29/08/2022

General Comment

Jerome Powell’s speech at the Jackson Hole Symposium last Friday, was the most important event for international financial markets in the past week. The head of the Federal Reserve of the United States stressed that fighting inflation remains the main goal for the bank at the moment and that this will be done, even if there is a sustainable slowdown in growth through a rise in interest rates. These statements raised the probability of an increase in interest rates in the United States next month by 0.75%, to 61%, according to the official FedWatch tool, and caused a stir in the markets as liquidity in the markets will decrease and money will become more expensive. These statements also eclipsed the rest of the announcements of macroeconomic results in the United States that had positive signs. U.S. GDP for the second quarter of 2022 shrank less than market expectations, durable goods orders moved at satisfactory levels for July, while personal consumption expenditures confirmed that there has been a decline in inflation lately.

In Europe, current and upcoming problems continue to dominate in a climate of intense fear and concerns about the coming winter regarding the energy adequacy of households and businesses in many countries. Efforts are being made to restore diplomatic relations with Iran to find alternative energy resources, but analysts, overall, agree that the situation is particularly difficult.

By Friday, most stock indexes were stabilizing, but after Powell’s speech, we saw strong corrective trends in Europe and America. The US dollar also strengthened as the most likely scenario is the continuation of the Fed’s interest rate hike and based on the negative sentiment that dominates internationally, the higher-risk currencies are under pressure. Gold ended the week with downward trends while oil prices rose significantly. Finally, the decline in Bitcoin and most cryptocurrencies continued for another week, as they do not seem able to recover at the moment.

The week that has just begun is very important with the announcement of new jobs in the United States on Friday (Non-Farm Payrolls – NFPs) and the announcement of inflation in the Eurozone a day before. A series of important announcements for Germany, including inflation, retail sales, and unemployment. The announcements of PMI indicators in Europe, the United Kingdom, China, and the United States complete the cycle of important announcements for the current week.

SP500

With strong corrective trends, the US SP500 index closed last week, at 4,044 points, and losses above 4.30%. Until Thursday, the index had mild moves with two bearish and two bullish days but on Friday, after Powell’s speech at the Jackson Hole Symposium, the SP500 found itself in freefall. The big issue for investors was whether the Fed will continue with big interest rate hikes or whether there will be some easing after the de-escalation in inflation we’ve seen in the U.S. for the past month. Powell said the de-escalation of inflation was a positive sign, but actions would continue until it is fully under control. The markets ‘ interpretation was clear: new rate hikes and tight monetary policy. The SP500, as well as the rest of the US equity markets, were in an environment of strong correction as liquidity in the market is likely to be limited. If the correction continues below 4,000 points, a downward channel may be formed that will reverse the upward reaction of the index that takes place from mid-June onwards. We may try short positions this week.

DAX30

The German DAX40 index moved sharply lower last week, closing at 12,872 points, with losses of 4.90%. Europe and above all Germany have significant problems because in the event of a lack of energy there will be a lot of inconvenience to citizens and significant problems in the productivity of companies that could lead to an uncontrolled recession. Added to this critical situation was Powell’s talk of tight monetary policy, and so the index’s weekly losses were the largest in about two months. Economic news in Germany was not negative: for the 2nd quarter of 2022, GDP strengthened by 1.7% (on an annual level), business sentiment continues to be positive, and two of the three PMI indicators were announced above market expectations. All of this was of course ignored on Friday, and the index easily found itself below 13,000 points, for the first time since mid-July. If the climate does not change, we may see the index at significantly lower levels so we will continue with short positions for one more week.

FTSE100

The British FTSE100 index moved lower last week, closing at 7,399 points, with losses of almost 2%. This index has been performing better than the rest of the world’s major stock indices for a few weeks, and this continued to do so until Thursday, but Powell’s speech was catalytic and plunged it into sharp downward trends. The PMI indicators announced on Tuesday were not rated negatively, in fact, the services PMI was above market estimations but on the one hand, the big economic problems of the UK (high inflation and possible recession) and tight monetary policy worldwide, outweigh any transient positive results. A possible approach of 7,000 points will probably mean that the index has entered a downward trend and we prefer short positions this week too.

Gold

The previous week for gold was bearish, closing at $1,750 with losses close to 0.60%. Although the week before, the losses were large, there was no recovery and the correction continued. There were signs of recovery by Thursday, of course, but Friday, with the Powell speech, was decisive. The dollar has strengthened significantly (let’s not forget that gold is denominated in dollars), international liquidity is limited, and a possible de-escalation of inflation is not conducive to gold, which is an investment solution to hedge inflationary pressures. From August 15 onwards, there are intense corrective pressures, which if continued would threaten significant support close to $1,678 so short positions is our selection for the current week.

US Oil

Last week was bullish for oil with next month’s futures closing at $92.98, with gains approaching 3.40%. The most important factor for oil prices for some time has been the efforts of markets to assess the size of the coming economic slowdown or recession and whether this will affect oil demand. Powell’s speech was not in a positive direction since reduced liquidity is not conducive to growth, but the market sentiment was improved in terms of oil demand. U.S. gasoline and crude oil inventories continue to fall, even more than market expectations. That means demand remains strong for the moment. Saudi Arabia’s energy minister said on Monday that OPEC might cut production to support prices, and a new wave of buyers appeared. Many countries, however, are looking for alternatives to Russian oil and there is a rumor that the embargo on Iran may be lifted. Such a development, combined with any deterioration in the economic climate, could bring about corrections in oil prices so we prefer short positions this week.

EURUSD (Euro vs US Dollar)
Last week was bearish for EURUSD which opened at 1.0030 and closed at 0.9962. By Friday and Jerome Powell’s speech at the Jackson Hole symposium, the exchange rate had shown a significant recovery up to the price range of 1.01, based mainly on dollar weakness. From Friday onwards, however, we saw a strong strengthening of the US currency that dragged the EURUSD below parity again. The perception of the markets now is that the US will continue aggressively with interest rate increases, with the primary goal of combating inflation, even if there are signs of de-escalation. The European Union had no major announcements last week except for PMI indicators that were neutral. The announcements in the largest economy in the Eurozone, which is Germany, were positive, and this gave some impetus to the euro, but the strengthening of the dollar that followed was catalytic. With market eyes on the announcement of the U.S. labor market (NFPs) and Eurozone inflation this week, the exchange rate could approach 0.99, which is the previous week’s low and low since December 2002 so we may try sell positions this week.

GBPUSD (Great Britain Pound – US Dollar)

Last week was bearish for GBPUSD, which opened at 1.1816 and closed at 1.1735. The UK had no major economic announcements, except PMI indicators that rather passed indifferently through the markets. In addition to the announcements, however, the country is suffering from major and significant problems. There is an extensive drought in many areas, which leads the government to take unprecedented measures. The economic situation is also particularly aggravated as inflation is already moving in double figures and there is a forecast by the Bank of England for much higher inflation rates and a prolonged recession of several quarters. This situation does not leave much room for the Bank of England to move aggressively with interest rate rises and so the sterling is pressed against the dollar after the US pursues a different policy. GBPUSD is already in a price zone that is about two and a half years low and if this situation continues, we may see several lower levels, with many analysts even talking about 1.15 soon enough. We prefer sell positions this week.

USDJPY (US Dollar – Japanese Yen)

USDJPY moved upward last week, opening at 136.85 and closing at 137.52. This rise, almost in its entirety, was achieved last Friday after Powell’s speech and confidence that the United States would continue with aggressive rate hikes. Bond yields also rose significantly, with the U.S. 10-year closing the week above the psychological threshold of 3%. In Japan, the situation does not seem to change at the moment, as relatively low inflation and the country’s weak macroeconomic picture give the Bank of Japan room to continue with a very loose monetary policy and negative interest rates. Given how the exchange rate managed to break out of the significant resistance of 137, the chances of approaching the price band of 140 have increased so we may try buy positions this week.

EURJPY (Euro – Japanese Yen)
Slightly downward was last week for EURJPY which opened at 137.38 and closed at 137.02. At this time both currencies (euro and yen) are weak, each one for its reasons. Europe faces major problems, especially energy adequacy for the coming winter and a possible recession. The Japanese currency, on the other hand, is weak because the Bank of Japan is the only one of the world’s major central banks to continue the very loose monetary policy. However, the yen is currently favored a little more, due to the good macroeconomic picture of Japan. The big bet for the continuation of the downward course of EURJPY is the region of 135 which is also stronger support in this price band. We may try sell positions this week.

EURGBP (Euro – Great Britain Pound)

Neutral was the last week for EURGBP which opened and closed in the price area of 0.8485. After three consecutive weeks of rising, the exchange rate paused as it stood quite close to its balance point for several months, which is the price area of 0.85. Almost on all days, there were losses but on Friday after Jerome Powell’s speech, the euro strengthened significantly making the week neutral. Close to 0.8510, it seems that a strong resistance has been created since this zone is the highest value in about a month. An upward break out in this zone signals a greater likelihood of further rise but as the EURGBP moves towards 0.84, the downward trend scenario prevails. Buy positions is our selection for the current week.

USDCAD (US Dollar – Canadian Dollar)

Last week was bullish for USDCAD, which opened at 1.2981 and closed at 1.3035. Canada had no major economic announcements, and so the trend and volatility of the exchange rate were mainly determined by the U.S. currency and oil prices. Oil prices were on the rise, which most often favors the Canadian dollar, but the strengthening of the US dollar was of such a scale that the exchange rate managed to break out the milestone price of 1.30, continuing the uptrend of the previous week. This week has important announcements for the US economy as we underlined above, but Canada also announces its second-quarter GDP next Wednesday. If the US dollar continues to strengthen, the next resistances, which are at 1.3075 and 1.3225, will be threatened so we are keen to try buy positions this week.

USDCHF (US Dollar – Swiss Franc)
The USDCHF had an upward trend last week as the opening price was at 0.9575 and the closing price was at 0.9659. Without much news from the Swiss economy, the exchange rate was dragged down by the strengthening of the US dollar, mainly on Friday. Thus, the USDCHF was able to move further away from the 0.95 price range where it had been after the recent interest rate hike by the Bank of Switzerland. The current week has major announcements for the Swiss economy as the inflation for August, the July retail sales, and the key KOF Economic Activity Index are announced. The main factor, however, continues to be the dollar and so if the currency pair manages to break out 0.97, the scenario of a further rise is favored. We may try buy positions this week.

AUDUSD (Australian Dollar – US Dollar)

Slightly bullish was the last week for AUDUSD, which opened at 0.6864 and closed at 0.6890. The pair had managed to exceed even 0.70 but the sweeping strengthening of the dollar on Friday after Jerome Powell’s speech at the Jackson Hole Symposium limited the rise to a significant extent. Australia had no regular economic news, but two other news significantly boosted its currency. The head of the Bank of New Zealand, Adrian Orr, in his speech in Jackson Hole stressed that there will be at least two more interest rate increases in the year. The economies of the two countries (Australia and New Zealand) are closely linked and so markets thought something similar would happen in Australia. Also, good news came from China after it was announced that 1 trillion yuan (about $ 150 billion) will be channeled into the country’s banking system to meet current needs. This will of course greatly favor Australia’s economy and its exports since both economies are closely linked as well. China cut its interest rates earlier this week from 3.70% to 3.65%, but this had no impact on the exchange rate, which could continue to fall if the U.S. dollar strengthens. We prefer sell positions this week.

Bitcoin

Last week, Bitcoin closed at $19,550 with losses exceeding 9%. Bitcoin had a mild upward reaction up to $22,000, but after Powell’s speech, there was a strong wave of sellers that continued into the weekend (recall that cryptocurrency markets are open throughout the week). It is therefore proven once again that a strong correlation has been developed between Bitcoin and the cryptocurrency market in general, along with the other high-risk markets. Thus, limited liquidity and a possible slowdown in growth will remove funds from high-risk investment options, which will be directed rather towards safer solutions. The vulnerable cryptocurrency market is therefore affected, with Bitcoin having lost its significant cushion of $20,000. Significant support above $18,500 may stand in the way of further decline, but a solid recovery above $20,000 could, even temporarily, reverse the climate. We may try short positions this week.

IMPORTANT DISCLAIMER

The information of this report is of a general nature only. It is not a piece of 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.