06/06/2022

DIFFICULTIES ARE AHEAD BUT SOME OPPORTUNITIES EXIST

General Comment

The same agenda continued the week that passed by, with the dominant issues of the last period remaining and intensifying. The war in Ukraine seems to be consolidating, as do its long-term effects on economies, especially European ones. The big issues also remain, with high inflation, expected actions by central banks and a slowdown in the economy, and fears of a recession that may bring about.

The US economy seems to be in better shape and this was reflected in the results of the labor market announced on Friday. As paradoxical as it may seem, the Fed would prefer worse news that would allow it optimism about the reflation of the economy. More precisely, in May 390K new jobs were created, a number that far exceeded the expectations of the markets that spoke of 325K. It is worth noting that from June 1 onwards the reduction of the balance sheet by the Fed is in force and this, of course, as time passed by, will hurt the liquidity of the American economy.

In Europe, the event that dominated last week was the announcement of inflation for May at 8.1%, well above estimates of 7.7%, and April’s rate at 7.4%. In the eurozone, inflation has not yet reached a peak and is particularly affected by the Russian-Ukrainian conflict that affects the region’s energy costs far more than the US.

Most equity markets in Europe and the US moved slightly downwards, gold moved slightly upwards while oil climbed to very high prices, even if there was a decision by OPEC to increase production, as we will see below. Key to the currency market were bond yields, with the U.S. 10-year rising and closing the week at 2.95% after three bearish weeks. So, the dollar managed to partially recover while the euro was stabilizing. Finally, the cryptocurrency market continues to be pressured with Bitcoin unable to overtake me and stay above $30,000.

This week also has important announcements, especially towards the end. The announcement of inflation in the United States and the meeting of the European Central Bank on interest rates and monetary policy are the dominant topics. The announcement of GDP in the eurozone and inflation in China also stand out.

SP500

The US SP500 index closed last week with downward trends, at 4,109 points and losses that approached 1.40%. The big rise of the week that had preceded, had no continuation as investment sentiment worsened and the statements of Fed officials were in the direction of very tight monetary policy and repeated increases in interest rates, at least for the whole of 2022. This expected approach by the Fed does not favor equity markets and may cause growth in the U.S. economy to slow, of course, aiming to combat high inflation. Bond yields also moved upwards, with the US 10-year again touching the psychological bar of 3% and according to Bloomberg, many funds bet on falling markets when yields approach 3%. As the index approaches 4,000 points, the case of the downward channel becomes more likely while above 4,200 points, further recovery gains are possible. We may try long positions this week.

DAX40

The German DAX40 index had consolidations in the week that passed by, closing at 14,476 points without much change. The European indices, and in particular the DAX40, continue to perform better at this time than the American indices since the Fed has hardened its stance on monetary policy and has already made interest rate increases, while the ECB is still in statements about a possible increase soon. Of course, the problems in the German economy remain as the energy crisis remains and the inflation was announced at 7.9% for May. The unemployment rate in Germany remained unchanged at 5% but the big drop in retail sales shows that the consumption problem is large. Above 14,640 points (the highest price of about 2.5 months), it is not excluded that the index will yield more gains while the downward scenario becomes more likely below 14,300 points. We believe more in the bullish scenario so we may try long positions this week.

FTSE100

The British FTSE100 index declined last week, closing at 7,545 points, with losses of 0.35%. This fall was due to the last two days of the week when investment sentiment worsened and statements and some analysts said that the Bank of England would tighten monetary policy further to deal with high inflation even if it hurt growth and could even lead to a recession. The UK had no major economic announcements last week and doesn’t have the current one either, so investment sentiment and statements by bankers and analysts will dominate equity markets. Close to 7,640 points there is the highest price in about three years and the index will find it difficult to exceed these levels. The 7,520 points is a relatively critical support in a possible downward turn but we prefer long positions this week too.

Gold

The previous week was slightly bullish for gold, with a closing price of $1,853 and losses close to 0.20%. It was the second week in a row with relatively low volatility and small fluctuations for gold that appears to be looking for directionality. From mid-April, strong downward trends dominated, while in mid-May there was an upward reaction. On the one hand, the Ukrainian war, the negative sentiment, and high inflation are sending investors to the gold solution, but on the other hand, attractive bond yields and a strong dollar are not letting prices rise sufficiently. If there is a bullish breakout above $1,878, which was the high price of last week, we may see the uptrend dominate, while the closer we get to $1,800, the downtrend may intensify. The announcement of interest rates and monetary policy in the Eurozone on Thursday and the announcement of inflation in the US on Friday will be crucial and we’re keen to take long positions this week.

US Oil

Last week was bullish for oil with next month’s futures closing at $120.32, performing gains that approached 4.70%. It is noteworthy that this upward rally took place even though on Thursday at the OPEC meeting, it was decided to increase production by 648K barrels per day, above the decision taken for 428K that was valid until recently. The embargo on Russian oil will create a greater shortage in the market and that is why prices react upward, while the return to normalcy in China with the gradual lifting of the lockdown will increase demand again (let’s not forget that China is the world’s largest oil consumer). Oil had exceeded $130 in early March when fears and worries about the war were at their top and with current prices above $120 this nightmarish scenario is back on track. But it is not excluded that we will see a de-escalation of prices this week because many times very high prices create less consumption and, in a way, the market regulates itself so we may try short positions this week.

EURUSD (Euro vs US Dollar)
Slightly bearish was last week for EURUSD which opened at 1.0733 and closed at 1.0719. It was a break from the upward reaction of the two weeks before the US dollar showed some signs of recovery. In the United States, a new rate increase is expected in June, with the probability that this increase will be 0.50% has exceeded 98%, based on Fedwatch tool. In Europe, most statements by officials and bankers converge that an interest rate hike will take place in the summer, but it is doubtful whether more will follow. An increase in interest rates is likely to hurt economic growth, and this is already reflected in the low performance of PMI indicators and retail sales in the eurozone, which fell into negative territory. Market analysts also point to the fact that inflation in the United States is likely to have reached a peak while this does not seem to have happened in Europe. If the recovery of the dollar continues and the pair falls below 1.0625, which was the low price of the previous week, then we will probably have a return to the long-term downtrend. On the contrary, above 1.08 the continuation of the upward reaction gains more points. We may try buy positions this week.

GBPUSD (Great Britain Pound – US Dollar)

Last week was bearish for GBPUSD, which opened at 1.2619 and closed at 1.2487. While the British were largely occupied with Jubilee and Queen Elizabeth, the US economy showed signs of robustness, especially in the labor market. The lack of economic announcements in the UK left the mood for risk and investment sentiment space to determine the trend and volatility of the sterling. Fears and concerns about stagflation and a possible recession in the British economy have put a lot of pressure on the sterling, while many analysts insist that double-digit inflation may appear soon enough. The lack of economic news in the UK will continue into next week and so investment sentiment along with news from the USA and especially about inflation will largely determine the course of the pair. As long as GBPUSD remains below 1.25, the scenario of further decline becomes more likely. We may try sell positions this week.

USDJPY (US Dollar – Japanese Yen)

USDJPY moved up explosively last week, opening at 126.96 and closing at 130.82. The week was enough to equal all the losses that the pair had suffered in the last three weeks and the USDJPY was able to revert above the milestone price of 130. The strengthening of the US dollar, combined with the rise in bond yields were factors that helped the USDJPY rise. However, the Japanese currency also suffered a decline because the economic announcements in Japan were disappointing and on the other hand the loose monetary policy does not seem to change. More specifically, industrial production in Japan had negative rates compared to the previous month. Bank of Japan head Haruhiko Kuroda said loose monetary policy needed to continue to raise wages while inflation of 2% is not a major concern. All factors point to the upward scenario for the pair but the sharp increase of the previous week may create profit takers. Also, the price is very close to the area of 131.25 which is the highest price in the last 20 years. For these reasons, we prefer sell positions this week.

EURJPY (Euro – Japanese Yen)
Bullish was the last week for EURJPY which opened at 136.34 and closed at 140.20. It was the first time in the last seven years that the pair managed to exceed the value of 140. This is due not so much to the strength of the euro as to the weakening of the Japanese currency, which came after the Bank of Japan’s central banker said that loose monetary policy would continue. This explosive rise has created a strong trend without any apparent resistance upwards while some signs of decompression could perhaps be seen below 138.30 but the overbought conditions may create corrections so we may try sell positions this week.

EURGBP (Euro – Great Britain Pound)

Last week was bullish for EURGBP which opened at 0.8493 and closed at 0.8582. The pair managed to escape far enough from the center of balance of the last interval, at 0.85. The euro had a relatively good week while the sterling weakened a lot. EURGBP is now quite close to the resistance of 0.8620 which is also the highest value in the last nine months or so. A bullish break out of this level will give fresh air to the uptrend. It takes a bearish break out below 0.85 for this trend to begin to change but we prefer buy positions for one more week.

USDCAD (US Dollar – Canadian Dollar)

Last week was bearish for USDCAD (the 3rd in a row), as it opened at 1.2719 and closed at 1.2589. The large increase in oil prices that usually favors the Canadian currency was certainly a decisive factor in this new downward movement. In addition, however, the Canadian currency strengthened after the Bank of Canada raised interest rates by 0.50% last Wednesday. This increase was followed by Paul Beaudry’s statement on Thursday. The banker from Vancouver said that he sees Canada’s interest rates at 3% levels by the end of the year, and this statement gave a strong boost to the Canadian dollar. After the recent increase, interest rates in Canada are at 1.5%. The other economic announcements related to GDP and the PMI index had a mixed sign and thus had little effect on the pair. Below 1.25 the movement of the last three weeks begins and acquires characteristics of a strong downward trend and we need to see prices at least above 1.27 to raise the question of reverse. We prefer sell positions this week.

USDCHF (US Dollar – Swiss Franc)
The USDCHF had an uptrend last week as the opening was at 0.9558 and the closing was at 0.9625. There was an upward reaction for the pair after two weeks of sharp declines. In addition to the strengthening of the US dollar, the information from the Swiss central bank (SNB) that they will expect an interest rate increase from the European Central Bank before making their increase, and not before September, also played an important role. Inflation, reported in Switzerland at 2.9%, was above market expectations, but not to the extent that the country’s central bank would be alarmed to make a hasty move. The announcements of GDP, retail sales, and trade balance were also positive for Switzerland. If the dollar continues to strengthen, the pair could again approach 0.98 but below 0.9450 the bearish trend may prevail. We may try sell positions this week.

AUDUSD (Australian Dollar – US Dollar)

Bullish was the last week for AUDUSD, which opened at 0.7157 and closed at 0.7207. The return to normalcy in China and the rise in commodity prices were factors that helped the Australian currency strengthen for the third week in a row. Australia’s economic announcements were also positive, sending a message that the economy is resilient and not affected by war and crisis as much as other major economies. The country’s GDP grew by 3.3% in Q1 2022, PMI indicators were generally better than expected and the trade balance exceeded 10 billion in April. The pair, however, is expected to be heavily influenced by the US currency, with two key dates shortly: the announcement of inflation in the US next Friday and the possible increase in interest rates by the Fed on 15/6. A possible strengthening of the US dollar may push the pair towards the price range of 0.71 or below and so we may try sell positions this week.

Bitcoin

Bitcoin closed at $29,889 last week with profits close to 1.50%. Bitcoin and most cryptocurrencies are still trying to recover from the recent shock of Luna and Terra that hit their credibility, especially the credibility of the stable coins. The largest exchanges now adopt and provide investors with futures and other derivatives in cryptocurrencies, and so the big funds now have the capability of short selling. At the beginning of this week, however, there is a strong upward reaction with Bitcoin already moving above $31,000. The same picture has the futures of many stock indices (SP500, NASDAQ100), confirming the correlation that has been developed between them. As rumors of market regulation by the relevant regulators’ flare-up, the SEC in the US is launching a campaign to inform investors through a TV show, with cryptocurrencies included in it, which shows that now everyone is more serious with them. If Bitcoin manages to exceed $32,500, we may see higher prices, but a violent return below $30,000 will greatly worsen the climate. We prefer short positions this week too.

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.