London 10/01/2022
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The information of this report is of a general nature only. It is not a personal financial advice. It does not take into account your objectives, financial situation and personal needs.
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HIGH INFLATION SHUFFLES INVESTMENT DECK
Weekly Report: Indices, Commodities, Currencies and Cryptos
General Comment
We saw a lot of interesting news and announcements in the first week of 2022. In the United States, the Fed minutes were announced on Wednesday and the important news that emerged is that the central bank intends to make three interest rate hikes during the year, earlier than expected, to tackle high inflation. The new jobs for December were announced on Friday, with the result of 199K jobs disappointing since the expectations of the markets spoke of 400K new jobs.
In the European continent, inflation reached a record high of 5% in December, fully justifying Christine Lagarde’s decision a few weeks ago to rapidly reduce the quantitative easing program in the eurozone.
The coronavirus pandemic and the Omicron mutation are also major concerns in markets these days. The spread of the mutation is very fast, the heavy hospitalizations and deaths remain at low levels though but many analysts are worried about the smooth operation of the economies since many employees will be missing from their jobs at the same time.
European stock markets had a better picture than the US ones, which underwent a major correction. Following the Fed’s intention to raise interest rates, there has been a capital transfer from growth stocks to value stocks in the US. The dollar and the euro remained unchanged while the pound strengthened. Significant losses for gold, strong gains for oil, and finally, Bitcoin as well as most cryptocurrencies continued the downtrend of the recent weeks. It is also worth noting the large increase in bond yields. Indicatively, we mention that the American 10-year opened at 1.51% and closed at 1.76%. This is a 16.5% rise.
This week does not have a corresponding abundance of financial news and announcements but it is dominated by the announcement of inflation in the US for December with expectations talking about the surreal 7.1%. Other important announcements are the unemployment rate and the industrial production in the eurozone area, retail sales in the US, inflation in China, and GDP in the UK.
SP500
The US SP500 was strongly bearish last week, closing at 4,667 points with losses approaching 2%. The stock market is being hit by the Fed’s tight monetary policy (the quantitative easing program ends in March) and recent announcements of interest rate hikes, three times in 2022. In addition, we have seen a sharp rise in bond yields but the markets reacted after the disappointing announcement of the US labor market. The markets considered that the need for tight monetary policy is more urgent and so the index on Friday fell even more. The Fed with the upcoming interest rates hike has caused a transfer from growth stocks to value stocks. If the correction expands below 4,600 units, concerns will intensify that this is not a temporary phenomenon but that the SP500 could fall below 4,500 units so short positions is our selection this week.
DAX30
The German index DAX40 moved higher last week, closing at 15,945 points, with profits of 0.70%. European stock markets performed better than the US ones, as a sharp rise in interest rates in the eurozone, such as the US, is not yet visible. Macroeconomic data released in Germany was also positive: retail sales rose 0.6% in November; factory orders rose 3.7% in the same month and the unemployment rate fell 5.2% in December. Inflation in Germany has risen to 5.3% and this is of course the biggest issue at this time in all economies. The index has not yet exceeded the 16,000 points and if that happens, many will chase the all-time highs, close to 16,300 points. Below 15,840 points we may see more intense corrective pressures but this week we prefer long positions.
FTSE100
The British FTSE100 index moved higher last week, closing at 7,431 points performing profits close to 1.30%. The Omicron mutation does not appear to discourage the investors, although the cases are at record levels, with many scientists’ voices and data pointing to a mild illness and rapid de-escalation after a few weeks. The only major announcements for the UK this week are on Friday: November GDP, industrial production, and trade balance and so the news around COVID-19 will have a bigger impact on the market by then. Index prices are already at a high of about 2 years and many buyers are targeting 7,665 points so we may try long positions this week.
Gold
Last week was strongly bearish for gold, closing at $ 1,796 and losing more than 1.80%. The tight monetary policy already pursued by the Fed and many other central banks to fight inflation, combined with the expected interest rate hikes, does not favor gold. Yields on bonds, the gold’s traditional rival of awe, rose sharply last week and this is another aggravating factor. The announcement of inflation in the US on Wednesday is crucial as any de-escalation will divert more investors from defensive solutions to inflationary pressures, such as gold. $ 1,752 is the most important support in any continuation of the downtrend and this is what we’ll go for with our short positions this week.
US Oil
Last week we saw a sharp rise for oil with the futures of the next month closing at $ 78.87, performing profits that exceeded 4.50%. The whole week was bullish on oil prices, except on Friday. OPEC decided on a new increase in production last Tuesday, while demand remains stable despite the Omicron mutation. The important events of the day, however, have to do with Kazakhstan, which is an oil-producing country. Tensions in the country have affected oil production and transportation. There was also a temporary reduction in production in Libya due to pipeline maintenance. However, these developments may be perceived by the markets as temporary problems and so we can see the increase in production by OPEC pushing oil prices. The next supports are at $ 77.40 and $ 74.25 and we may try short positions this week.
EURUSD (Euro vs US Dollar)
The EURUSD moved slightly lower last week, opening at 1.1367 and closing at 1.1360. The US currency strengthened sharply until Friday but the announcement of new jobs in the United States weakened the dollar and so the pair closed the week with very small losses. The Fed’s decision to hike interest rates three times in 2022 is a boost for the dollar, but the eurozone is also hit by high inflation without yet hearing anything about raising interest rates from the ECB. Another strengthening factor of the dollar is also the increase in US bond yields, which have reached a two-year high. The price range of 1.1180 continues to be the main target of sellers of the pair as it is strong support and a low price of about 1.5 years. Above 1.14, the upward reaction will be more likely. A key point for the week will be the announcement of inflation in the US, next Wednesday. We may try sell positions this week.
GBPUSD (Great Britain Pound – US Dollar)
Last week was bullish for the GBPUSD (3rd in a row), which opened at 1.3521 and closed at 1.3589. The pound has been favored recently due to the hike in interest rates by the Bank of England, but the dollar is also expected to strengthen since, according to the statements by the Fed, interest rates will also rise in the United States. All PMIs released last week in the UK were above market expectations. Also in the country, although the pandemic cases number is particularly high, serious illnesses and deaths remain relatively low and this gives an extra tone of optimism for the course of the British economy. The pair’s trend is upward and many analysts see prices even close to 1.40 but in case of strengthening of the dollar, there will be a bearish trend which will strengthen further below 1.3490. We may try sell positions this week.
USDJPY (US Dollar – Japanese Yen)
The USDJPY moved up for the 5th week in a row, opening at 115.05 and closing at 115.54. The pair was greatly favored by the large rise in bond yields but the movement was smaller than expected for two main reasons. First, the feeling of risk aversion in a large portion of investors due to the Omicron mutation turns funds to safe-haven assets such as the Japanese currency. Second, the pair has been moving at the highest levels of the last five years and it makes sense for sellers to make an appearance. The trend has been strongly bullish for about a year now and it is difficult to counteract it but at such high levels, corrections cannot be ruled out. However, if there is a clear split of 116, we can see a further rise. We’ll keep on opening buy positions for one more week.
EURJPY (Euro – Japanese Yen)
Bullish was the last week was for the EURJPY (3rd in a row) which opened at 130.75 and closed at 131.26. The pair continued to rise, with the euro strengthening after the decision for a tighter monetary policy in the eurozone and the end of the quantitative easing program in March and the yen weakening after low inflation (announced at 0.8% in November), allowing for loose monetary policy in Japan, at least for a while. The pair has stabilized above 130 and hopes to “fight” for resistance near 133.50 so buy positions is our selection for the current week.
EURGBP (Euro – Great Britain Pound)
Last week was bearish for the EURGBP which opened at 0.8395 and closed at 0.8355. The pound is particularly strong at this time, following the recent hike in interest rates by the Bank of England and so we saw five consecutive weeks of falling for the pair which is now very close to the price range of 0.8275 which is the lowest price of the last 5.5 years. Up to these levels, the pair can reach, if the current picture continues elsewhere, many investors will see market positions as an opportunity and there may be bullish reactions. We may try sell positions for one more week.
USDCAD (US Dollar – Canadian Dollar)
The USDCAD moved with consolidative trends last week, as it opened and closed around the price range of 1.2630. The week started upwards but from Wednesday onwards, the weakening of the US dollar and the rise in oil prices brought the pair close to the weekly open price. Canada also had a much better picture in the job market in December, with the unemployment rate falling to 5.9% and new jobs outpacing market expectations. Critical support at 1.26 will largely determine whether the corrective action will continue but if the US currency strengthens (based on tight US monetary policy) then we may see prices even above 1.28 so we may try buy positions this week.
USDCHF (US Dollar – Swiss Franc)
USDCHF was on the rise last week, after opening at 0.9105 and closing at 0.9183. The pair strengthened above the dollar’s strength, with inflation in Switzerland reported at 1.5% in December, below market estimates. The unemployment rate fell to 2.4% while retail sales rose by 5.8% and this positive news for the Swiss economy announced on Friday, put a small stop to the uptrend of the USDCHF. At the beginning of this week, however, the rise has returned and the first target of many buyers is 0.93. We’re keen to open buy positions this week.
AUDUSD (Australian Dollar – US Dollar)
Last week was bearish for the AUDUSD which opened at 0.7255 and closed at 0.7181. The Fed is tightening monetary policy and announcing interest rate hikes, but the Bank of Australia is not yet clear, with many voices saying that interest rates in Australia will not rise before 2024. According to the Bank of Australia, the Omicron mutation is a threat but will not seriously affect the growth of the Australian economy. The PMI indicators that were announced above expectations, confirm that the country’s economy is on a growth trajectory. Despite the fall we have seen, the pair has been reacting upwards since the beginning of December, and for this to be confirmed, we must see a bullish breakout above 0.7280. Below 0.7080, however, this reaction is likely to be transient. We may try sell positions this week.
Bitcoin
Last week was intensively bearish for Bitcoin, which closed at $ 41,876 and losses that exceeded 11.50%. Tensions in Kazakhstan, with power outages and internet outages, have reduced Bitcoin mining, with the hash rate falling by 15%. The Fed’s intention to raise interest rates and tighten monetary policy to deal with inflation aggressively also prevents a portion of investors from turning to cryptocurrencies, which many see as a counterweight to inflationary pressures. Let’s not forget that gold, which has the same characteristics, also suffered significant losses last week. Critical support levels are close to $ 39,500 because below that, as much as it may seem excessive, there is no visible cushion up to $ 28,800. We will try short positions this week.
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