27/06/2022

THE PROBLEM OF INFLATION IS BECOMING A PROBLEM OF RECESSION

General Comment

The entrenched problem of high prices and the energy crisis in most economies of the world is being addressed dynamically with actions by central banks, even if this has not yet been reflected in the inflation rates announced monthly. Central banks, led by the Fed, have been tightening monetary policy and raising interest rates for several months. The continued quantitative easing of the past few years has created large inflationary pressures that until recently have been under the carpet. Perhaps the actions of the central banks had started earlier but the pandemic and the war in Ukraine created the need for extra liquidity.

The US has already raised interest rates three times from 0.25% to 1.75% and is expected to raise them further this year, while most central banks have done the same except for the European Central Bank, which is even more cautious, even if all statements by European officials converge on an increase in July and perhaps a second interest rate increase in September. Fed chief Jerome Powell in his congressional testimony last week reiterated once again how the bank is determined to fight the inflation monster, even if it leads to slowing growth.

In the rest of the economic news of the week, the announcements of the PMIs in the United States and the Eurozone had a negative impact, while the Michigan index showed that consumer sentiment remains in strongly negative territory. Equity markets, however, showed a more optimistic view of the markets on the situation, as most indices had significant gains. By contrast, gold, oil, and most commodities had losses which is something to be expected in anticipation of a recession. Bond yields also fell with the U.S. 10-year closing the week at 3.14%. Some faint signs of recovery in cryptocurrencies stopped the big drop but have not yet generated the required optimism.

The dominant theme of the week that has just begun is Christine Lagarde’s speeches at the beginning of the week and the announcement of inflation in the Eurozone next Friday. The announcement of GDP and personal consumer expenditures in the United States also stand out.

SP500

The US SP500 index closed last week with upward trends, at 3,913 points and gains that approached 6.30%. There are obvious concerns about the course of the US economy due to the expectations for the Fed’s stance and the repeated increases in interest rates that have been announced and the announcements of PMIs in the US that were overall below market expectations. Last week, however, equity markets took a more optimistic approach to the situation, probably because there is a view that the prospect of a rate hike has already been consumed by investors and reflected in index prices, along with some hopes that fears of a recession may soften the Fed’s stance somewhat. Of course, the SP500 is far from having a picture of substantial recovery and this, in addition to the 4,000 points breakout, requires an approach of 4,200 points. Below 3,800 points the perception that we are returning to the downward channel is strengthened but we may try long positions this week too.

DAX30

The German DAX40 index moved upward in the previous week, closing at 13,205 points, with gains of 0.75%. The week was not good in relation to economic announcements in Germany, with PMI indicators and business sentiment showing a picture of deterioration and the producer price index (a precursor to prices) again hovering at very high levels (33.6% increase over the previous year). Germany’s image also concerning the war in Ukraine and the threatened great energy crisis seems to be deteriorating and everyone is now talking about a very difficult winter. These were the reasons why the DAX40 did not perform as well as most major stock indices and if it falls below 12,800 points, the downtrend will probably return. The sense of optimism will strengthen above 13,600 points. We may try long positions this week.

FTSE100

The British FTSE100 index moved upward last week, closing at 7,190 points, gaining more than 3.60%. Inflation in the United Kingdom continues to rise and was announced at 9.1% in May, while the producer price index and the retail price index also had very high prices. Below-expected also announced retail sales and almost all PMI indicators. All this creates a gloomy climate and a negative sentiment for the course of the economy, but there are statements by executives from the Bank of England that caution is needed because too tight monetary policy and large increases in interest rates may lead to an uncontrolled recession. If the FTSE100 manages to exceed 7,300 points then the hopes of further upward reaction are dwell founded and of course, a new plunge below 7,000 points will make negativism prevail again. Long positions is our selection for the current week.

Gold

The previous week for gold was bearish, closing at $1,829 and losses close to 0.70%. The relatively rare phenomenon of losses in gold in combination with losses in the US dollar occurred and is rare because, as is known, gold is denominated in dollars. In times of intense worries and fears of a recession in the global economy, commodities and not only agriculture is affected due to reduced demand but also gold as economies will enter a phase of deflation. The current week, however, has opened with strong gains for gold, and this is mainly due to the decision of the G7 to ban gold imports from Russia, as part of the ongoing sanctions. Gold is a large source of income for Russia, and the ban on imports reduces supply in the market. However, if gold cannot exceed $1,883, we cannot talk about an upward trend and any loss of $1,800 probably restores the downward scenario. We prefer short positions this week.

US Oil

Last week for oil was bearish with next month’s futures closing at $107.04 and losses of about 0.80%. The midweek fall was much bigger, with prices touching $101.50 levels but on Friday there was a strong upward reaction. The markets have two opposing views: on the one hand, the fears of slowing growth or recession create the perception of reduced demand in the future but on the other hand, the summer months always have increased demand that does not seem to be affected at the moment, even if prices are extremely high. This week there is also a meeting of OPEC members but no further developments are expected to the pre-decided increase in production by 648K barrels per day from August onwards. If the uptrend continues above $111, then the further uptrend scenario outweighs while in the event of approaching $101.50, the downtrend trends dominate. We may try long positions this week.

EURUSD (Euro vs US Dollar)
Bullish was last week for EURUSD which opened at 1.0474 and closed at 1.0554. The U.S. dollar, after the recent rally, has shown signs of saturation and we are doubtful whether they are based on real data or are technical. So EURUSD has moved away from the critical zone of 1.0350 which is strong support and any loss of it can even lead to a 1:1 parity. The path of interest rates in the United States is more or less predetermined, and it is expected that U.S. interest rates at the end of the year are in the range of 3.5% – 4%. Europe is more cautious and as usual, much slower in its decisions and so for now there is simply an expectation of a rate hike in July and possibly September. If the dollar comes back and regains the momentum it has developed lately then perhaps the pair will approach the area of 1.0350 again so we may try sell positions this week.

GBPUSD (Great Britain Pound – US Dollar)

Bullish was the previous week for GBPUSD, which opened at 1.2219 and closed at 1.2274. The negative economic results in the United Kingdom, as announced last week, have led many investors to fear that the country will be hit by a sharp recession. The logical thinking after this conclusion is that the Bank of England will be softer on monetary policy and a rise in interest rates in the foreseeable future, and so while the US dollar weakened, the pair was unable to gain upward momentum. The tight monetary policy of the Bank of England may be in question but in the United States, it should be taken rather for granted and so in the event of a new strengthening of the dollar, the pair could approach the price range of 1.20, with the only support on this path, 1.2160 so we prefer sell positions this week.

USDJPY (US Dollar – Japanese Yen)

USDJPY moved slightly upward last week, opening at 134.92 and closing at 135.16. It was the fourth consecutive bullish week for the pair but milder than the previous ones. During the week there was a new high of two decades but then there was a retracement because both the US dollar weakened and bond yields de-escalated. There is an apparent divergence in the actions of the central banks of Japan and the United States. As we have already mentioned, the United States is facing inflationary pressures with determination, but the Bank of Japan continues its very loose monetary policy and negative interest rates since low inflation rates in the country allow this to happen. The next resistance to the uptrend of the pair is the price range of 136.70 but corrections are not excluded because it is already at overbought levels. We’re keen to try sell positions this week.

EURJPY (Euro – Japanese Yen)
Bullish was the last week for EURJPY which opened at 141.32 and closed at 142.68. The pair continued its uptrend even though the euro was not particularly strengthened and even though the yield on the German 10-year bond fell from 1.66% to 1.44%. Therefore, the continued rise is attributed to the great weakness of the yen resulting from the ultra-loose monetary policy that, based on the statements of executives from the Central Bank of Japan, is expected to continue. The next target of buyers is a price above 144.25 which will be at the same time a high price of about 7.5 years but it is not excluded that there will be profit-taking and a return to 140 since the rise of the pair from the beginning of March onwards is strong and sharp. We may try buy positions for one more week.

EURGBP (Euro – Great Britain Pound)

Last week was bullish for EURGBP which opened at 0.8565 and closed at 0.8596. From mid-April onwards, a mild upward trend has developed, which will begin to consolidate and intensify above 0.8720. The UK, according to executives from the Bank of England, has a high probability of a recession that could be combined with double-digit inflation. Things in Europe are not much better, but the ECB has some potential interest rate hikes ahead, giving more air to the euro. If the sterling nevertheless strengthens and has reasons to do so if the Bank of England reverts to action determination, then the EURGBP may move towards 0.85 so we may try sell positions this week.

USDCAD (US Dollar – Canadian Dollar)

Last week was bearish for USDCAD, which opened at 1.3018 and closed at 1.2893. After two sharply upward weeks, the pair lost the critical price of 1.30 after the U.S. dollar weakened and the Canadian dollar gained greater prospects for strengthening after the country announced inflation in May at 6.1%, well above April’s 5.7%. Bank of Canada executives such as Carolyn Rogers spoke of an unacceptable price and so the perception passed in the markets that the bank will harden its stance. This perception outweighed the new decline in oil prices, which was not large enough to justify a weakening of the Canadian dollar. If the US currency returns to its uptrend, we may see prices at 1.30 again so buy positions is our decision for the current week.

USDCHF (US Dollar – Swiss Franc)
The USDCHF had a downward course last week since the opening price was at 0.9706 and the closing price at 0.9584. The aftermath of the recent and unexpected increase in interest rates of 0.50% by the Swiss National Bank continues to strengthen the Swiss franc and the weakening of the US dollar that we saw last week, also helping the pair’s bearish course. In the last two weeks, there has been a drop of about 500 pips which constitutes losses of around 5%. It is clear, however, that when the increase in interest rates in Switzerland is absorbed by the markets and the dollar begins to strengthen, we may see the pair return to the uptrend that has been taking place for several months so we may try buy positions this week.

AUDUSD (Australian Dollar – US Dollar)

Neutral was last week for AUDUSD, which did not change significantly and closed in the price range of 0.6940. Bank of Australia chief Philip Lowe said no recession is expected and action to combat high inflation will continue with a possible 0.25% or 0.50% increase in interest rates at the bank’s next decision meeting. Australia was also among the exceptions of countries that announced PMI indicators above market expectations, a sign that psychology and estimates for the course of the economy are positive. In the event of an upward break out of 0.70, the climate improves further while if the pair gets below 0.6830, the downtrend acquires a very strong profile. We may try sell positions this week.

Bitcoin

Last week, Bitcoin closed at $21,029 with gains close to 2.30%. It was the first attempt at an upward reaction after the strong fall of the last period but not something impressive. It seems that Bitcoin manages to stay above the $20,000 that is the big bet at the moment but without being able to develop upward momentum. There is a widespread belief that the great rise of Bitcoin and most cryptocurrencies that occurred in the recent past is a product of the very high liquidity channeled by the central banks and now that monetary policy is beginning to tighten, prices are being squeezed extremely. So, cryptocurrencies have gained an increased correlation with high-risk stock market assets and their price is depressed accordingly. A further strong reaction above $25,000 is needed for optimism to begin to return, but a solid loss of $20,000 could bring new strong losses so 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.