22/07/2024

General Comment

Last week we saw a sharp correction for most of the financial markets in the United States and Europe. In addition to the reasonable profit-taking after consecutive historical records and all-time highs, there were other reasons that led to this correction. More specifically, the chip sector experienced a selloff after the Biden administration threatened to impose stringent export restrictions on foreign chipmakers selling to China.  According to Bloomberg, the Biden administration cautioned allies that it might impose severe trade restrictions on foreign chipmakers if they continue to sell advanced chips to China. This action indicates an escalation in the Biden administration’s efforts to prevent China from acquiring the advanced chips necessary for powering artificial intelligence, amidst increasing tensions between Washington and Beijing. At the same time, former President Trump unsettled the market by proposing that Taiwan should compensate the US for defense against Chinese aggression. Following these developments, tech shares showed strong corrective trends.

Regarding the central banks and their plans to cut interest rates, the positive sentiment remains. Market participants, resting on the CME FedWatch Tool, have fully priced in a rate cut by the Federal Reserve at the September meeting, with some even opposing a 50 basis points cut. As far as macroeconomic announcements go, the only major announcement for the United States economy was retail sales, which were unchanged from the previous month, confirming market estimates.

In the Eurozone, Thursday’s meeting on interest rates and monetary policy and the press conference that followed were important. The European Central Bank (ECB) kept interest rates unchanged, as widely expected, and did not commit to a specific monetary policy path. Policymakers reiterated that rate decisions will be data-dependent and made on a meeting-by-meeting basis. During the ECB press conference, key points included that the Eurozone area economy grew in the second quarter, while investments suggest muted growth for 2024. The recovery is expected to be supported by consumption, with a resilient labor market creating more jobs, particularly in services. Despite high domestic inflation and elevated wage growth, inflation is anticipated to hover near current levels for the rest of the year before declining to target in the second half of next year. Risks to growth are tilted to the downside, and the policy decision was unanimous, emphasizing a data-dependent approach without a predetermined rate path for September.

In addition to Europe and the United States, China had also important economic announcements. China’s economy grew 4.7% year-over-year in the second quarter of 2024, down from 5.3% in the first quarter, according to the National Bureau of Statistics (NBS). This growth surpassed market expectations of 5.1%. June’s Retail Sales increased by 2.0% year-over-year, below the 3.1% expected and 3.7% prior, while Industrial Production grew 5.3% year-over-year, exceeding the 5.0% estimates but slightly lower than May’s 5.6%. Fixed Asset Investment rose by 3.9% year-to-date in June, matching expectations but down from the previous 4.0%.

As per the geopolitical developments, on Sunday, Biden announced his withdrawal from the presidential race, an unprecedented move that leaves the Democrats without a candidate less than four months before Election Day. In a subsequent post, Biden endorsed Vice President Kamala Harris, but it remains to be seen if voters will rally behind her. Markets did not have any significant reaction in the first hours of the new trading week.

To sum up all the above, the main stock indexes in Europe and the United States moved with strong corrective trends. The correction was strong for most commodities such as copper and oil, while lower pressure was placed on gold. The U.S. dollar came under strong pressure at the beginning of the week but managed to recover over the last two days and wrote a profitable week. Bond markets did not have much swing, with the yield on the U.S. 10-year bond closing Friday just above 4.24%. Finally, the recovery of Bitcoin and most cryptocurrencies has been impressive, and it has had one of the most profitable weeks in recent months. Details of all asset classes will be seen in the individual sections below.

In the week that has just begun the spotlights will logically fall on the United States economy. Personal consumption expenditures are announced on Thursday and Friday. These measures are the Fed’s favorite indicator of inflation. On Thursday the US GDP for the 2nd quarter of the year will be also announced. These announcements may give a much better picture of the state of the U.S. economy and help the Fed in its decisions. The PMI indicators for the world’s major economies are also announced in the current week as well as the Bank of Canada’s decision on interest rates and monetary policy.

SP500

The US SP500 index was bearish last week as it closed at 5,504.99 points and loss of 1.97%. There were multiple factors contributing to this correction, beyond just the natural profit-taking after a series of record highs. A significant reason was a selloff in the chip sector, spurred by the Biden administration’s warning of stringent export restrictions on foreign chipmakers selling to China. There is a possibility of severe trade restrictions if these companies continue their sales of advanced chips to China. This move signifies an escalation in efforts to block China from obtaining advanced AI-powering chips, amid growing tensions between Washington and Beijing. These factors together prompted a marked correction in tech stocks. Despite these developments, optimism persists regarding central banks’ plans to reduce interest rates. Based on the CME FedWatch Tool, market participants have fully anticipated a rate cut by the Federal Reserve in their September meeting. On the macroeconomic front, the only significant announcement for the US economy was that retail sales remained unchanged from the previous month, aligning with market expectations. In the current week, the focus will be on the PCE and GDP announcements and the developments regarding the replacement of Joe Biden. We may try short positions for one more week.

DAX40

The German DAX40 index was bearish last week, closing at 18,171.93 points, with losses of 3.07%. It was a strong correction for DAX40 after four consecutive bullish weeks. Obviously, the European markets were affected by the negative economic sentiment in the USA. The fears of a trade war between the West and China will undoubtedly influence the German economy since China is one of the biggest importers and consumers of German goods. Furthermore, the German economy had negative economic results last week. The economic sentiment according to the ZEW survey, dropped to 41.8 from 47.5 in June and the producer price index increased by 0.2% in June vs 0% in May. On Thursday, the European Central Bank had its meeting on interest rates and monetary policy. The ECB decided to keep interest rates unchanged, as anticipated and did not commit to a specific future policy path. Policymakers emphasized that rate decisions will be based on data and made on a meeting-by-meeting basis. Growth risks in the Eurozone are skewed to the downside, and the policy decision was unanimous, stressing a data-dependent approach without a set rate path for September. Markets were expected a clearer stance and more hints for rate cuts in September so the reaction was negative. We may try short positions this week too.

FTSE100

The British FTSE100 index moved downward last week, closing at 8,167.5 points, losing about 0.84%. Speculation is mounting among traders about a potential interest rate cut by the Bank of England in August, bolstered by persistently low inflation for the second consecutive month. In June, inflation held steady at 2% in the United Kingdom, with both the producer price index and the retail price index indicating a downward trend. Additionally, the economic data released on Thursday and Friday was unfavorable, with jobless claims surpassing market expectations and a 1.2% drop in June retail sales. This challenging economic climate might increase the pressure on the Bank of England to lower interest rates. FTSE100 has been in a tight sideways channel for the last 6 weeks without an obvious trend or direction. Below 8,100 points we may see a new downtrend forming and we’re keen to try short positions this week.

Gold

The previous week was bearish for gold, with the next month’s futures closing at $2,399.1 and losses of 0.89%. During the week, gold prices reached a new all-time high at $2,488.4. This upward rally was driven largely by increasing anticipation of a Federal Reserve rate cut in September. This expectation was reinforced by similar statements from other Fed officials, pushing the likelihood of a September rate cut to 96.2% as per the CME FedWatch Tool. Consequently, gold, which tends to benefit from lower interest rates, skyrocketed to a record high on Wednesday. However, the momentum shifted mainly on Friday, with gold prices accelerating lower. This decline was influenced by a stronger dollar and profit-taking. The stronger dollar made gold more expensive for holders of other currencies, exerting downward pressure on prices. Additionally, after such a meteoric rise, some investors chose to lock in gains, further contributing to the pullback. Despite the recent dip, the market remains attentive to future Federal Reserve actions and their potential impact on gold prices so we may try long positions this week.

US Oil

Last week was bullish for oil with the next month’s futures closing at $78.64, with a loss of 4.34%. The week started with oil prices under pressure due to concerns about China’s economic growth. China’s GDP growth rate of 4.7% did not meet expectations, triggering apprehensions about demand. However, these demand concerns eased in the next few days according to the stock announcements in the USA. According to the American Petroleum Institute, the weekly crude oil stocks in the USA dropped last week by 4.44 million barrels. According to the US Energy Information Administration, the crude oil stock change was 4.87 million barrels. Those two figures confirm a high demand in the USA. Two significant factors contributed to the decline in oil prices though. Firstly, growing optimism about a potential ceasefire in Gaza began to diminish the geopolitical risk premium that had been buoying oil prices. Secondly, the US dollar strengthened due to strong economic data, making dollar-denominated oil more costly for international buyers. Although there were two bearish weeks for the oil price, the demand which remains high and the potential of interest rate cuts may lift the prices again so we may try long positions this week.

EURUSD (Euro – US Dollar)
Last week was slightly for EURUSD as it closed at 1.0881 about 25 pips below the close price of the previous week. On Wednesday, the exchange rate touched the price area of 1.0950 which we had not seen since last March. From Thursday onwards, however, the EURUSD slipped below 1.09, as markets assessed the policy outlook for the European Central Bank for the remainder of the year. On Thursday, the ECB kept interest rates steady, as anticipated. That decision was more or less expected but raised concerns because the inflation announcement in the Eurozone that preceded it the day before showed how much inflation remains stuck at 2.5%. ECB head Christine Lagarde did not provide any guidance for future meetings, indicating that the September decision remains open. Markets still anticipate that the ECB might resume cutting interest rates in September as the central bank may focus on growing economic concerns. This weekly picture of the pair was helped by the US dollar too, which from Thursday onwards began to regain its momentum. It seems that the scenarios of 1.10 have a low probability for the time being at least since the euro cannot develop such upward momentum, 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 1.2964 and closed at 1.2912. The exchange rate managed to exceed the milestone price of 1.30 during the week, which had not been done for about a year. But then it came under pressure and retreated to the price range of 1.29. While all the analyses are consistent that the Fed will cut interest rates in September, the U.S. dollar gained support from Thursday onwards. Federal Reserve officials, including John Williams and Mary Daly, seem to remain cautious about cutting interest rates. As per the UK, traders are speculating on the possibility of an interest rate cut by the Bank of England in August. This scenario is reinforced by low inflation in the country for the second month in a row. In June inflation remained unchanged at 2% in the United Kingdom, while the producer price index and the retail price index also were announced in the direction of decreasing inflation. On Thursday and Friday, the economic results for the UK were not positive after there was a rise in jobless claims above market expectations while the retail sales in June fell by 1.2%. This negative economic environment may make it more imperative for the Bank of England to cut interest rates, which will weaken sterling even further and therefore we may try sell positions this week.

USDJPY (US Dollar – Japanese Yen)

USDJPY was bearish last week, opening at 158.06 and closing at 157.43. In the first three days of the week, the exchange rate had strong downward trends, but the dollar recovered from Thursday and onwards, easing the fall without, however, a global reversal. The analysis of the United States economy last week was about the Fed and its future plans, and there is a common view that in September we could see a rate cut. In Japan, things seem to be very different though. Japan’s inflation rate held steady at 2.8% in June, while core inflation increased slightly to 2.6% from 2.5%. The rise in core inflation bolstered speculation that the Bank of Japan might hike interest rates during its July meeting. Supporting this view, Japan’s Digital Minister Kono Taro told Bloomberg that another rate increase in July is necessary to strengthen the yen. In an interview on Bloomberg Television on Wednesday, Taro Kono discussed the issues caused by the yen’s steep decline against the dollar, noting its inflationary impact on domestic prices. Kono explained that although a weaker yen can enhance export competitiveness, the advantage is now limited as numerous Japanese companies have established production facilities abroad. This view strengthens the Japanese currency, which is also reinforced by the strong rumors that have been circulating lately of Japan’s possible intervention in the foreign exchange market. We may try sell positions for one more week.

EURJPY (Euro – Japanese Yen)
Bearish was last week for EURJPY which opened at 172.06 and closed at 171.32. The euro suffered some losses following the European Central Bank’s decision to leave interest rates unchanged last Thursday and due to the cautious stance used by Christine Lagarde at the press conference in relation to a possible September rate cut. Japan’s currency had a reason to strengthen though. The increase in core inflation has fueled speculation that the Bank of Japan might raise interest rates during its July meeting. Japan’s Digital Minister, Taro Kono, supported this expectation, stating in a Bloomberg interview that another rate hike is essential to bolster the yen. This perspective has strengthened the yen, further supported by strong rumors of potential intervention by Japan in the foreign exchange market. Unless something important changes, we may see a third week in a row for the exchange rate and therefore we prefer sell positions.

EURGBP (Euro – Great Britain Pound)

Last week was bullish for the EURGBP, as it opened at 0.8388 and closed at 0.8427. Neither the euro nor sterling was particularly strong last week. The euro weakened after the European Central Bank decided to leave interest rates unchanged and keep a cautious stance on its next steps. However, sterling weakened even further because low inflation in the UK (2% announced for the last month) combined with some negative economic outcomes for the UK economy (unemployment and retail sales) have created a sense that the Bank of England will cut interest rates at its August meeting. We may stay out this week.

USDCAD (US Dollar – Canadian Dollar)

Bullish was the last week for USDCAD, as it opened at 1.3643 and closed at 1.3728. Canada’s inflation was announced for June at 2.7%, down from the previous month’s 2.9%. This development has significantly increased the likelihood that the Bank of Canada at next Thursday’s meeting will cut interest rates by 0.25%. It’s a development that weakens the Canadian dollar. In addition, Canada’s economy has had a number of negative performances according to last week’s announcements. Wholesale sales fell in May by 0.8%, retail sales fell in the same month also by 0.8% while industrial production remained unchanged even though markets expected an increase of 0.2%. An aggravating factor for the Canadian dollar was also the decline we saw in oil prices. On top of these developments, the US dollar strengthened in the last two days of the week, making the rise of the USDCAD even greater. This strengthening may carry on so we prefer buy positions for the current week.

USDCHF (US Dollar – Swiss Franc)
The USDCHF was bearish last week as the opening price was at 0.8928 and the closing price was at 0.8887. The U.S. dollar was weak until Wednesday, so the exchange rate managed to develop a strong downward trend. Fed officials ‘ statements for a possible interest rate cut in September, and possibly more times in the year, made the U.S. dollar weak. On the other hand, the Swiss franc has been favored lately mainly because of the geopolitical and political uncertainty that prevails in many parts of the world. The Swiss franc is considered a safe haven in times of crisis. This strengthening of the franc, however, is limited because of market expectations that the Bank of Switzerland could make another interest rate cut. We may try buy positions this week.

AUDUSD (Australian Dollar – US Dollar)

Strongly bearish was the last week for AUDUSD, which opened at 0.6768 and closed at 0.6684. It was the first bearish week for the AUDUSD after five consecutive weeks of rising. The U.S. dollar was weakening until last Wednesday but from Thursday then had a strong rebound. The main reason the Australian dollar weakened was the Australian labor market announcement for the previous month. The unemployment rate in Australia, which rose to 4.1% from 4% last month, shows that the Australian labor market is starting to have problems, which significantly reduces the likelihood that the Reserve Bank of Australia will raise its interest rates. Also, a negative factor for the Australian dollar was the fall in the prices of many commodities such as gold and copper. The U.S. dollar will have the most important role this week as major announcements on the U.S. economy are expected. We may try sell positions for one more week.

Bitcoin

Last week, Bitcoin was strongly bullish and closed at $68,158 with profits of 12.06%. Joe Biden’s decision to quit the presidential race has propelled crypto-friendly Donald Trump into a commanding lead in the presidential election race. This development sparked a wave of enthusiastic buying frenzy in the cryptocurrency market. Investors are betting on Trump’s favorable stance towards digital currencies, anticipating a regulatory environment that could be more supportive of crypto innovation and adoption. This surge in market activity saw significant gains across various cryptocurrencies, reflecting the high hopes and optimism among crypto enthusiasts for a Trump presidency. Also, the potential of interest rate cuts in the next few months creates optimism as there will be a risk-on mood, and asset classes such as the cryptos will be favored. The trend during the last two weeks is bullish but the latest news may easily be consumed by the markets and corrections may occur. Under these considerations, 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.