17/06/2024

General Comment

Last Wednesday’s developments and announcements were quite significant for the United States economy and may have set the tone for the Fed’s decisions and actions in 2024. Of course, it is not excluded that these decisions may be amended or even set aside on the basis of updated data throughout the year. On Wednesday, the US Bureau of Labor Statistics announced that the Consumer Price Index increased by 3.3% year-over-year in May, less than the 3.4% rise that the markets expected. Additionally, the report indicated that the monthly CPI remained unchanged, decreasing from 0.3% of the previous month. Moreover, the core CPI, which excludes the costs of food and energy, was lower than anticipated and showed a decline from the April rates. These results mean a slight de-escalation of inflation, but it was enough to set the markets on the upside. In the same day we had the open Federal Market Committee meeting on interest rates and currency policy which concluded with no changes, as expected. Interest rate projections were adjusted though, showing only one anticipated rate cut for 2024, down from three in March. The FOMC’s updated Summary of Economic Projections indicated a split among officials regarding rate cuts, with 4 seeing none, 7 expecting a 0.25% cut, and 8 predicting a 0.50% cut. On Thursday, the BLS reported that the Producer Price Index (PPI) rose 2.2% year-over-year in May, down from April’s 2.3% and below market expectations. The core PPI increased by 2.3%, while the monthly PPI fell by 0.2%. The outcome of the above economic announcements and news is positive for the U.S. economy, even if the more likely scenario now is a one-and-only Federal Reserve rate cut in 2024. Inflation is showing signs of de-escalation while estimates of the U.S. economy remain optimistic.

Things look quite different in Europe and in the Eurozone economy. Far-right parties achieved victories in many European countries and this development prompted French President Emmanuel Macron to call for a parliamentary election. The rise of far-right parties has caused some concerns in the markets about whether economic policy and fiscal discipline are being adhered to by the Eurozone economies. We recall that in early June the European Central Bank had reduced the allowance by 0.25%, indicating that there will not be a corresponding reduction before the autumn. After the European elections, this scenario seems not to have changed significantly but the political uncertainty had distorted the outlook of the future plans.

China continues to perform a problematic picture; at least as recent announcements have shown. Inflation in China last month rose by 0.3%, from the 0.4% expected by markets, while on a monthly level, there was deflation of 0.1%. The producer price index also had a negative result. In addition, it was announced that the new loans in May were significantly below market expectations. Markets have considered a lot in China’s recovery through the fiscal expansion programs recently announced. Things are more complicated in China though. The European Union plans to increase tariffs on Chinese electric vehicles from 10% to 38% on July 4, unless Beijing agrees to address the components that the EU claims are distorting its markets. The European Commission announced this decision on Wednesday, highlighting the ongoing trade tensions between the European Union and China, particularly regarding green technologies. If this announcement is carried out, it is possible that there will be similar retaliation on the part of China, which will also hit the European industry, especially the German car industry.

To summarize the above, the upward rally in U.S. stock indexes continued with quite a lot of intensity. In addition to a drop in inflation and positive economic sentiment, U.S. indices are still favored by expectations of artificial intelligence and the growth in the global economy they may bring. Such tech stocks as NVIDIA continue to have a strong rise, pulling all markets up. The corresponding stock indices in Europe did not have the same picture, especially the German stock index as we will see below had strong losses. In the currency market, the big winner of the past week was undoubtedly the U.S. dollar after the hawkish stance the Fed appears to be taking. There was a big de-escalation in bond yields last week, with the U.S. 10-year bond yield closing Friday near 4.22%. Most commodities such as gold, copper, and oil had an upward move last week. This upward movement was not followed by Bitcoin and most cryptocurrencies that had losses.

The current week is clearly calmer for the United States economy. The announcements of retail sales, industrial production, and PMI indicators stand out. In the euro area, in addition to the political developments expected as a result of the European elections, the announcements of PMI and the harmonized index of consumer prices will dominate. But within the week, four central banks are due to announce their decisions on interest rates and monetary policy, and this is likely to be the focal point of developments. These banks are the People’s Bank of China, the Bank of England, the Reserve Bank of Australia, and the Swiss National Bank. The decisions and press conferences that follow will significantly affect volatility in their currencies and markets. We will examine all these cases in the sections that will follow.

SP500

The US SP500 index was bullish last week as it closed at 5,431.61 points and profits of 1.58%. This uptrend brought a new all-time high price for SP500 and it was followed by the Federal Reserve’s anticipation that there would be only one interest rate cut this year, despite US inflation figures for May being lower than market predictions. Nevertheless, the excitement surrounding artificial intelligence kept driving up the stock prices of major tech companies. Nvidia, Apple, and other major technology stocks performed strong profits over the past week. This trend underscores the robust investor confidence in the growth prospects of AI-related technology firms, which continues to bolster their market performance. As we have seen many times in the past, every new technology trend comes through a bubble situation before it becomes steady but we believe that the market has not taken bubble characteristics so far. Returning to the US macros, last week we saw all the inflationary measures such as the Consumer Price Index, the Producer Price Index, and the Import/Export Price Index to be announced below market expectations. Even if only one interest rate cut is expected this year, the de-escalation of inflation and the FOMC press conference which did not reveal anything unexpectedly negative, gave a signal that the situation is under control. We may try long positions for one more week.

DAX40

The German DAX40 index was bearish last week, closing at 18,002.02 points, with losses of 2.99%. The rise of far-right parties in the recent election for the European Parliament has further complicated the situation and has led to concerns about potential policy gridlocks, which could delay crucial economic reforms and decision-making processes essential for the EU’s growth and stability. Another weighing factor for the German economy is the European Union’s announcement to raise tariffs on Chinese electric vehicles from 10% to 38%. This decision, revealed by the European Commission last week may cause China’s reaction with similar measures, which could adversely affect the German automotive sector. China remains a big destination for German industrial goods, especially cars. As per the ECB and interest rates, nothing changed last week and the perception of the markets is that there won’t be any other cut before September. The inflation in Germany, as it is expressed by the Harmonized Index of Consumer Prices remained unchanged last month at 2.8% which is a rate that confirms a delay in interest rate cuts. We may try short positions this week.

FTSE100

The British FTSE100 index moved downward last week, closing at 8,174.2 points, losing about 0.58%. Markets continued to evaluate the potential for interest rate cuts by the Bank of England, while also grappling with political uncertainties in both Europe and the UK ahead of the UK’s upcoming election next month. Investors are keenly observing these developments, as the outcome of the election could significantly influence economic policies and market dynamics. This combination of monetary policy considerations and political risks is creating a cautious environment for traders and investors, who are carefully strategizing to navigate the potential impacts on the financial markets. Furthermore, the economic data released last week in the UK were not encouraging. The unemployment rate increased to 4.4% as the Claimant Count Change was announced at 50.4K. Also, the GDP in May was announced at 0% vs 0.4% in the previous month, the industrial & manufacturing production dropped significantly and the trade balance was announced at -6.65 bn pounds. This week, the central event is the Bank of England’s decision on interest rates & monetary policy. Although it is expected that the rates will remain unchanged, the voting result and the press conference may give extra insights about the future. 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 $2,349.1 and profits of 1.04%. In the previous week, new data revealed a mild de-escalation in U.S. inflation trends. The consumer & producer prices saw a mild decline which was below market expectations. In its recent policy meeting, the Federal Reserve decided to maintain current interest rates and presented a dot plot indicating just one quarter-point cut. Despite this cautious outlook, the market’s response reflects a broader expectation of monetary easing, which has consequently boosted gold’s appeal as a non-yielding asset. According to the FOMC and to the majority of the market analysts, the prevailing scenario is for one rate cut by the end of the year. European markets saw significant volatility too, especially in France, where political instability has heightened uncertainty. This turmoil, coupled with a cautious mood in other economies as well, has reignited interest in gold. Investors are turning to safe-haven assets as geopolitical tensions escalate in Europe and the Middle East. Additionally, substantial gold purchases by central banks, with China being a considerable buyer, are bolstering gold prices further. The combination of these factors has created a robust demand for gold, reflecting a broader shift towards security and stability in investment strategies. As geopolitical risks continue to loom, the appeal of gold as a reliable store of value remains strong, drawing attention from both retail and institutional investors alike. In the current week, the decisions of four central banks (People’s Bank of China, Bank of England, Swiss National Bank, and Reserve Bank of Australia) for interest rates and monetary policy will be critical for gold prices. These decisions will define yielding assets like bonds and may provide evidence for the actions of other major central banks. We may try short positions this week, considering a potential strengthening of the US dollar and an improved market sentiment in the geopolitics.

US Oil

Last week was bullish for oil with the next month’s futures closing at $78.45, with profits of 3.87%. The Federal Open Market Committee (FOMC) maintained its interest rate unchanged for the seventh consecutive time during its June meeting on Wednesday, in line with widespread expectations. Elevated interest rates have the potential to slow economic growth, which can subsequently lead to a decrease in oil demand. This decision underscores the FOMC’s cautious approach to balancing inflation control with economic stability, as the ramifications of higher rates extend across various sectors, influencing both consumer behavior and industrial activity. In China, which is also a big oil consumer, the latest data regarding inflation, money supply, and new loans disappointed the markets. This economic performance highlights the uneven recovery within the Chinese economy, creating concerns about the oil demand. The demand outlook according to the US stocks changes last week was mixed as the API weekly crude oil stocks were announced at -2.42 million barrels but the EIA crude oil stocks change showed an increase of 3.73 million barrels. Baker Hughes reported a decrease in the number of active oil rigs in the US (488 vs 492 in the week before), bringing the count to its lowest level since January 2022. This decline suggests potential future reductions in oil production, as fewer rigs typically lead to lower output. Remaining in supply, Russia’s energy ministry announced on Thursday that its oil production in May exceeded the quotas established by the OPEC alliance. In a statement, the ministry acknowledged this overproduction and assured that corrective measures would be implemented in June to align with the targeted production levels. This development highlights the challenges within the OPEC agreement and the ongoing efforts by member countries to manage production levels and stabilize the global oil market. Most of the factors align with higher oil prices but we see an over-reaction during the last days and we cannot rule out some possible corrections. We may try short positions this week.

EURUSD (Euro – US Dollar)
Last week was bearish for EURUSD as it opened at 1.0772 and closed at 1.0701. The U.S. dollar strengthened last week even as U.S. inflation decelerated.  The Fed’s FOMC meeting on monetary policy has resulted in interest rates remaining unchanged, but now the prevailing scenario for 2024 is a single rate cut. This means a shift from the anticipation in place a few months ago, under which there would be three rate cuts in the year. This is a clear factor that favours the USD since the rates will remain high for longer. On the other hand, the recent cut in interest rates by the European Central Bank, the likelihood that there will be another cut in interest rates in the autumn, and the political uncertainty brought about by the outcome of the European elections, are factors that weaken the euro. This week we will learn more about the Eurozone economy after PMIs and inflation are announced. If there is no significant change, it is not excluded that the exchange rate will move even lower, towards the support of 1.06, and for this reason, we will choose sell positions this week.

GBPUSD (Great Britain Pound – US Dollar)

Bearish was the last week for GBPUSD, as it opened at 1.2727 and closed at 1.2686. As expected, the Federal Reserve maintained interest rates at their current levels. Additionally, they signalled a plan to implement just one rate cut this year. This forecast falls short of what the market had been expecting for 2024, where more aggressive rate cuts were anticipated. The Fed’s cautious approach suggests a more gradual easing of monetary policy than investors had hoped for. On the other hand, the sterling was unable to react in particular since the macroeconomic results of the United Kingdom did not favour it. The unemployment rate in the United Kingdom for the previous month rose from 4.3% to 4.4%, and the country’s GDP in April stagnated.  Industrial production and manufacturing performed negatively in the previous month by 0.9% and 1.4% respectively. The Bank of England’s decision on interest rates and monetary policy on Thursday will be of great importance to the markets. The Bank of England is anticipated to maintain its current interest rates however, traders are expecting a rate cut to occur in either August or September. We may try sell positions for one more week.

USDJPY (US Dollar – Japanese Yen)

USDJPY was bullish last week, opening at 156.62 and closing at 157.34. The U.S. dollar strengthened last week despite a slowdown in inflation. The Federal Reserve’s recent FOMC meeting concluded with interest rates staying steady. However, the outlook for 2024 has shifted to predict only one rate cut, a change from earlier expectations of three rate cuts for the year. This adjustment supports the USD, as it suggests that interest rates will remain elevated for an extended period. Last Friday, the Bank of Japan opted to maintain its current interest rates, a move that was widely expected following its first rate hike in seven years back in March. Additionally, the BoJ announced it would continue its Japanese government bond purchases at the existing rate, postponing any decisions on reducing these purchases until its July policy meeting, contrary to market expectations for an immediate cutback. Also, BoJ head Kazuo Ueda confirmed that while the central bank intends to gradually reduce its substantial balance sheet, the specific timing is still undetermined. Japan’s GDP fell by 0.5% in the first quarter, making things even worse for the yen. Perhaps the rise for the pair could be bigger, but it has now approached several decades ‘ highs and so opposite trends are emerging. However, we will choose buy positions for one more week.

EURJPY (Euro – Japanese Yen)
Bearish was last week for EURJPY which opened at 168.73 and closed at 168.45. Both the euro and yen were weak last week, each for its own reasons. The euro weakened after the European Central Bank’s recent rate cut and due to the political uncertainty brought by the European elections. The yen for its part had reasons to be weak since according to the Bank of Japan’s decision interest rates remained unchanged and the bond-buying program also remained unchanged until further notice. However, it seems that at this stage the problems of the euro are bigger and more intense and therefore we will prefer sell positions for one more week.

EURGBP (Euro – Great Britain Pound)

Last week was bearish for the EURGBP, as it opened at 0.8460 and closed at 0.8437. The recent cut in interest rates by the European Central Bank and the uncertainty in Europe following the strengthening of far-right factions in the last European elections have created considerable pressure on the euro.  These pressures are increasing as a recent decision by Europe will place tariffs on the purchase of electric cars from China. This may provoke a reaction from China, and a trade war will not favor European industry. Sterling on the other hand is not particularly buoyant but markets ‘ expectation that interest rates will be left unchanged in the Bank of England’s decision on Thursday gives more points. We will ride the downtrend by opening sell positions for one more week.

USDCAD (US Dollar – Canadian Dollar)

Bearish was the last week for USDCAD, as it opened at 1.3757 and closed at 1.3733. The U.S. dollar strengthened significantly last week, largely on the belief that markets will see a single Fed rate cut this year, and as long as interest rates remain high for longer, that is something that strengthens the U.S. dollar.  Nevertheless, the exchange rate developed a mild downward trend. On Wednesday, Bank of Canada head Tiff Macklem emphasized that there is a ceiling to how much the Canadian central bank can differ in its interest rate policies compared to the Fed. Macklem highlighted that while the BoC currently has some flexibility to set its own course regarding interest rates, this divergence has its boundaries. He assured that they are not approaching this limit yet, suggesting that there is still room for independent monetary policy actions before hitting the constraints posed by the need to align more closely with the Fed’s rate decisions. This statement underscores the interconnectedness of the two economies and the practical limitations faced by the BoC in maintaining a significantly different rate path from that of the Fed. A major strengthening factor for the Canadian dollar was also the rise in oil prices. The dominating factor of the USDCAD remains the USD and if it keeps on rising, we may see higher prices for the pair so we prefer buy positions this week.

USDCHF (US Dollar – Swiss Franc)
The USDCHF was bearish last week as the opening price was at 0.8954 and the closing price was at 0.8900. The exchange rate has completed three consecutive weeks of decline, and what is remarkable is that this was the case last week when the dollar had a strengthening trend. Those strengthening trends stemmed from the strong likelihood that the Fed will make a single rate cut this year. In Switzerland, on Thursday the Producer Price Index was announced that fell by 0.3% month-over-month in May, following a 0.6% increase in April. This decline was well lower than the anticipated 0.5% rise. In response to this data, market analysts predict that the Swiss National Bank will maintain its current interest rates in Thursday’s decision, a move that could strengthen the Swiss franc. Furthermore, ongoing geopolitical tensions are expected to enhance safe-haven demand, which would also benefit the franc in the near term. We believe, however, that the continued decline may cause buying power for the exchange rate as long as the dollar continues to strengthen, and for that reason we prefer buy positions this week.

AUDUSD (Australian Dollar – US Dollar)

Bullish was the last week for AUDUSD, which opened at 0.6577 and closed at 0.6614. The strengthening of the U.S. dollar was not capable of causing a downward trend in the exchange rate. In Australia, the unemployment rate slightly decreased to 4% in May, down from the 4.1% recorded in April, matching market expectations. The Reserve Bank of Australia is anticipated to maintain the interest rates during its meeting on Tuesday. However, the RBA is expected to reaffirm its stance that further interest rate hikes are still on the table if inflation begins to rise again. Last week, RBA Governor Michele Bullock emphasized the central bank’s readiness to take action should inflation persist at higher levels. Bullock’s remarks underscore the RBA’s vigilant approach to monitoring inflation trends and its commitment to adjusting monetary policy as necessary to achieve price stability. The negative picture presented by China last week, as we saw in the general commentary, was not capable of causing turbulence in the Australian dollar. After all, rising commodity and metal prices are something that boosts the Australian dollar. The People’s Bank of China is also due to announce its interest rate decision on Thursday, but no changes are expected. We may try sell positions this week, trusting that the USD strength may continue.

Bitcoin

Last week, Bitcoin was bearish and closed at $66,622 with losses of 4.33%. According to data from Glassnode, the number of active addresses has dropped to its lowest level in about 5 years. Typically, a decline in active addresses is seen as a bearish indicator for the market. However, on-chain data reveals that trading volume remains relatively high despite the decrease in active addresses. This suggests that while fewer individual users may be transacting, the overall level of activity in terms of transaction volume is still robust, indicating sustained interest and potentially significant transactions by a smaller number of participants. Concerns regarding the cryptos asset class were created after JPMorgan expressed considerations about the sustainability of the recent inflows of funds into spot Bitcoin-ETFs. The bank’s experts noted that the latest developments in Bitcoin such as the cost of mining could potentially lead to a slowdown in these inflows. They argue that the elevated valuation of Bitcoin compared to its production costs and its price relative to gold may deter new investments, causing a deceleration in the momentum of fund allocations into these ETFs. This caution reflects broader market apprehensions about the long-term viability of current investment trends in the cryptocurrency sector. Technically speaking, Bitcoin is unable to approach the recent all-time high price, and above $70K, strong selling pressures are taking place. Below $65K we may see an acceleration of the downtrend. We prefer short 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.