24/06/2024

General Comment

Volatility was relatively low for financial markets last week, which was expected after major announcements were missing in the United States and the Eurozone and no other important developments took place. In contrast, in some other markets volatility has been high, mainly due to central bank decisions on interest rates and monetary policy.

Taking things from the beginning, the announcements concerning the United States economy last week had a mixed sign. The Commerce Department reported a modest 0.1% increase in retail sales for May, following a revised 0.2% decline in April. The Federal Reserve reported that industrial production grew by 0.9% in May, exceeding consensus expectations and marking the quickest growth rate in almost a year. Following Wednesday’s public holiday (Juneteenth), Thursday’s announcements were again negative for the U.S. economy after the initial jobless claims building permits and housing starts announced below market expectations. However, the positive sentiment returned on Friday after the PMI announcements had impressive results in both manufacturing and services.  As for the Fed and its interest rate intentions in the year, we had a lot of officials talk in the week without adding anything new to our knowledge. Fed officials are cautious, keep repeating that data over the next few months will determine their moves, and markets expect one or two rate cuts by the end of the year.

In Europe and the Eurozone in particular, nothing seems to have changed as far as the intentions of the European Central Bank are concerned, so markets are waiting for the next rate cut from the autumn onwards. The inflation appears to be under control but also persisting after it was announced last week at 2.6% for the previous month. A major disappointment for Eurozone economies came through the announcement of PMI indicators for manufacturing. Although manufacturing has been showing signs of recovery lately, it seems that there is still a long way to go in European economies.

Four central banks last week announced their decisions on interest rates and monetary policy.  The People’s Bank of China, the Bank of England, and the Reserve Bank of Australia left interest rates unchanged, while the Swiss National Bank cut them by 0.25%. Details will be presented below.

The European Union has imposed temporary additional tariffs ranging from 17.4% to 38.1% on Chinese electric cars after a lengthy investigation into unfair subsidies. Germany, fearing negative impacts, tried to avert this decision in Brussels. The new tariffs range from 17.7% for BYD vehicles to 38.1% for SAIC vehicles. China has strongly condemned the move, citing it as unjustified and harmful to economic and climate goals.

Stock markets in Europe and the United States were positive last week. The commodity market had a mixed picture after gold and copper fell and oil made gains. In the currency markets the big winner was again the US dollar, which made gains for the third week in a row. The big losers include the Japanese yen and the Swiss franc as we will see in detail below. In bonds, there was a slight rebound in yields, with the yield on the U.S. 10-year bond closing the week near 4.26%. Finally, Bitcoin and most cryptocurrencies have been under downward pressure.

The current week the microscope of the markets will again focus on the American economy and its announcements. Stand out are the first-quarter U.S. GDP announcement and the personal consumption expenditures announcement which is the Fed’s favorite inflation indicator. In the rest of the world, the announcements of retail sales and unemployment in Germany and the announcement of inflation in Japan stand out.

SP500

The US SP500 index was bullish last week as it closed at 5,464.61 points and profits of 0.61%. The upward trend for the index continued for the third week in a row, with a new all-time high price. Technology companies continue to be the driver in this upward trend of U.S. indices.  Markets are optimistic that developments in Artificial Intelligence will be a breakthrough and will bring an increase in global productivity and the economy. However, SP500 faced pressure in the last two sessions of the week, as investors took profits from Nvidia and other high-performing AI-related stocks. Economic results in the United States continue to impress the markets and this has been confirmed once again by PMI indicators that have far exceeded market expectations in both manufacturing and services. The Fed and the potential rate cuts it may make by the end of the year remain under the market’s microscope, with the highest probability gathering on one or two cuts. Markets are now anticipating the Fed-preferred Personal Consumption Expenditures inflation measure and Q1 2024 GDP data this week for further guidance. Additionally, earnings reports are expected from companies such as FedEx, Micron Technology, Inc., and Nike. The fact is that the correction of Thursday and Friday has caused some concerns, and it is not excluded that it will be extended so we will choose short positions this week.

DAX40

The German DAX40 index was bullish last week, closing at 18,163.52 points, with profits of 0.90%. Remarkably, the index managed to have a bullish week when many factors were against this move. The economic sentiment announced by the ZEW Survey fell sharply last month and all the PMI indicators, manufacturing-services-composite, were announced below market expectations. There are also strong concerns about the German auto industry over the European Union’s recent announcement to impose tariffs on Chinese electric vehicles. There is a serious possibility that China will retaliate against German carmakers, whose main destination is China. But judging by the upward reaction of DAX40 on Thursday, we conclude that the announcement of the producer price index which fell by 2.2% in the previous month, and the decisions of central banks on interest rates, in Switzerland and the United Kingdom caused a bullish recovery for DAX40. The political crisis, and the problems of the German and European economies, however, continue to exist and this can be reflected in the stock indices sooner or later. We may try short positions this week.

FTSE100

The British FTSE100 index moved upward last week, closing at 8,230.8 points, earning about 0.69%. The Bank of England left interest rates unchanged at last Thursday’s meeting, which was expected by markets. However, the FTSE100 reacted positively as the inflation announcement on Wednesday was quite encouraging. Inflation last month was announced at 2% which means the Bank of England’s target has been met and the likelihood of immediate interest rate cuts from the Bank of England is now very strong. This could be a deep breath for the UK economy. In addition, retail sales in the UK rose by 2.9% in May, a month-on-month level, indicating that consumption remains high in the country. Despite the positive developments mentioned above, the downward trend that has started since mid-May does not yet appear to have changed. Short positions is our selection for the current week.

Gold

The previous week was bearish for gold, with the next month’s futures closing at $2,331.2 and losses of 0.76%. The slight rise in bond yields is certainly an aggravating factor for gold prices since such a rise hurts non-yielding assets. Additionally, the continuous strengthening of the US dollar has exerted further downward pressure on gold. It’s important to recall that gold is priced in US dollars, and thus, any appreciation in the dollar typically leads to a decrease in gold’s price. This dual pressure from rising bond yields and a stronger dollar has created a challenging environment for gold prices. Also, US economic data for June has shown improved signals and Fed officials have delayed the timing of the first interest rate cut this year. Stronger US economic data, coupled with the hawkish stance of Federal Reserve policymakers, continues to bolster the US dollar and push gold prices down. Higher interest rates typically depress gold prices by raising the opportunity cost of holding non-yielding assets. This week the weight of markets will mostly fall on the announcement of personal consumption expenditures which is the Fed’s favorite measure of inflation in the United States. However, the recent fall in gold prices over the past few weeks may seem like an investment opportunity for many buyers so we may try long positions this week.

US Oil

Last week was bullish for oil with the next month’s futures closing at $80.73, with profits of 2.91%. The EIA Crude oil stocks report last week showed that there was a decrease in inventories of about 2.55 million barrels indicating that demand in the United States is at a high level. A positive sentiment on demand was also expressed on Friday by announcements about the United States economy, and specially manufacturing, which exceeded expectations. The oil prices continue to find support from geopolitical risks in the Middle East, as Israeli troops advance further into Gaza, and Ukrainian drone attacks on Russian refineries persist, disrupting supply. There has been a strong upward reaction to oil prices for the past three weeks when it found itself in the $ 72 price zone that the market apparently saw as a buying opportunity. So now that oil is above $ 80 a barrel, it is not excluded that we will see the opposite phenomenon, that some people will consider prices excessive and sell. We may try short positions this week.

EURUSD (Euro – US Dollar)
Last week was mildly bearish for EURUSD as it opened at 1.0703 and closed at 1.0691. The recent political crisis in Europe after the result of the European elections, especially in countries such as France and Germany has caused a mini downward trend in the euro, which is also attributed to the negative economic results announced by the Eurozone lately. Inflation has fallen significantly in the Eurozone lately and last month it was announced at 2.6% but is still far from the 2% target set by the European Central Bank. PMIs revealed that manufacturing in the Eurozone, Germany, and France contracted more sharply than anticipated. Additionally, the services sector experienced an unexpected slowdown in the Eurozone and Germany, along with a more significant decline in France. On the other hand, the U.S. dollar continues to be strong after the Fed postponed its first rate cut to the end of the year. The results of the U.S. economy are also significantly better than those of the Eurozone. The exchange rate has come close to the critical support of 1.06, which is the lowest price in the last 8 months. We may try sell positions for one more week.

GBPUSD (Great Britain Pound – US Dollar)

Bearish was the last week for GBPUSD, as it opened at 1.2682 and closed at 1.2640. The U.S. dollar is in a strengthening phase after the U.S. macroeconomic results show a resilient economy and the Fed is likely to make one or two rate cuts this year, against the perception of more cuts that prevailed a few months ago. The previous week was very important for the UK economy though. The Bank of England at Thursday’s meeting left interest rates unchanged at 5.25%, with no surprises in the vote. But it was a surprise announcement on Wednesday that last month’s inflation in the UK was announced at 2% compared with 2.3% of the month before. This development increases the likelihood that there will be a rate cut by the Bank of England within the coming months, and this fact weakens sterling even further. A recovery effort was made on Friday after the positive result of retail sales, but it was not significant. We prefer sell positions for one more week.

USDJPY (US Dollar – Japanese Yen)

USDJPY was bullish last week, opening at 157.29 and closing at 159.77. The U.S. dollar continues to strengthen as markets believe that the inflation that persists in the United States will not let the Fed cut interest rates before the end of the year. Japan’s currency is unable to show signs of recovery and the exchange rate is once again close to decades-long highs. Japan’s top currency diplomat, Masato Kanda, announced the government’s readiness to counter speculative currency movements but at the same time, the US Treasury placed Japan on a watchlist for currency manipulation. This follows the Bank of Japan’s recent decision to continue its large-scale bond purchases, with a detailed plan for tapering to be released in July. The yield on the 10-year Japanese government bond (JGB) rose to 0.97% from 0.93% the previous week, as investors reacted to May’s accelerating inflation data and its potential impact on future BoJ rate hikes. BoJ Governor Kazuo Ueda emphasized that a July rate increase remains a possibility, dependent on upcoming data, while the central bank will separately outline its tapering strategy for JGB purchases. We cannot rule out downward reactions due to overbought levels of the exchange rate, so we will try sell positions this week.

EURJPY (Euro – Japanese Yen)
Bearish was last week for EURJPY which opened at 168.39 and closed at 170.83. The euro was not particularly strong last week but that did not stop the exchange rate from climbing above 170 and approaching critical resistance at 171.60, the highest price in many decades. The recent interest rate cut by the European Central Bank and the Eurozone’s discouraging economic results leave little room for the euro to strengthen. Yet the yen continues its period of great weakness. There may be statements for increases in interest rates in the near future but the Bank of Japan’s recent decision to maintain its large-scale bond purchases continues to weaken the yen. While the trend is clearly upward, we cannot rule out corrective trends mainly from investors who will see this high price as a selling opportunity, and for this reason, we prefer sell positions this week.

EURGBP (Euro – Great Britain Pound)

Last week was bullish for the EURGBP, as it opened at 0.8428 and closed at 0.8457. Sterling has had a week of pressure after inflation in the UK dipped to 2%, hitting the target set by the Bank of England. In addition, at the Bank of England meeting, the decision was to keep interest rates unchanged. This might have been expected by the markets, but it certainly created new pressures on sterling. Beyond the fundamental reasons, there were technical reasons for this upward reaction as the exchange rate reached its lowest level since August 2022. If the market digests the latest developments in the UK and takes into account the problems of the Eurozone economy and the political crisis, perhaps the downward trend will return for this reason we may try sell positions this week.

USDCAD (US Dollar – Canadian Dollar)

Bearish was the last week for USDCAD, as it opened at 1.3727 and closed at 1.3693. What is remarkable is that the exchange rate has completed two falling weeks in a row while the US dollar continues to strengthen. Of course, the rise in oil prices has played a significant role in this move, but this is not the only cause. The recent rate cut by the Bank of Canada has raised some concerns. Bank of Canada officials have objected to a possible divergence between the Bank of Canada and the Fed on interest rates and monetary policy. The summary of deliberations outlines various risks discussed by the governing council, such as the possibility of a larger-than-anticipated economic downturn due to households renewing their mortgages at higher rates. Conversely, the central bank also considered the risk that lowering interest rates could potentially reignite the housing market. These developments were seen as hawkish by markets, boosting the Canadian dollar. The inflation to be announced on Tuesday for Canada’s economy may have a decisive role in the next developments. We may try buy positions this week.

USDCHF (US Dollar – Swiss Franc)
The USDCHF was bullish last week as the opening price was at 0.8897 and the closing price was at 0.8942. In addition to the U.S. dollar strengthening during this period, the key event last week was the Swiss National Bank’s decision on interest rates and monetary policy at Thursday’s meeting. The Swiss National Bank reduced its key interest rate by 25 basis points to 1.25%, continuing its easing policy. The majority of the market analysts had predicted this rate cut. Following the decision, the SNB set its conditional inflation forecast at 1.3% for 2024, 1.1% for 2025, and 1.0% for 2026, based on the assumption that the interest rate will remain at 1.25% during this period. In May, Switzerland’s inflation rate held steady at 1.4% after rising in April, and it is expected to average this level throughout 2024, according to the SNB’s latest projections. Also, the SNB stated it now expects economic growth of approximately 1% for this year and around 1.5% in 2025. Based on the above, the exchange rate had its first upward reaction after three sharply declining weeks. If current data continues and the USDCHF can exceed the milestone price of 0.90, an upward trend may develop and therefore we prefer buy positions this week.

AUDUSD (Australian Dollar – US Dollar)

Bullish was the last week for AUDUSD, which opened at 0.6602 and closed at 0.6640. The exchange rate managed to have a second consecutive upward week, although the U.S. dollar in the same period is strengthening. As expected, the Reserve Bank of Australia maintained interest rates at a 12-year high of 4.35% but the RBA is likely to keep the possibility of a rate hike open this year due to persistent inflation, At the post-meeting press conference, the Reserve Bank of Australia maintained this hawkish tone as Michele Bullock stated that the board debated the necessity of an interest rate hike during the June meeting but did not consider the possibility of a rate cut. Based on these developments, the rise for the Australian dollar may have been even greater but the fall in the price of some commodities such as gold and copper has not helped.  China also had mixed results, so its results did not particularly affect the Australian dollar. Industrial production in China rose but below market expectations, while retail sales were announced above market expectations. Sooner or later, however, the US dollar is expected to dominate the exchange rate again and if its strengthening continues, we may see the downward trend return. We may try sell positions this week.

Bitcoin

Last week, Bitcoin was bearish and closed at $63,154 with losses of 5.21%. Downward pressure on Bitcoin and most cryptocurrencies continues with great intensity. According to Google Trends, interest in Bitcoin from retail investors has been steadily declining since March. Also, over the past four weeks, Santiment has recorded extremely negative investor sentiment towards Bitcoin. Data indicates that Bitcoin ETFs experienced outflows exceeding $730 million over the past week. These consistent outflows suggest a decrease in demand. So, we see that in Bitcoin and most cryptocurrencies, both retail investors and institutional investors have reduced interest, and they remove capital from the crypto markets. This removal cannot be justified solely by economic data relating to traditional markets. The sentiment and economic sentiment in traditional markets are not so risk-off as to justify doing so. We may try 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.