18/07/2022

 

GROWING CONCERNS ABOUT RECESSION IN EUROPE

General Comment

This week has been an important one in many areas that affect financial markets. Inflation in the United States for June was announced at 9.1%, belying many analysts who believed that inflationary pressures would begin to subside after the first Fed rate hikes and tighter monetary policy. It turns out, however, that inflation continues to rise and in addition, there is talk of a 1% interest rate increase at the next central bank meeting, even if this appears to be a reduced probability by various executive bankers.

In Europe, where international interest is concentrated, things are getting worse. Russia has closed the Nord Stream 1 natural gas pipeline for repairs but is doubtful whether it will reopen it. If this case is confirmed, many European countries will have major consequences on their economy and the quality of life of residents. Many countries are already upset with statements of panic in Germany about the coming winter, a government crisis in Italy, and big concerns in general.

As far as central banks are concerned, there is a strong chance of a 0.25% increase in interest rates by the ECB at next Thursday’s meeting, but this does not undo the divergence that has been created between the two central banks in Europe and the United States. The United States has already made three rate hikes, while for Europe it will be the first in several years. The macroeconomic data released show that the US economy is in much better shape than the European one. U.S. retail sales in June performed a positive result, following the positive sentiment from the labor market announced the week before.

The overall investment sentiment is negative and, in more investors, there is a sense of risk-averse, expecting a slowdown in growth or even a recession. As a consequence of all this, equity markets had corrective trends while a plethora of investors concentrated on the dollar as a safer option. Given the recent rally in the dollar, its re-strengthening has led many rates to historic records of many years or even decades. Gold and oil continued to suffer losses, while bitcoin and most cryptocurrencies showed stabilizing & light bullish trends.

In addition to the announcement of interest rates in the Eurozone on Thursday, this week stand out announcements of the unemployment rate, inflation and retail sales in the UK, inflation in Japan, and PMI indicators in the world’s largest economies.

SP500

The US SP500 index closed last week with downward trends, at 3,867 points and losses that approached 1%. Losses were much larger by Thursday, with the announcement of U.S. inflation but Friday’s significant rebound helped the index curb its losses. The strong dollar and the feeling that the Fed will be forced to tighten the liquidity and raise interest rates even more aggressively are considerations that do not favor equity markets. Fed executives ‘ statements have reinforced the probability of a 0.75% rate hike at 27/7 (72% probability based on FedWatch) while there is a significant 28% chance of a 1% increase, which will probably come as an unpleasant surprise to equity investors. The SP500 companies have already started to announce the results of the 2nd quarter and the numbers are below estimates, as far as the average companies that reported earnings above expectations. The positives include the good macroeconomic picture of the US based on the latest announcements, with retail sales increasing in June by 1%. Above 3,950 points, the sentiment is improving noticeably but a turn towards the downtrend is not excluded, especially if the index is below 3,800 points again. We may try long positions this week.

 

DAX40

The German DAX40 index moved downward in the previous week, closing at 12,830 points, with losses of 0.90%. Germany has good reason to worry about the course of its economy, given its energy dependence on Russia, after the temporary stop of natural gas due to repairs, but has raised questions about its resumption. If these estimates are verified, Germany will have a big energy problem that will most likely be reflected in business operations and growth. Inflation was unchanged at 8.2% in June while economic sentiment dipped to sharply negative numbers. If the downtrend continues, it is not ruled out that the price range at 12,360 points will be threatened, which is a low price of about 20 months, when the index recovered from the pandemic. Short positions is our selection in the current week.

 

FTSE100

The British FTSE100 index moved slightly lower last week, closing at 7,120 points, with marginal losses. The factors that do not let the index recover are the recent government crisis in the UK and the possibility of a recession that can hit the economy. Of key importance are the possible interest rate rises that may follow through the year from the Bank of England. There is a view confirmed by Bank chief Andrew Bailey that increases need to be more aggressive to fight high inflation. But many economists argue that this would exacerbate a possible recession in the country and lead to heavy losses in jobs and other macroeconomic indicators. As long as the index is kept above 7,000 points, the situation seems to be under control but any loss of these levels or even more, values below 6,900 points (low value of about 4 months), will probably mean the development of a strong downtrend. We prefer short positions this week.

 

Gold

Last week was bearish for gold (the 5th in a row), closing at $1,706 and losses close to 2%. In five weeks, gold has lost about 10% of its value, which is a huge drop, given the low volatility it has. The main “enemy” is the strong dollar that is constantly strengthening and breaking price records for many years. U.S. inflation was announced at 9.1% in June, but this does not seem to favor a recovery in gold, which is a frequent choice of investors as a counterweight to inflationary pressures. The main reason is that markets have already anticipated that the Fed will continue to raise interest rates to tame inflation, limiting liquidity and making money expensive. These conditions are against the increase in gold prices and if they continue, they may drive gold towards a 2-year low of $1,673. Reasons for supporting gold and its possible recovery are geopolitical risk and a softer approach by the Fed. If that happens, we may see gold moving towards $1,750 and we may try long positions this week.

 

US Oil

Last week’s oil futures closed at $97.53, with losses approaching 7%. Fears of a recession in the global economy that could potentially curb oil demand are the main reason that prices have been falling sharply for about a month. The strong dollar is also a related reason for losses in oil, with investors ‘ eyes turning to the Fed and its upcoming decisions (July and September). As a counterweight to this situation that does not allow further losses and that lifts oil prices, is the attitude of the oil-producing countries that until now have not changed their production. This may change shortly though, with the next OPEC meeting on August 3rd being particularly critical because the US is pushing Saudi Arabia to increase production. The US president is on a trip to the Middle East and one of his goals is to achieve conditions to combat high inflation. Last week’s lows near $90.50 are now the most important support to a possible turn in prices down while above $100, the upward scenario is more favored. We may try short positions this week.

EURUSD (Euro vs US Dollar)
Last week, EURUSD was bearish as it opened at 1.0173 and closed at 1.0087. The EURUSD was swept away by the great strength of the US currency and midweek fell for the first time since late 2002, below 1:1. The US dollar continues its upward rally after gathering three conditions for strengthening. The behavior of the Central Bank of the United States (Fed) with the three interest rate hikes that have already taken place and the ones that are expected by the markets with a strong probability, gives a great incentive for investors to choose the dollar. Second, the prevailing negative investment sentiment pushes many funds into safe havens rather than high-risk investing options. Finally, America is showing a strong macroeconomic picture with positive announcements lately, which means that its economy is at a better level than other competing economies. In Europe, things are very difficult since the fear of an energy blackout in winter creates intense worries and uncertainty. The European Central Bank does not seem willing to follow the Fed in an aggressive policy of raising interest rates and it remains to be seen whether this will be confirmed in the decision of Thursday’s meeting where an increase of 0.25% is expected. The pair was tested below 1: 1 but rebounded with the appearance of some buyers. But if this happens again, the strong downward trend could continue. It takes at least one upward reaction above 1.0220 for the climate to begin to reverse and we may try buy positions this week.

 

GBPUSD (Great Britain Pound – US Dollar)

Last week GBPUSD was bearish as it opened at 1.2006 and closed at 1.1868. The pair is pressed downwards and dropped well below 1.20, which is considered a milestone price. The US dollar has been following a frantic rally for some time, creating strong pressure on all currency pairs that contain it. The Federal Reserve has convinced markets that it is determined to tackle inflation with very aggressive and tight monetary policy and interest rate hikes. The Bank of England, although it is following at the same pace having already made interest rate increases, is still strongly questioned by investors and markets, its willingness to continue in the same tone since the problems of the British economy are acute and the possibility of recession very high. The head of the Bank of England, Andrew Bailey, said in a speech last week that the bank would continue aggressively until it combated the inflation monster. A series of positive UK economic data on GDP, industry, manufacturing, and the trade balance was also announced on Wednesday, but neither the Bailey statements nor this positive news could reverse the sentiment for the sterling. This is followed by the current week with important economic announcements for the UK (inflation, unemployment rate, retail sales) and if the same situation continues, it is not ruled out that we will see the pair at much lower levels. A critical price zone for any upward reaction is 1.20 and we may open buy positions this week.

 

USDJPY (US DollarJapanese Yen)

USDJPY moved upward last week, opening at 135.97 and closing at 138.52. The pair managed to break out of the strong resistance at 137 and move with momentum to higher levels since the US dollar with its explosive rise, supports this trend. At the same time, Japan’s currency is extremely weak since the country’s central bank is perhaps the only exception among major economies that continues very loose monetary policy and keeps interest rates in negative territory. The recent statements of Kuroda (head of the Bank of Japan) spoke of even looser monetary policy in case the economy is in trouble. The USDJPY could already have touched 140 but in the uptrend, there is also an inhibitory factor. Bond yields that have a strong correlation to the pair fell this week, with the yield on the U.S. 10-year falling below 3%, to 2.93%. It stands to reason that some buyers continue to chase 140 but next Friday inflation is announced in Japan and any surprises upwards may unleash forces at the Bank of Japan for policy in the opposite direction. We may try sell positions this week.

 

EURJPY (EuroJapanese Yen)
Bullish was last week for EURJPY which opened at 138.35 and closed at 139.69. The euro was quite weak but the Japanese currency was even weaker, especially after Bank of Japan head Haruhiko Kuroda said very loose monetary policy would continue as uncertainty about the course of Japan’s economy is high and relatively low inflation allows it. With this data, we may see an excess of 140 again after a break of a few days unless the announcement of inflation on Friday holds surprises that will partially change the outlook of the markets. We may try buy positions this week.

 

EURGBP (Euro – Great Britain Pound)

Last week was bullish for EURGBP which opened at 0.8461 and closed at 0.8499. The euro and sterling were weak due to concerns of recession in the eurozone and UK economies respectively, but the euro appears to have benefited slightly more. The pair has returned to its familiar balance- point lately, around 0.85. The announcement of interest rates in the Eurozone and a series of announcements in the UK (inflation, unemployment rate, retail sales) will have an important role this week and if this ends up strengthening sterling, we may see EURGBP close to 0.84 so we prefer sell positions this week.

 

USDCAD (US Dollar – Canadian Dollar)

Last week was bullish for USDCAD, which opened at 1.2948 and closed at 1.3022. The price of the pair on Thursday had exceeded 1.32 after the announcement of inflation in the U.S. and the big drop in oil prices that have a strong correlation with Canada’s currency. But quickly the situation de-escalated and the pair closed just above 1.30. On Wednesday, the Bank of Canada raised interest rates by 1%, from 1.50% to 2.50%, which came as a mini surprise as markets expected a 0.75% increase. That day the Canadian dollar rebounded slightly but was quickly carried away again by the great momentum of the American currency. Above 1.30, the uptrend is maintained for USDCAD which could again catch 1.32 but below 1.30 and even further below 1.2930 signaled a strengthening of the downtrend. We may try sell positions this week.

 

USDCHF (US DollarSwiss Franc)
The USDCHF had a slightly downward course last week after the opening was at 0.9764 and the closing at 0.9760. The pair rebounded after the recent and unexpected interest rate hike by the Swiss National Bank, which had driven it towards 0.95. The strong dollar and markets ‘ expectations of repeated Fed rate hikes pushed the USDCHF close to 0.99 but the Swiss currency, traditionally considered a very safe investment option, gained points in recent days when there were market worries and fears that have intensified and so we saw a return below 0.98. If we see an upward split above 0.9885 then the scenario for 1:1 will now be quite likely. But if investment sentiment deteriorates then there may be a downward spiral for the pair so we prefer sell positions this week.

 

AUDUSD (Australian Dollar – US Dollar)

Last week AUDUSD was bearish as it opened at 0.6842 and closed at 0.6793. The strong US dollar was able to push the pair below 0.6830 support again but Australia’s good macroeconomic picture did not let the fall extend. New jobs in Australia in June far exceeded expectations while the unemployment rate fell within a month from 3.9% to 3.5%. China’s announcements were neutral as the trade balance and retail sales met expectations but GDP and industrial production were below expected. Any new strengthening of the US currency will create conditions of threat for support at 0.6680 which will be a low price for more than two years but if the upward scenario prevails, it is not excluded that the pair will approach 0.70 so we may try buy positions this week.

Bitcoin

Last week was practically neutral for Bitcoin, which opened and closed at around $20,800. There is a balance of around $20,000, with the market looking for directionality. Many analyses and polls among cryptocurrency investors see $10,000 as the most likely scenario. However, some more optimistic analysts believe that $30,000 is the prevailing scenario. After the recent big drop in cryptocurrencies, it is very difficult to make safe estimates. Technically speaking, above $22,400 the climate will improve while as prices move away from $19,000 the pessimistic scenario consolidates. We may 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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