29/07/2024

General Comment

The correction in U.S. equity markets continued for a second week in a row. The week was kind of special as the SP500 experienced a sell-off of over 2% on Wednesday, marking its first significant drop since February 2023. Meanwhile, the Nasdaq endured its most substantial loss since October 2022. On Wednesday, in the USA it was revealed that only 617K new homes were sold in June, falling short of the anticipated 640K and marking the lowest monthly figure since last November. At the same time, the U.S. manufacturing PMI index had a surprising value after being announced at 49.5 versus 51.7 that markets had forecast. These two Wednesday announcements mainly caused the strong correction of the United States market.

However, Thursday brought several positive surprises in the data, potentially fuelling a bullish recovery from their midweek lows. The US reported a 0.5% increase in durable goods orders, excluding transportation. Additionally, weekly and continuing jobless claims dropped more than expected, while personal consumption expenditures grew at an annualized rate of 2.6% in the second quarter. Moreover, the initial estimate revealed that the US economy expanded at an annualized rate of 2.8% in the second quarter, significantly above expectations and double the first-quarter growth rate. However, a substantial portion of this growth was attributed to inventory building and increased government spending.

On Friday, markets in the United States had a mild recovery as the personal consumption expenditures for the past month, rose 2.5% as much as markets had expected. In total, last week’s data did not change markets ‘ perception of the Fed and expected reductions in interest rates.  According to the FedWatch tool, there is a slight probability of around 6% for a 0.25% reduction in interest rates at next Wednesday’s meeting however, for the September meeting things are very different. There is an 88% chance of a 0.25% reduction while there are chances of a 0.50% reduction and even a low chance of a 0.75% reduction.

Markets are concerned about technology and artificial intelligence and whether they could contribute to global GDP and economic growth. The nervousness of the market in the last two weeks indicates a doubt in this scenario considering that there has been a pro-optimism.

In Europe, things were completely different last week as equity markets were on the rise. This is due in large part to Friday’s big rise with the investment community focusing on the companies ‘ quarterly results showing encouraging signs. PMI indicators, however, in both manufacturing and services were below market expectations in the Eurozone.

Outside Europe and the United States, a rate cut that we have seen from the People’s Bank of China has made an impression. At Monday’s meeting, the People’s Bank of China cut its key interest rate from 3.45% to 3.35%. This rate cut was an unexpected move, likely driven by the significant slowdown in growth momentum during the second quarter and the objective set by the third plenum to achieve this year’s growth target. Additionally, some analysts believe that increasing expectations for the Federal Reserve to begin cutting interest rates have provided the PBoC with the opportunity to ease its policy. This is especially pertinent given the pressure on the yuan caused by the substantial yield gap with the dollar.

As per the geopolitics, Israel has sparked a major conflict in the Middle East by confronting Hezbollah, whom it accuses of the deadly attack in the annexed Golan Heights that resulted in the deaths of 12 children. Israel, which is considering how to retaliate, has vowed that the Lebanese organization (which denies involvement in the attack) “will pay a heavy price“. Meanwhile, Hezbollah’s main ally, Iran, warned of “unimaginable consequences” if it is attacked. Although skirmishes between the two sides are not unusual in the region, tensions have escalated dangerously this time. Thousands attended the funeral of the 12 children, demanding revenge, while Israeli Prime Minister Benjamin Netanyahu cut short his trip to the United States and hurried back home to participate in a war council. Markets do not seem to worry for the moment but a possible involvement of Iran may bring heavy turbulences mainly due to oil support to the global markets.

To recap the above, the past week has been a corrective for most major equity indices in the United States while on the contrary, it has been upward in the respective European markets. Bond markets were slightly correcting, with the yield on the U.S. 10-year bond closing Friday just below 4.20%. The U.S. dollar also strengthened last week against its main competitors, such as the euro, sterling, and the Australian dollar, but the dollar index held relatively low due to the strengthening of the Japanese yen and the Swiss franc. The commodities market had significant losses with commodities such as gold, oil, and copper all trending down. Bitcoin and most cryptocurrencies have been stabilizing in the past week.

The spotlights of the markets will continue to be on the United States economy in the current week as well. On Wednesday is the Fed’s meeting on interest rates and monetary policy. There is a small chance of a 0.25% cut in interest rates but the prevailing scenario is that interest rates will remain unchanged. Of course, markets will monitor closely the press conference that will follow. On Friday, the U.S. labor market (NFPs) will be announced, and it is one of the economy’s biggest barometers. Two major central banks will also announce their decisions on interest rates and monetary policy: the Bank of Japan on Wednesday and the Bank of England on Thursday.

SP500

The US SP500 index was bearish last week as it closed at 5,459.09 points and loss of 0.83%. Markets have some concerns regarding the course of the companies in the technology sector. Many analysts believe that the contribution of the new AI features has been overestimated. Investors eagerly anticipate the upcoming wave of earnings reports from leading technology giants. This week, Apple, Intel, Amazon, MicroStrategy, Twilio, ADP, Microsoft, and Meta Platforms are all scheduled to unveil their latest quarterly results. Last week’s results for the US economy had mixed signs and caused mixed emotions. Last week, the US revealed disappointing data with fewer new homes sold in June than expected, marking the lowest figure since last November. The US manufacturing PMI was also surprised with a lower-than-anticipated value. These factors led to a significant market correction midweek. However, positive data on Thursday sparked a recovery. Durable goods orders increased, jobless claims dropped more than expected, and personal consumption expenditures grew slightly in the second quarter. The US economy expanded significantly in the second quarter, doubling the growth rate of the first quarter, driven largely by inventory building and government spending. On Friday, the markets saw a mild recovery as personal consumption expenditures rose as expected. Despite the data, market perception of the Fed remained unchanged with a slight probability of an interest rate reduction at next Wednesday’s meeting. However, for the September meeting, there is a high chance of a rate reduction, with possibilities for even larger cuts. It is going to be a volatile week mainly due to the FOMC on Wednesday and NFPs on Friday but maybe markets will pay more attention to the quarterly results of the tech companies. If these results fail to meet the expectations, the correction may be even deeper so we may try short positions for one more week.

DAX40

The German DAX40 index was bullish last week, closing at 18,417.55 points, with profits of 1.35%. The European markets, including DAX40, are positive that the European Central Bank will keep on reducing interest rates starting with the next reduction in September. Although Monday was a profitable day, the following days we saw corrective trends but on Friday there was a strong recovery that brought this positive weekly result. European stocks ended Friday on a high note, propelled by earnings gains in various sectors such as luxury. Meanwhile, global markets stayed steady following data that indicated a positive trend in US inflation. It is impressive thought that this profitable week came along with a series of negative results for the German economy. July’s manufacturing PMI was announced at 42.6 vs 44 the markets expected. Same picture for services PMI (52 vs 53.1) and composite PMI (48.7 vs 50.7). Also, the business climate, the IFO expectations, and the IFO current assessment were all well below market expectations. These results do not shape a situation of optimism for the German economy and if it is combined with a cautious stance from the ECB, we may see corrections in DAX40. We may try short positions this week.

FTSE100

The British FTSE100 index moved upward last week, closing at 8,132.4 points, earning about 1.77%. The FTSE100 had an impressive performance and the last time we saw something like this on a weekly basis, was about three months ago. However, even this strong movement was not able to make the FTSE100 exit from the sideways channel of the last two months. Technically speaking, it takes a solid breakout above 8,365 points. The UK investing community was in euphoria since the UK’s low inflation rate, holding steady at 2% for the past two months, has strengthened market confidence that the Bank of England will soon begin an aggressive cycle of interest rate cuts. The upcoming meeting next Thursday is expected to result in a 0.25% rate cut, bringing the rate down from 5.25% to 5%. Further reductions are anticipated throughout the year. Additionally, the UK economy received positive news last week. All PMI indicators—manufacturing, services, and composite—were reported above 50, signaling expansion. Except for the services sector, these figures also surpassed market expectations, further bolstering economic optimism. Although, according to the futures market, the week has started positively for the FTSE100, we believe that the situation is not still mature for reaching all-time highs, so we prefer short positions for the current week.

Gold

The previous week was bearish for gold, with the next month’s futures closing at $2,381 and losses of 0.75%. The mixed economic data has created optimism about the Fed’s upcoming actions, leading markets to anticipate a higher likelihood of a rate cut in September. Such expectations generally bolster gold prices. After the release of the Personal Consumption Expenditures data, the 10-year bond yield dropped significantly, which further supported gold prices. Recent signs of progress on inflation have fueled expectations that the Fed might begin easing monetary policy in September. This prospect has bolstered the price of precious metals, as lower interest rates typically decrease the opportunity cost of holding non-yielding assets like gold. The anticipation of the Fed’s stance towards its monetary policy has made precious metals more attractive to investors. Physical demand also significantly influenced gold’s performance last week. India’s decision to cut import duties on gold and silver stimulated physical demand, driving gold premiums in the country to their highest level in a decade. This surge in demand likely helped counteract some of the downward pressure on gold prices. Analyzing this development, India’s move to reduce import duties is a strategic attempt to curb illegal gold imports and bolster the domestic jewelry industry. Furthermore, the increase in physical demand from one of the world’s largest gold markets could provide a stabilizing effect on global prices. As India accounts for a significant portion of global gold consumption, any substantial changes in its demand patterns can ripple through the international market. Meanwhile, escalating geopolitical tensions in the Middle East may further bolster safe-haven assets like gold. This follows Israel’s pledge to retaliate strongly against Hezbollah, heightening regional instability and driving investors toward the security of gold. The increased demand for gold as a safe-haven asset could reflect the market’s response to the growing uncertainty and potential risks arising from the conflict so we may try long positions this week.

US Oil

Last week was bearish for oil with the next month’s futures closing at $77.16, with losses of 1.88%. Crude oil declined for a third consecutive week, being at a crossroads with various potential outcomes. Oil prices were affected by reduced demand from China despite a significant drop in US crude inventories. China’s economic slowdown, reflected in decreased oil imports and refinery activity, has heavily influenced prices. Geopolitical developments, like ceasefire talks between Israel and Hamas, have alleviated supply concerns, further contributing to the decline. However, the latest conflict in the Middle East between Israel and Hezbollah may complicate things. Although China has implemented rate cuts to stimulate its economy, these have not reversed the declining oil demand, with imports falling significantly year-over-year. Conversely, US crude inventories have seen a robust decrease, indicating strong domestic demand. According to the American Petroleum Institute, the weekly crude oil stocks dropped last week by 3.9 million barrels, and according to the US Energy Information Administration, the crude oil stock change last week was -3.74 million barrels. Positive US economic data and expected Fed rate cuts may support oil demand, but broader macroeconomic concerns could temper these effects. This week, the new conflict in the Middle East may prevail though and it can create fears that can lift the oil prices. We may try long positions.

EURUSD (Euro – US Dollar)
Last week was bearish for EURUSD as it opened at 1.0883 and closed at 1.0855. In the first three days of the week there has been a strong downward trend while in the two last there has been an attempt to recover but without changing the downward sign. Markets have been anticipating a rate cut in the United States in September, so it looks like the dollar isn’t weakening anymore. Weak PMI data for the Eurozone have heightened expectations for the European Central Bank to implement two more interest rate cuts this year. This is a development that weakens Europe’s shared currency. ECB Vice President Luis de Guindos mentioned that more information, including new macroeconomic projections, will be available in September, allowing for a more accurate reassessment of monetary policy. In July’s session, the ECB held interest rates steady as anticipated, and Christine Lagarde indicated that the September decision remains wide open. If all these data remain the same, it is not excluded that the exchange rate will have a third consecutive falling week and for this reason, we may choose sell positions this week.

GBPUSD (Great Britain Pound – US Dollar)

Bearish was the last week for GBPUSD, as it opened at 1.2912 and closed at 1.2865. The exchange rate continued the downward trend that had started the week before. Low inflation in the UK (2% for two consecutive months) has cemented confidence in markets that the Bank of England will start the cycle of cutting interest rates aggressively. The next meeting is next Thursday, and markets expect a rate cut by 0.25%, from 5.25% to 5%.  There may be further reductions this year. It seems that because of low inflation, the Bank of England could be more determined to cut interest rates than the Fed, and that is what is creating the corrective pressures on the exchange rate. The UK economy also had positive economic news last week. All PMI indicators (manufacturing, services, and composite) were announced above 50 and with the exception of services, above market expectations. We may try sell positions for one more week.

USDJPY (US Dollar – Japanese Yen)

USDJPY was strongly bearish last week, opening at 157.35 and closing at 153.79. Within the week the rate found itself below even 152, something we had not seen since last April. Investors are anticipating the Bank of Japan’s policy meeting on Wednesday, which most likely could result in a rate hike. Markets are also evaluating data indicating that Tokyo’s inflation rate, which was announced at 2.2%v in July, accelerated for the third consecutive month. Additionally, the BoJ is expected to unveil its bond purchase tapering plans this week as part of its efforts to de-stress its extensive monetary stimulus. Another reason for the yen’s strength was its safe-haven buying amidst the recent sell-off in global equities. In the last three weeks, the rate has lost more than 700 pips, and it is not impossible to see bullish reactions even of technical type. For this reason, we will choose buy positions this week.

EURJPY (Euro – Japanese Yen)
Strongly bearish was last week for EURJPY which opened at 171.27 and closed at 166.94. The euro has been in a weakening phase for several weeks, mainly due to the European Central Bank’s recent cut in interest rates and expected new cuts this year, most likely starting in September. On the other hand, for the past three weeks, Japan’s currency has been strengthening since there is confidence in markets that the Bank of Japan is going to move aggressively by raising interest rates. Perhaps the start will be from Wednesday’s meeting, and if this is accompanied by a reduction in the bond-buying program, the Japanese currency will strengthen further. But it is not out of the question that we will see a bullish reaction to the exchange rate, perhaps for technical reasons and perhaps for reasons of buy the rumor-sell the news effect, regarding the Bank of Japan. We may try buy positions for one more week.

EURGBP (Euro – Great Britain Pound)

Last week was bullish for the EURGBP, as it opened at 0.8424 and closed at 0.8436. The central banks of the two economies have entered a path of cutting interest rates following the decline in inflation. The fact is that inflation in the UK has fallen more sharply, reaching 2%, and so it is expected that the Bank of England could move more aggressively in reductions. The European Central Bank has already made a reduction and it is not excluded that this will happen again in September. Buy positions is our selection for the current week.

USDCAD (US Dollar – Canadian Dollar)

Bullish was the last week for USDCAD, as it opened at 1.3716 and closed at 1.3837. The U.S. dollar has been in a phase of a slight upward reaction for about 2 weeks, after the big fall that preceded it. The reason is that the markets have slowly digested the looming rate cuts from the Fed, given that the rest of the central banks are in the same phase. The Bank of Canada last Wednesday cut interest rates by 0.25% from 4.75% to 4.5%. This is the main reason for the increase in the exchange rate, which was found in a price band that we had not seen since last November. Tiff Macklem in the press conference stated that a significant rise in the jobless rate is unnecessary to achieve the inflation target, as inflation is already decreasing and the labor market is rebalancing, leading to moderated wage growth. While acknowledging potential new challenges, Macklem expressed optimism that they are progressing toward the inflation target. He emphasized that the Canadian economy has room for growth and job creation even as inflation nears the 2% goal. The markets took these statements as dovish and the Canadian dollar weakened, along with a new decline in oil prices. We may try buy positions this week.

USDCHF (US Dollar – Swiss Franc)
The USDCHF was bearish last week as the opening price was at 0.8871 and the closing price was at 0.8836. For four consecutive weeks, the exchange rate has been on a downward trend, even though in the last two weeks the U.S. dollar has been showing signs of recovery. The Swiss franc has reached its highest level since the Swiss National Bank implemented a rate cut on June 20th. The SNB’s rate cut aimed to stimulate economic activity and counter deflationary pressures. However, the franc’s appreciation indicates a significant reversal of the carry trade, where investors had borrowed in the low-interest-rate franc to invest in higher-yielding assets. The unwinding of these positions has led to increased demand for the franc, pushing its value to new highs. An important role has also been played by a correction in U.S. stocks, especially in the tech sector since the Swiss currency acts as a counterweight and as a safe haven asset. Under these circumstances, it is not excluded that we will see more questions about parity and therefore we may try sell positions this week.

AUDUSD (Australian Dollar – US Dollar)

Strongly bearish was the last week for AUDUSD, which opened at 0.6686 and closed at 0.6545. It was the second strongly bearish week in a row for the exchange rate, which by Thursday had completed nine consecutive falling days. The Australian dollar had its worst performance since November last year, driven by a global selloff in some commodities, a weak economic outlook in China, Australia’s top trading partner, and some view changes regarding Australia’s monetary policy. Although some investors were betting on a potential rate hike by the Reserve Bank of Australia in August, economists are cautioning against further tightening due to increased recession risks. Earlier data this week indicated that manufacturing activity remains in contraction (PMI at 47.4 vs 47.2 in the previous month) and the services sector experiencing slow growth (PMI at 50.8 vs 51.2 in the previous month). The trend looks strongly downward, and unless something dramatically changes, it cannot be ruled out that it will continue. We may try sell positions for one more week.

Bitcoin

Last week, Bitcoin was slightly bullish and closed at $68,264 with profits of 0.16%. Bitcoin’s rally was likely sparked by Donald Trump’s crypto declarations at the Nashville conference. The US Presidential candidate pledged to establish a strategic national stockpile of Bitcoin if elected. On Saturday, Donald Trump outlined several cryptocurrency-friendly policy commitments, including a pledge to fire Securities and Exchange Commission (SEC) Chair Gary Gensler and to establish a “strategic national bitcoin stockpile”. These proposals are part of his broader campaign promise to foster the growth of the cryptocurrency industry in the United States. Trump’s advocacy for crypto is a key element of his platform, aiming to attract support from the crypto community and promote innovation within the sector. Known for his supportive stance on cryptocurrencies, Trump has garnered over $6 million in donations from crypto-related Political Action Committees (PACs) and donors. Trump’s speech was able to make Bitcoin recover from its weekly low price of $65,796 and this bullish trend is carrying on at the beginning of the current week as Bitcoin is performing 1.80% profits early this Monday. 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.