australia will need to raise interest rates again. The most recent monthly Consumer Price Index was announced at 3.6% in April, accelerating from the 3.5% recorded in March. Retail sales in Australia were announced below market expectations, but this happened early this week and was quickly digested by markets. However, the development of high inflation was unexpected and with a strong footprint in the markets since 3.6% is far from the target. The rise in the Australian dollar was limited for two reasons though. The first and main reason has to do with a negative image performed by China in both manufacturing and services sectors as reflected through the PMIs. The second reason has to do with the losses that several commodities had such as copper. We need to remind you that the Australian dollar is a commodity-linked currency. The U.S. dollar is expected to dominate the exchange rate again, so if it strengthens, we will see AUDUSD on a downward trend. We may try sell positions this week.

Bitcoin

Last week, Bitcoin was bearish and closed at $67,752 with losses of 1.08%. The week can be characterized as neutral enough as the fluctuations and the volatility were low compared to the average weekly volatility of Bitcoin. During the previous week, several key factors influenced Bitcoin’s price movements. Firstly, the increasing institutional demand for Bitcoin, especially through spot Bitcoin ETFs, has been significant. These ETFs have seen substantial inflows, contributing to the positive market sentiment and supporting Bitcoin’s price stability​. In the week ending May 31, the US Bitcoin spot ETF market recorded net inflows totaling $170.9 million. The worries that were created though had to do with the latest announcements of the US economy and with the anticipation of the markets regarding interest rates. The US GDP was revised lower and the expectation of the first rate cut by the Fed has been shifted to September or November. This economic environment is not favourable for risky asset classes such as cryptos. On the other hand, it seems that the markets have already consumed the Ethereum ETF approval by the SEC and now they’re looking for new fuel. During the beginning of this week though, Bitcoin is in an uptrend rally of 2%. It seems that the overall sentiment has been improved in both traditional and crypto markets. We may try long 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.