28/02/2022

 

THE WAR IN UKRAINE IS EXACERBATING ECONOMIES ALREADY PLAGUED BY HIGH INFLATION

General Comment

The Russian invasion of Ukraine has been the dominant topic in financial markets since the middle of last week. The Russo-Ukrainian war has upset the world community because, in addition to the concerns it raises about its expansion, it also raises fears of major upheavals in the world’s economies. The energy problem is expected to intensify further as Western sanctions on Russia will create gas supply problems, mainly in Europe. There are diplomatic efforts at a ceasefire and the two sides are expected to meet in Belarus to find a solution, but President Putin’s threat to use nuclear weapons is raising concerns.

Of course, the known problems in the economy remain dominated by inflation. High inflation combined with very low interest rates is causing a loss of real income in the world’s largest countries and it remains to be seen whether the actions announced by the central banks (tighter monetary policy and interest rate hikes) will eventually apply, with the new data brought by the war in Ukraine.

The first reaction of the markets after the start of the Russian invasion was a big correction, but it quickly stopped and from Thursday onwards and more on Friday, the main stock indices followed an upward trend. US indices managed to close the week with gains, as did the British index. The rest of the European indices, despite the recovery, could not completely reverse the climate and thus closed in negative territory.

The US dollar strengthened, although it eventually corrected towards the end of the week while the euro moved lower. Gold, although rising sharply during the week, finally closed lower and oil, which reached above $ 100 a barrel for the first time in several years, finally closed with a slight rise. Bond yields moved higher with the US 10-year closing at 1.97% while most cryptocurrencies continued to drop for the third consecutive week.

The war in Ukraine will dominate the markets this week along with the regular economic announcements, the most important of which are inflation in Germany and the eurozone, new jobs in the United States (NFPs), and the testimony of the head of the Fed Jerome Powell in Congress.

 

SP500

The US SP500 index closed higher last week, at 4,382 points and profits of 0.80%. The index was in a downtrend since the middle of the month, which intensified last Wednesday, after the Russian invasion of Ukraine. From Thursday onwards, however, a strong recovery began that reversed the negative picture and so the index weekly closed in positive territory. Early on Monday, however, there is strong pressure with futures losing more than 2%. The ongoing war, Putin’s threats to use nuclear weapons, and the economic sanctions imposed on Russia, which will hit the West financially, have worsened the climate. The VIX index, which reflects estimates for the future volatility of the SP500, has risen above 30, which means that daily volatility of the index is expected with a high probability of over 2%. If there is a solution in Ukraine, we may see some recovery, but in case of a downtrend, the support is at 4,210 points and last week’s low, at 4,100 points. We may try short positions this week.

 

DAX40

The German index DAX40 moved strongly down last week, closing at 14,630 points, with losses that exceeded 2.70%. The war in Ukraine affects Europe more than any other region in the world, not only because it is being waged in its neighborhood but also because Europe is as energy-dependent on Russia as any other region in the world. The DAX40 futures opened this week with losses of more than 3.50%, a sign of great concern and negative sentiment in the market. The macroeconomic results in Germany were not negative with the GDP in the 4th quarter of 2021 strengthening by 1.8% and the economic climate indicators being announced at satisfactory levels. It is important to note that the producer price index has increased by 25%, compared to last year, which shows how strong the inflationary pressures are in Germany. If the index continues downwards, below last week’s low of 13,780 points, the correction will probably expand so short positions is what we may try this week.

FTSE100

The British FTSE100 index moved higher last week, closing at 7,520 points and profits of 0.90%. There was a full recovery from last Thursday’s lows and a closing week finally in positive territory. The index futures opened this week, in strongly negative territory and losses of over 2%, in line with the generally negative market climate. The world’s strong economies will be more or less affected by sanctions on Russia, with the United Kingdom no exception. The fact is that the FTSE100 performs better than the indicators of European Union countries. Below 7,140 points, the climate is expected to worsen further so we may try short positions for one more week.

 

Gold

Last week was corrective for gold, closing at $ 1,890 and losing more than 0.50%. Gold had jumped above $ 1,976 on Thursday but then came under intense pressure, especially on Friday, with the week closing below $ 1,900. The investment sentiment and the risk-off mood of the markets and investors will be the most critical factors in the formation of gold prices in the near future, but also, we should not ignore the problem of high inflation that afflicts the economies of the latter months. Above $ 1,920, the scenario of approaching $ 2,000 is stronger, but in case of a bearish breakout below $ 1,875, it is possible to see a de-escalation of prices. Trusting more on the second case, we may open short positions this week.

 

US Oil

Last week was bullish for oil with next month’s futures closing at $ 91.89, showing gains approaching 1.80%. In the middle of the week, there was a jump in prices above $ 100, for the first time since 2014 but relatively soon the price dropped. There is a big rise at the start of this week, close to $ 97 which means that worries about the outcome of the war and the energy crisis have intensified. The positives of the day are a possible solution to the issue of Iran’s nuclear program, and if the embargo is lifted, oil production will increase and there may be a breather in rising prices. Above $ 100, it is considered that the situation is out of control and that we may experience a major energy/oil crisis. Below $ 89, the markets will probably consider that there is a relative recession in fears. We may try long positions this week, at least until $100.

 

EURUSD (Euro vs US Dollar)

The EURUSD was bearish last week, opening at 1.1316 and closing at 1.1272. Midweek, prices reached 1.11 which is a low price of about 20 months but there have been upward reactions from Thursday onwards. The US dollar as a safer solution gathered the preferences of investors, who moved away from the euro as the eurozone is hit hardest by the war in Ukraine. The European Union has imposed a series of sanctions on Russia, but this will also hurt it financially. Christine Lagarde, however, appeared reassuring, saying the ECB would do everything in its power to maintain economic stability and price stability. On the other hand, inflation in the eurozone remains at high rates, and monetary policy and possible interest rate hikes are now under new considerations, due to the war. Below 1.1120, the fall will take the form of a strong downtrend so we may try sell positions this week.

 

GBPUSD (Great Britain Pound – US Dollar)

The previous week was strongly bearish for the GBPUSD, which opened at 1.3580 and closed at 1.3410. The strong dollar was the main reason for this movement of the pair since as a lower risk option, it gathers the preferences of the markets. The pound was also pressed after the announcement of monetary policy by the Bank of England and the speech of its head, Andrew Bailey. More specifically, Mr. Bailey said that even though higher inflation rates are expected in the country, investors should not bet on an aggressive increase in interest rates. With no other major financial announcements and the extremely likely rise in US interest rates in March, market sentiment was low on the UK interest rate policy. If there is a bearish breakout of 1.3270, then the significant support will be targeted, just below 1.3170 so sell positions is our selection for the current week.

 

USDJPY (US DollarJapanese Yen)

The USDJPY moved higher last week, opening at 115.01 and closing at 115.52. The strengthening of the US dollar and the rise of bond yields, were able to offset the rise of the Japanese currency, which due to its nature as a safe-haven asset for investment, is favored in times of crisis. Inflation in Japan was reported at 1%, which is significantly lower than the rest of the world’s major economies but is high for Japan, so interest rate and monetary policy actions by the central bank may be not ruled out. If the dollar continues to strengthen, there may be an approach to the resistance of 116.35, but it needs many buyers to break it out as it is high for many years. We will keep opening buy positions for one more week.

 

EURJPY (EuroJapanese Yen)

It was a consolidative week for the EURJPY with opening and closing in the price area of 130.20. However, volatility was very high and we saw a weekly low price below 128. The current week opened well below 130, confirming the weakness of the euro and the strengthening of the Japanese currency, which has the characteristics of a low-risk investment solution. Below 127.40, the pair acquires characteristics of a strong downtrend so we may try sell positions this week.

 

EURGBP (Euro – Great Britain Pound)

Last week was bullish for the EURGBP which opened at 0.8327 and closed at 0.8403. The euro may have been weak, but the Bank of England’s Bailey statements, which somewhat cut interest rate expectations, further weakened the pound. Given the problems that the war in Ukraine will cause in the eurozone, we may see the pair take a downward turn again, to 0.8285 so we prefer sell positions this week as well.

 

USDCAD (US Dollar – Canadian Dollar)

Last week was bearish for USDCAD, which opened at 1.2745 and closed at 1.2701. The US currency strengthened but the rise in oil prices helped the Canadian dollar more. Canada did not have significant economic announcements and so the pair’s movement was shaped by developments in Ukraine and oil prices. This week, however, contains announcements about GDP and interest rates in Canada, so regular news will also come to the fore. A strengthening of the US dollar and USDCAD prices above 1.2880, will raise expectations for buyers for prices at 1.30, and in that case, we may try buy positions this week.

 

USDCHF (US DollarSwiss Franc)

USDCHF was on the rise last week, with the opening price at 0.9206 and the closing price at 0.9254. The US dollar was strong and pushed the pair upwards without the Swiss franc being able to balance with a corresponding strengthening since the factors that affect it (e.g., gold) did not move accordingly. The price range of 0.9375 continues to be the most important resistance to a possible uptrend of the pair and we’re keen to go for it with buy positions this week.

 

AUDUSD (Australian Dollar – US Dollar)

Last week was bullish for the AUDUSD (4th in a row), which opened at 0.7172 and closed at 0.7231. This has happened even though the US currency has strengthened considerably. The perception of the markets is rather that the Australian economy will not be affected by the crisis of the war in Ukraine and it is not ruled out that it will strengthen due to China. Retail sales, as announced earlier this week, rose 1.8% in January, well above market expectations, and the climate is improving even more. Interest rates, GDP, and the trade balance are announced this week in Australia and so high volatility and interesting pair’s movements are expected. Resistance at 0.7315 will be the first obstacle to a possible continuation of the rise, unless the US dollar strengthens so much that it pushes the pair lower, to 0.71. We may try buy positions this week.

 

Bitcoin

Last week was slightly bearish for Bitcoin, which closed at $ 37,713, with losses of around 1.70%. Bitcoin has taken on the characteristics of a high-risk option and is not favored in times of crisis, such as the one we are experiencing. So, it has developed a downtrend during the last three weeks, with total losses of 11%. However, after the sanctions imposed on Russia, cryptocurrencies may be an alternative way of trading and may be favored by the circumstances. A positive development is also for cryptocurrencies and Bitcoin, the ongoing inflationary pressures that push many investors into hedging solutions. In the event of a break above $ 45,000, Bitcoin could make strong gains. We’re keen to try long 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.

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