05/08/2024

General Comment

The past week has been pretty tough for financial markets in the United States and in other financial centres of the world. Especially in the United States, there was a barrage of negative economic announcements that triggered the third corrective week in a row in equity markets. The July Nonfarm Payrolls (NFP) report from the United States revealed notable weaknesses in what was previously a robust labour market. Employers added just 114,000 new jobs, falling short of the anticipated 175,000 and significantly below the previous month’s figure of 179,000. The unemployment rate also saw a sharp increase, climbing to 4.3%, up from both the estimated and previous rate of 4.1%. Additionally, growth in Average Hourly Earnings, a critical indicator of wage growth that drives consumer spending and impacts inflation, slowed further, alleviating concerns about sustained inflationary pressures. On an annual basis, wage growth decelerated to 3.6%, below the expected 3.7% and down from the prior reading of 3.8%, which was also revised down from 3.9%.

The NFP report was not the only negative development of the week in the labour market, however. The ADP report revealed that the private sector added 122,000 new jobs in July, falling short of the expected 150,000. Additionally, Initial Jobless Claims for the last week unexpectedly increased to 249,000, surpassing predictions. Manufacturing also had a strong negative image last month. The ISM Manufacturing PMI on Thursday was announced to decline to 46.8 in July from 48.5 in June, falling short of the expected 48.8. The concerns are great because it seems that the economic crisis is not only touching the labour market but also other sensitive areas of the U.S. economy such as manufacturing.

However, we also had developments at the Fed as on Wednesday there was the decision on interest rates and monetary policy followed by the press conference. As expected, the Fed maintained the interest rates at 5.25% -5.5%. Chairman Jerome Powell mentioned that a rate cut in September is possible if current macroeconomic trends persist. However, Powell emphasized that no decisions on future monetary policy have been made, and the Fed will remain data dependent. Consequently, financial markets began pricing in at least two rate cuts before the end of the year, with increasing expectations of three cuts in 2024. According to the CME FedWatch tool, there is a 78% chance that interest rates will be cut by 0.25% in September and there is a fairly significant probability of 22% that this reduction will be 0.5%.

In addition to macroeconomic outcomes. and the Fed, markets are also looking at companies ‘ results for the second quarter of the year. Emotions are mixed as we will see in detail below in the section of the SP500 stock index but concerns in particular in the technology sector are manifest.

But we also had significant developments in economies outside the United States. In the Eurozone, the outlook was mixed. The GDP announcement for the second quarter of 2024 was quite encouraging as there was an increase of 0.3%. Positive news was also manufacturing which continued to be below 50 but was announced above market expectations. The negative surprise raising concerns was last month’s inflation announced at 2.6%, above the 2.4% predicted by markets. Two other major central banks, the Bank of Japan and the Bank of England announced their decisions on interest rates and monetary policy. The Bank of Japan raised interest rates while the Bank of England lowered them. Details will be seen in the sections on the British and Japanese economies respectively.

Within this negative landscape, there are also geopolitical tensions that exacerbate the climate and create additional nervousness in the markets. Last week, tensions in the Middle East sharply escalated following the deaths of key commanders from Iran-affiliated military proxies involved in the conflict with Israel. On Wednesday, Israeli forces reported the killing of Fuad Shukr, a military commander of Hezbollah, during a raid in Beirut. On the same day, Iran accused Israel of assassinating Ismail Haniyeh, the political leader of Hamas, in Tehran. In response, Iran called for an emergency meeting of the United Nations Security Council to address the situation, while Israel neither confirmed nor denied its involvement in Haniyeh’s death.

To sum up all of the above, in most major equity markets in Europe and the United States there was a sharp correction. Especially in the United States, where this correction has been in force for the last three weeks, the concerns are intense. The bond market has had a strong and robust de-escalation, one of the strongest we have seen in recent months. The yield on the 10-year U.S. Treasury bond closed Friday in the region of 3.79%. It is worth noting that the yield on the opening week was close to 4.20%. The market for commodities had a mixed picture with gold and copper strengthening but oil continuing its corrective course. As for the currency market, the US dollar came under intense pressure last week while the winner beyond doubt was the Japanese currency and to a lesser extent the euro. Finally, strong pressure has come on bitcoin and most cryptocurrencies, which have had one of the sharpest bearish weeks in recent months.

The week just started is a significantly milder one with respect to economic announcements. The PMI indicators for services in the world’s largest economies stand out, while the markets will pay particular attention to the announcements of Germany and the Eurozone in relation to a series of metrics. The Bank of Australia announces its decision on interest rates and monetary policy, while the announcement of inflation in China is also important. Given the tension in the geopolitical landscape, the nature of the week’s economic announcements is converging toward reducing volatility.

SP500

The US SP500 index was bearish last week as it closed at 5,346.55 points and loss of 2.06%. In the United States, a series of negative economic reports have triggered the third consecutive week of declines in equity markets. The July Nonfarm Payrolls (NFP) report revealed significant weaknesses in the labor market, with only 114,000 jobs added, falling short of the expected 175,000 and down from the previous month’s 179,000. Manufacturing also struggled, with the ISM Manufacturing PMI falling to 46.8 in July, indicating a broader economic downturn. Despite these challenges, the Fed decided to maintain interest rates at 5.25%-5.5% and signaled the possibility of a rate cut in September if current economic trends continue. Markets are now anticipating at least two rate cuts before the end of the year, with a high probability of three cuts. In addition to macroeconomic concerns, investors are also closely watching second-quarter corporate earnings, with mixed emotions, particularly in the technology sector. So far, 75% of SP500 companies have reported their Q2 2024 results, with 78% surpassing earnings estimates. This is slightly above the 5-year average of 77% and the 10-year average of 74%. However, the earnings are only 4.5% above estimates on average, which is below the 5-year average of 8.6% and the 10-year average of 6.8%. The forward 12-month P/E ratio for the index stands at 20.7, which is higher than the 5-year average of 19.3 and the 10-year average of 17.9. In the upcoming week, more SP500 companies, including Airbnb, Uber, Disney, and Unity Software, are set to report their results. There are concerns that the technology sector will not be able to meet the super-optimistic expectations of the markets that have contributed to the bullish rally that we saw in the last few months. Although the aggressive rate cuts by the Fed are theoretically a positive sign for the stock markets, the negative results of the US economy seem to prevail for now. All these facts, combined with the geopolitical tensions in the Middle East could bring more corrections so we may try short positions this week too.

DAX40

The German DAX40 index was strongly bearish last week, closing at 17,661.22 points, with losses of 4.11%. DAX40 had a sharp correction and its price approached the critical support of 17,626 points which is also the lowest price of the last five months. The negative market sentiment in the European markets followed the sell-off on Wall Street, where all three major U.S. indices plunged amid recession fears. In the U.S., the new data has reignited fears of a possible recession and this brought waves of concerns to the global markets. Germany in particular, had also a series of negative economic announcements throughout the week. The German GDP for the second quarter of 2024 dropped by 0.1%, implying a potential recession if the negative figure carries on. Also, there was an uptick in inflation as the Harmonized Index of Consumer Prices was announced at 2.6% in July vs 2.4% that the markets estimated. The unemployment rate remained steady at 6% but the unemployment change rose to 18K vs 15K that markets expected. The manufacturing PMI index remained well below 50 (the growth/contraction threshold) and it was announced in July at 43.2. This week Germany is going to announce the factory orders, the industrial production, and the trade balance but early this week, the correction steepens so we prefer short positions.

FTSE100

The British FTSE100 index was bearish last week, closing at 8,218.8 points, losing about 1.13%. The FTSE 100 fell, even outperforming the many stock indices, mirroring declines in other major markets. This drop followed a disappointing US jobs report that heightened fears of a potential recession in the US. Earlier concerns about weak US manufacturing data and mixed corporate earnings had already been weighing on global markets. The key focus for the UK economy last week was the Bank of England’s decision on interest rates and monetary policy. The Bank lowered the interest rate by 0.25% to 5% on Thursday, in line with market expectations. Markets have also raised their expectations for further rate cuts this year, potentially anticipating two more, with the next one likely in November. However, Governor Andrew Bailey warned against cutting rates, citing concerns about persistent domestic inflation. Similarly, Bank of England chief economist Huw Pill expressed uncertainty about whether it’s the right time to start reducing rates, emphasizing the need to carefully balance efforts to tackle ongoing inflation. Even if the rate cuts will be a relief for the stock markets in the UK, the global negative sentiment, mainly from the USA, and the geopolitical tensions and the conflicts in the Middle East are expected to affect the FTSE100 to a great degree so we prefer short positions for one more week.

Gold

The previous week was bullish for gold, with the next month’s futures closing at $2,469.8 and profits of 3.73%. Federal Reserve Chair Jerome Powell’s comments hinting at a potential rate cut in September had a notable impact on gold prices. Lower interest rates tend to weaken the US dollar because they make dollar-denominated assets less attractive to investors. Since gold is priced in dollars, a weaker dollar makes gold cheaper for buyers using other currencies, thereby increasing demand and pushing up prices. The weak US jobs report released on Friday, which showed only 114K jobs added in July—far below the anticipated 175K—and a rise in unemployment to 4.3%, reinforced expectations of further Federal Reserve rate cuts. This bolstered the bullish case for gold, as the fears of a recession drove many investors to safety. Consequently, the report had a positive impact on gold prices, driving them higher. Treasury yields dropped to their lowest levels since December, reflecting growing investor expectations of further interest rate cuts by the Fed in response to recent economic data. This decline in yields supports higher gold prices, as lower returns on bonds reduce the opportunity cost of holding non-yielding assets like gold, making the metal more attractive to investors. Finally, tensions in the Middle East significantly intensified after the deaths of key commanders from Iran-affiliated military groups involved in the conflict with Israel. A possible response from Iran may cause chain reactions with unpredictable consequences.  These developments increased gold’s appeal as a safe haven asset against geopolitical risks. All these factors caused a new all-time high price for gold and this is usually followed by a correction so we may try short positions this week.

US Oil

Last week was bearish for oil with the next month’s futures closing at $73.52, with losses of 4.72%. China, the world’s largest oil consumer, is showing signs of an economic slowdown. Manufacturing activity as expressed by the Caixin PMI manufacturing indicator contracted and oil imports across Asia, particularly in China, fell to a 2-year low. As China is a key driver of global oil demand, any signs of weakening in its economy can lead to increased volatility and uncertainty in the oil market, potentially impacting prices and causing broader economic ripple effects. The slowdown has prompted traders and investors to reassess their expectations for future oil demand, heightening market anxiety. The same picture came from the USA as the weak NFPs report and the poor manufacturing performance have caused fears for a potential recession in the USA. Amid these economic concerns, OPEC chose to maintain its current strategy, which includes gradually unwinding some production cuts starting in October. This cautious approach, coupled with the absence of significant supply disruptions despite ongoing tensions in the Middle East, helped stabilize the market. By sticking to their planned production increases, OPEC aims to balance the market, ensuring that supply levels remain adequate while avoiding any sharp price spikes that could further destabilize the global economy. The week had a bullish reaction on Wednesday driven by escalating tensions in the Middle East. The killings of a Hamas leader in Iran sparked concerns over potential disruptions to the oil supply. This uncertainty led to a sharp increase in oil prices on Wednesday, as traders grew increasingly anxious about the security of key oil shipping routes in the region. Positive surprises still come from the oil stocks though. Last week, according to the American Petroleum Institute, weekly crude oil stocks dropped by 4.5 million barrels and according to the US Energy Information Administration crude oil stocks dropped by 3.44 million barrels. The correction from the high price that we saw at the beginning of July (near $84.50) was very sharp and exceeded 13% in losses. Some investors may see it as a buying opportunity, especially in a week with no important economic announcements. Under these thoughts, we may try long positions.

EURUSD (Euro – US Dollar)
Last week was bullish for EURUSD as it opened at 1.0854 and closed at 1.0926. The exchange rate managed to regain its upward trend and to approach again the price range of 1.0950 which is a strong resistance as it is the highest price in the last 5 months. Led by concerns over the strength of the US economy following a disappointing jobs report, speculation has risen that the Fed may need to apply three interest rate cuts this year instead of the previously expected two. In the Eurozone, markets are factoring in the likelihood of at least two additional rate cuts by the ECB this year, with the next expected in September. In terms of data, the annual inflation rate in the Eurozone area unexpectedly rose to 2.6% in July, and the manufacturing PMI was announced at 45.8, still well below 50 but above market expectations of 45.6. Additionally, preliminary estimates indicated that the Eurozone economy grew by a stronger-than-expected 0.3% in the second quarter. The United States economy, though it has had a series of negative announcements, is not at a much worse level than that of the European one. In addition, interest rate cuts will not only be made by the Fed but probably also by the European Central Bank. It is not impossible to see a re-strengthening of the dollar and for this reason, we prefer sell positions this week.

GBPUSD (Great Britain Pound – US Dollar)

Bearish was the last week for GBPUSD, as it opened at 1.2858 and closed at 1.2805. During the week the exchange rate even reached 1.27 levels but on Friday there were strong upward trends mainly due to the negative performance of the U.S. economy in the labour market as we saw above. The dominant theme for the UK economy last week was the Bank of England’s meeting on interest rates and monetary policy. The Bank of England lowered the interest rate by 0.25% to 5% on Thursday, aligning with the expectations of the markets. Markets have also heightened their expectations for additional rate cuts throughout the rest of the year, anticipating maybe two more reductions, with the next likely occurring in November. However, Governor Bailey cautioned against cutting rates “too quickly or by too much,” expressing concerns about the ongoing persistence of domestic inflationary pressures. Bank of England chief economist Huw Pill also expressed uncertainty about whether it is the right time to begin cutting interest rates, acknowledging that there is still work to be done to address the persistent domestic component of inflation. He avoided taking a definitive stance on rate cuts, emphasizing the importance of striking the right balance. Based on all the above we will choose sell positions for one more week.

USDJPY (US Dollar – Japanese Yen)

USDJPY was strongly bearish last week, opening at 153.66 and closing at 146.52. It was certainly one of the strongest bearish weeks of recent years. The US dollar has been very weak due to negative economic announcements coming from the United States and market expectations of aggressive rate cuts even into the year, as the impact on the economy is now evident. Meanwhile, the Bank of Japan raised its interest rate to 0.25% and indicated a willingness to implement further rate hikes if economic conditions justify it. Markets are anticipating two additional rate increases before March of 2025, with the next hike expected in December. Recent data also revealed that Japanese authorities spent 5.53 trillion yen in July to support the currency through intervention. Additionally, the Japanese central bank announced plans to taper its purchases of Japanese government bonds (JGB) to 3 trillion yen per month, starting in the first quarter of 2026. At the post-policy meeting press conference, Bank of Japan Governor Kazuo Ueda explained that the Bank decided to adjust its easing measures to sustainably achieve the 2% inflation target. He noted that Japan’s economy is recovering moderately, with private consumption remaining solid despite inflation. Ueda emphasized the importance of monitoring financial and foreign exchange markets, especially given the upside risks to prices. Ueda stressed the importance of using short-term rates as the main policy tool now that massive easing is no longer necessary. He also addressed the weak yen, stating it had little impact on the price outlook but was considered a significant risk. The drop for the USDJPY has been extremely steep in the last four weeks with total losses touching 9%. Such movements are rare to encounter in the currency market so it is not excluded that we will see upward reactions for the exchange rate and for this reason, we will choose buy positions this week.

EURJPY (Euro – Japanese Yen)
Strongly bearish was last week for EURJPY which opened at 166.85 and closed at 159.87. The fall for the EURJPY continued with unabated intensity for the fourth week in a row. The euro is in a phase of weakness after the European Central Bank has entered a cycle of cutting interest rates. We may see two more reductions in the year after the one that has already happened. In contrast, Japan is in the opposite phase after there was a rise in interest rates last week and a reduction in the bond-buying program by the Bank of Japan. However, the fall of the last four weeks is very sharp since the exchange rate from the price range of 175 was found below 160.  So, the market may react upward and for this reason, we will choose buy positions for the current week.

EURGBP (Euro – Great Britain Pound)

Last week was bullish for the EURGBP, as it opened at 0.8434 and closed at 0.8519. The pair, with an impressive recovery and a rise for three consecutive weeks, managed to find itself again above 0.85. The euro is not at its best since the European Central Bank has already started its interest rate cut cycle, but the British sterling is even weaker because, in addition to the 0.25% drop in interest rates that we saw last week, there are reasonable assumptions that there will be further reductions in the year after inflation in the UK has de-escalated and is now at 2%. Apart from that, the differences in the two currencies at the moment are not large and for this reason we may see downward reactions to the exchange rate so we will prefer sell positions this week.

USDCAD (US Dollar – Canadian Dollar)

Bullish was the last week for USDCAD, as it opened at 1.3831 and closed at 1.3872. It is impressive that the exchange rate managed to have its third consecutive upward week, even if the US dollar was extremely weak last week. The U.S. dollar weakened due to negative economic results and markets ‘ belief that the Fed will be forced to make as many as three rate reductions in the year. As per the Canadian economy, there are higher chances that the Bank of Canada may prolong its rate-cutting cycle, which could restrain gains for the Canadian dollar. The Canadian manufacturing PMI dropped to 47.8 in July from 49.3 in June. This downturn was primarily driven by significant drops in output and new orders, reflecting the challenging market environment. Moreover, preliminary data pointed to a slowing Canadian economy, with GDP growth slowing to just 0.2% in June. These economic indicators suggest that the Canadian economy is facing mounting headwinds, which may prompt further monetary easing by the Bank of Canada to support growth. Another determinant of the weakness of the Canadian dollar is the continued fall in oil prices. Oil has had its sharp losses over the past four weeks. We may try buy positions for one more week.

USDCHF (US Dollar – Swiss Franc)
The USDCHF was bearish last week as the opening price was at 0.8835 and the closing price was at 0.8877. This strong fall in the exchange rate largely reflects the weakness of the US dollar. The dollar is in a phase of weakness as the Fed estimates it will be forced to make up to three rate cuts this year to prevent further economic deterioration in the labor market and other sectors of the economy. In contrast, Switzerland’s annual inflation rate held steady at 1.3% in July, unchanged from the previous month and matching market expectations. This stability has strengthened the anticipation of a third consecutive rate cut by the Swiss National Bank in September. This continued low inflation reinforces the likelihood of further easing as the SNB aims to support economic conditions. The sharp decline has brought the USDCHF in prices that we have not seen since last January. This has happened sharply so it is not excluded that we will see upward reactions. We may try buy positions this week,

AUDUSD (Australian Dollar – US Dollar)

Bearish was the last week for AUDUSD, which opened at 0.6546 and closed at 0.6511. The fall in the exchange rate came on a week of weakness for the US dollar, which makes it special. The Australian dollar faced downward pressure due to weaker-than-anticipated inflation data for the second quarter, reducing the likelihood of a rate hike by the Reserve Bank of Australia on Tuesday. Australia’s core inflation rate slowed more than expected, dropping to 3.9% year-over-year and 0.8% quarter-over-quarter in the second quarter. This softer inflation has led markets to reassess their expectations, now pricing in about a 50% chance of a rate cut as early as November, significantly earlier than previous forecasts, which had anticipated a move in April next year. The shift in expectations reflects growing concerns about the pace of economic growth and the potential need for monetary easing to support the economy. But negative news for the Australian dollar also came from China as the manufacturing PMI indicator was below 50 last month, emphatically contradicting market expectations. Sell positions is our selection for one more week.

Bitcoin

Last week, Bitcoin was heavily bearish and closed at $58,142 with losses of 14.83%. Bitcoin and the broader cryptocurrency market experienced a sharp decline last week. This price weakness can be attributed to a combination of factors, including disappointing US employment data and escalating geopolitical tensions. The July Non-Farm Payrolls report revealed a slowdown in US employment growth and a rise in the unemployment rate to 4.3% from 4.1%, sparking concerns about the economy. These economic worries, coupled with rising tensions between Israel and Iran, have increased uncertainty in global markets. In times of geopolitical tensions, the risk-averse sentiment does not favor asset classes of high risk such as the cryptos. Adding to the market’s woes, the bankrupt crypto lender Genesis moved $1.5 billion in Bitcoin and Ethereum to repay creditors. This large transfer likely exacerbated concerns among traders as the sudden liquidation of such a substantial amount of Bitcoin and Ethereum can put downward pressure on prices. This confluence of factors, including negative economic data, geopolitical risks, and significant movements of crypto assets by distressed firms, has led to a broad decline in the cryptocurrency market, reflecting heightened investor anxiety and a retreat from riskier assets like Bitcoin. It’s hard to see a different picture this week so we may try short positions.

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.