21/02/2022

MARKETS ON THE RAZOR’S EDGE EVEN WITHOUT WAR

General Comment

There were two major events last week for the financial markets. The first was the developments in the crisis in Ukraine and the fears of a war that might complicate the recovery of the economies after the two-year pandemic. Earlier in the week, news broke that the Russians were withdrawing their troops from the Ukrainian borders. Soon, however, these expectations were dashed and the clouds of war thickened again over the area. There is a barrage of diplomatic efforts in the background, to avoid the worst and the latest news concerns the communication channel between Macron and Putin to find a solution.

However, the main issue of concern comes from the explosive rise in inflation in the US and elsewhere that has forced the Fed to run behind developments on the brink of panic that certainly does not calm the markets.

So, the other big topic of the week was the announcement of the Fed’s practices. At this meeting, we did not expect action but more information about the forthcoming interest rate hikes in the United States. It is now considered certain that interest rates will increase next month and there is a serious possibility that this increase will be of the order of 0.50%. In Europe, actions seem more restrained. There is talk of raising interest rates in the eurozone but Christine Lagarde stressed that this should be done very carefully so as not to hurt growth and job positions. This environment of high inflation due to low bank interest rates and low bond yields creates a suffocating landscape for investors.

The stock markets continued to correct; gold had an explosive rise that brought it to a high price of about 8 months while oil also moved correctively. The dollar strengthened slightly; the pound strengthened further while the week for the euro was declining.

The de-escalation of bond yields was also important, with the US 10-year bond, which had well exceeded 2%, finally closing the week at 1.93%. Finally, the week was declining for Bitcoin and most cryptocurrencies.

The current week starts with a holiday in the US (President’s Day) but continues dynamically with the announcement of PMI indicators in the euro area, Germany, and the United Kingdom. On Tuesday, the same index is announced in the United States. On Wednesday there is the most important announcement of this week which is the Eurozone inflation. US GDP announced on Thursday and Friday we have the Eurogroup meeting, the announcement of durable goods orders in the US, and inflation in Japan.

SP500

The US SP500 index fell last week, to 4,344 points, performing losses of 1.60%. It was a week with strong fluctuations, rising at the beginning and declining trends towards the end. The crisis in Ukraine and the possibility of a Russian invasion, make many investors nervous and hesitant, keeping a wait-and-see attitude. It is a fact that the evolution of the crisis will have a catalytic significance in the course of the index together with the inflationary pressures in the world economy that will probably force the central banks to announce an increase in interest rates. A possible rise in interest rates and a further rise in bond yields are likely to hit stock markets. In case of a possible continuation of the correction, the price levels at 4,260 and 4,210 points are important, which may act as supports. We may try short positions this week.

DAX40

The German DAX40 index moved lower last week, closing at 15,037 points, with losses reaching 0.80%. Fears of a war in Ukraine have also affected the German stock market, given the major energy crisis on the European continent. The ZEW index, which measures the economic climate in Germany, was reduced, while in the last 10-year bond auction, the interest rate was 0.31%, much higher than the negative interest rates that Germany has been accustomed to for a long time. Monetary policy and a possible delay in raising bank interest rates in the eurozone area will also be key determinants of the index. In the correction scenario, the securing or not of 15,000 points and the very important support, close to 14,800 points, which is the lowest price of the last 11 months, will play a big role. We may try short positions this week, below 15,000 points.

FTSE100

The British FTSE100 index moved higher last week, closing at 7,526 points with profits above 0.70%. For another week, the index performed better than the other major stock indices in the world, despite the recent rise in interest rates by the Bank of England. The British economy based on recent announcements (GDP, industrial production, manufacturing production, trade balance) is in a good shape, raising the psychology of investors. Announcements of the unemployment rate and inflation in the UK are expected this week and will be factors that will affect the index, but concerns about a possible war in Ukraine may be the most decisive factor. The index is also approaching the price range of 7,665 points, which is a high price of about 3.5 years and so it makes sense for sellers – profit takers to appear. Below 7,400 points the positive climate will probably start to be disturbed and due to the general negative sentiment, we may try short positions this week.

Gold

Last week was very bullish for gold, closing at $ 1,900 and rising more than 2%. Fears and worries about a Russian invasion in Ukraine and widespread military operations in the region are pushing a portion of investors to gold, which is always a solution to hedging geopolitical risks and dangers. The environment of high inflation also creates income protection needs through choices in non-inflationary financial products. This is strengthened when interest rates remain low and bond yields de-escalate, as they did last week. The same landscape will bring gold prices in the face of the strong resistance of $ 1,920 which is a high price of about a year. Only in case of easing of tension in Ukraine, we may see a deflation of prices, to $ 1,850. We may try short positions this week as many buyers would liquidate their profits and by trusting the case of a solution in Ukraine.

US Oil

Last week was corrective for oil with futures for next month closing at $ 90.27, with losses approaching 4%. It was the first corrective week after eight bullish weeks. The question is whether this is a technical correction due to overbought conditions after a total price increase of 35% in these eight weeks or whether it is a precursor to easing the crisis in Ukraine. We will not be late to find out the answer because things must become clear and there will be either an invasion or a diplomatic solution. In the first case, the $ 100 will not be a surprise and in the second case, there will probably be a de-escalation of prices, with the supports being at $ 88.50, $ 86.30, and $ 81.90. Short positions is our selection for the current week.

EURUSD (Euro vs US Dollar)
The EURUSD was bearish last week, opening at 1.1338 and closing at 1.1322. The US currency strengthened slightly; the euro also had a small correction but the pair was able to be maintained above the support of 1.1280. A key issue pushing the EURUSD down is the statements of officials of the two central banks but also the general sense of the market on how the United States will raise interest rates faster and many times in 2022. Eurozone’s GDP in the fourth quarter of 2021 increased by 4.6%, as expected by markets while industrial production recovered in December. The producer price index in the United States rose to an unrealistic 9.7% in January, but retail sales recovered significantly. This week the pair will be affected by developments in Ukraine and the very important announcement of inflation in the eurozone. Any continuation of the strengthening of the dollar, accompanied by a loss of support of 1.1280, could push the EURUSD, even more, lower, to the important support of 1.1170. 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 1.3544 and closed at 1.3586. The UK has already raised interest rates ahead of the Fed and while interest rates are expected to rise in the United States next month, the Bank of England is likely to do the same, as inflation was reported at 5.5% in January and this will likely lead to new actions. The macroeconomic results announced in the United Kingdom were also encouraging: the unemployment rate remained unchanged at 4.1% but retail sales increased significantly by 9.1%, compared to the previous year. Given that the United Kingdom is leading the way in raising interest rates compared to the United States, many analysts believe that the rise could continue, but this goes beyond breaking the significant resistance at 1.3750. On the contrary, a significant strengthening of the dollar could push the pair towards the price range of 1.3360. By trusting more in the first case, we may open buy positions this week.

USDJPY (US Dollar – Japanese Yen)

The USDJPY, which opened at 115.39 and closed at 115.06, was bearish last week. The US currency strengthened slightly but the pair moved down mainly due to the de-escalation of bond yields and the strengthening of the Japanese currency which is considered a safe-haven asset for investment when there are widespread fears in international markets, as is currently the case due to the Ukrainian crisis. Japan’s GDP grew by 1.3% in the fourth quarter of 2021, but below market expectations. Inflation, reported at 0.5% in January, is well below analysts’ estimates, and Japan still has room for keeping the loose monetary policy, in contrast to the US, where high inflation is forcing the Fed to raise interest rates many times throughout the year. This may lead to a rise in the USDJPY in the next period, but we must not forget the very strong resistance in the price range of 116.35, which is a high price for about five years. We’re keen to try buy positions this week.

EURJPY (Euro – Japanese Yen)
Last week was bearish for the EURJPY which opened at 130.81 and closed at 130.25. The euro remains stagnant in the face of fears of a war in Ukraine and Lagarde’s statements, which largely cut expectations for a rise in interest rates in the eurozone soon. The Japanese currency has also strengthened due to the backdrop of negative investment sentiment, although inflation in Japan is very low and the loose monetary policy continues. A decisive turning point is at 130 since above it, the pair maintains the upward profile but in a possible bearish breakout, the downtrend scenario gains more points. We may try sell positions below 130.

EURGBP (Euro – Great Britain Pound)

Last week was slightly bearish for the EURGBP which opened at 0.8362 and closed at 0.8327. The Bank of England’s aggressive policy of raising interest rates and the relative inaction of the ECB maintains a profile of sterling lead against the euro. There is a downtrend for the pair since the autumn of 2020 which has led it close to the significant support of 0.8275 which is a low price of about 5.5 years. There will therefore be several difficulties in breaking down these levels. Since last summer and from the price range of 0.85, the trend remains declining but the rate of decline has decreased significantly. We’ll keep on opening sell positions for one more week.

USDCAD (US Dollar – Canadian Dollar)

Last week was slightly bullish for the USDCAD, which opened at 1.2731 and closed at 1.2752. The fall in oil prices did not help the Canadian currency to recover and so we saw the fourth week in a row with low volatility and prices fluctuating close to 1.27 – 1.2750. A key role in not weakening the Canadian dollar was the announcement of inflation in Canada for January, at 4.3%, below what markets expected at 4.6%. This allows the Bank of Canada to delay the tightening of monetary policy and interest rate hikes. Retail sales shrank in December but were announced better than expected, thus reviving hopes for a positive trajectory of the economy. The key factor of course remains the US dollar and in its possible strengthening and if there is a clear break of 1.28, we may see 1.30 closer. We may try buy positions this week.

USDCHF (US Dollar – Swiss Franc)
The USDCHF had a slight downtrend last week, as the opening was at 0.9243 and the closing at 0.9215. The Swiss franc, as a safe-haven asset for investment, in times of fear and negative investment sentiment, strengthened more than the US currency. However, the franc had other reasons for strengthening: the sharp rise in gold prices, which has a strong positive correlation with the currency (20% of Swiss exports are gold), and the producer price index, which strengthened in January, raising suspicions of inflationary pressures in Switzerland too. For the past 8 months, the pair has been on a sideways trend and the downtrend is going through the bearish breakout of 0.9085 while the uptrend requires prices above 0.9375. Sell positions is our selection for the current week.

AUDUSD (Australian Dollar – US Dollar)

Last week was strongly bullish for the AUDUSD (3rd in a row), opening at 0.7127 and closing at 0.7176. There are now strong indications that the Bank of Australia will raise interest rates in 2022, based on similar statements by officials. Rising commodity prices, especially metals, also favor the Australian currency. The labor market in Australia has a positive image, with the unemployment rate at 4.2% and a positive surprise in the balance of jobs in January. If the AUDUSD manages to exceed 0.7315 (three-month high) it may have room for further rise. However, if the US dollar strengthens, we may see a turn towards 0.71. We may try buy positions this week.

Bitcoin

Last week was bearish for Bitcoin, which closed at $ 38,374 and losses close to 9%. Bitcoin’s recovery effort, which began in late January, did not continue and two declining weeks in a row were enough to make it drop below $ 40,000 again. The high volatility and other characteristics of cryptocurrencies classify them as high-risk options that are not favored in times of crisis, especially geopolitical. India has also labeled cryptocurrencies as the Ponzi scheme through the central bank officers, and a possible ban on the country would raise concerns about a possible ban in other countries as well. If Bitcoin stays below $ 40,000, the seven-month low, close to $ 33,000, could be in threat so we may try short positions this week.

IMPORTANT DISCLAIMER

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.

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.