03/10/2022

 

INFlATION AND IMPENDING RECESSION SUSTAIN HIGH VOLATILITY IN THE MARKETS

General Comment

The two biggest concerns plaguing international financial markets continue to be high inflation and an imminent slowdown in growth, or worse, a possible recession. These fears sustain high volatility in markets while causing stock indices to fall. The concern is growing given the fact that many central banks have already made repeated rate hikes but inflation continues to remain at very high levels. The side-effect damage of these policies, however, appears, the main one being high bond yields in many countries including the United States, the Eurozone, and the United Kingdom. Especially in the United Kingdom, the government has decided and announced a bond-buying program, which is in essence a debt-buying program. This move followed the move that had preceded the infamous mini-budget which includes clipping tax rates and was criticized by many political and economic actors.

Europe also looks embarrassed in the face of the major energy crisis, which has been exacerbated by the recent explosion in the Nord Stream 1 pipeline. Recent measures taken by the European Union include a mandatory reduction in energy consumption, a temporary revenue cap for unconventional power producers, and a temporary solidarity levy on excess profits generated by activities in the oil, gas, coal, and refineries sectors.

In their speeches, the heads of the central banks of the Eurozone and the United States reiterated once again that their main goal remains the fight against high inflation, whatever that entails. The United States continues to have a better macroeconomic picture and this was reflected in the announcements of durable goods orders and the US GDP which shrank but to a lesser extent than market expectations. Also, personal consumer spending, which is an indicator of inflation, was announced to increase, giving the Fed more room to proceed with aggressive rate hikes. In the Eurozone for the first time in many decades, inflation was announced in double figures: 10% for September.

The dollar showed a slight decline after the huge rise that had preceded which benefited currencies such as the euro and sterling that had been in a heavily oversold zone lately. Commodities such as gold and oil, as well as cryptocurrencies that have recently followed the general trend of markets, took a small upward breath.

The week has just begun, and it is also crucial because the announcement of the unemployment rate and new jobs in the United States next Friday, will show to a large extent the state of the American economy and therefore the comfort that the Federal Reserve has in pursuing a tight monetary policy. Also important is the meeting of OPEC members and announcements of PMI indicators in the world’s largest economies. The summit of the leaders of the European Union takes place on Friday, while the same day the retail sales in Germany are announced. From the rest of the world stand out the announcement of inflation in Japan and interest rates in Australia.

SP500

The US SP500 index closed last week with corrective trends, at 3,605 points and losses of just over 2.80%. Fears of a large-scale and long-lasting recession have sharply negated investment sentiment, leading equity markets to be strongly pressured over the past three weeks. The dollar’s temporary correction last week did not help the index recover, even temporarily. Bond yields which continued to climb are a significant inhibiting factor for the SP500. The US 10-year bond yield climbed as much as 4%, being a safe alternative for investors, compared to the high volatility of equity markets. The perception that the Fed will continue aggressively with interest rate hikes and more expensive money gives a perception of limited liquidity. Thus, many funds are directed to liquidation or bond purchases. The index has already broken the support of 3,635 points, which was the lowest value since the end of 2020, and if it remains below these levels, we may see even stronger downward trends. If it can rise above these zones or even more, if it exceeds 3,725 points, then the scenario of a reversal of the downtrend gains more points. An important role will be played by the announcement of the US labor market next Friday. We prefer short positions for one more week.

 

DAX40

The German DAX40 index moved lower last week, closing at 11,977 points, with losses of 2.80%. Things in Germany as in most Eurozone countries continue not to go well and negative sentiment prevails. Bond yields may have taken a breather after the UK repurchase program that many believe will find imitators but remain at particularly high levels, with the German 10-year moving above 2.11%. The security of bonds and the high volatility and nervousness in the equity markets, push many investors to send capital transfers from the first investment solution to the second. Economic news from Germany continues to have a negative sign: business sentiment and investment sentiment are in the deep red, while inflation continues to climb as the harmonized consumer price index, announced for September at 10.9%. The only positive exception was the unemployment rate which remained unchanged at 5.5%. The index is already well below the 12,365 points that until a few days ago was the lowest price since November 2020 and so there is room, technically at least, for further losses. We may try short positions this week.

 

FTSE100

The British FTSE100 index moved significantly lower last week, closing at 6,834 points, with losses of almost 2.80%. The recent development from the United Kingdom, on the purchase of debt, somewhat calmed bond yields and gave some upward breaths to the index above 7,000 points, but the particularly strong downtrend dragged the FTSE100 again into corrective pressure. The economic climate in the UK is so negative that not even the unexpected GDP growth of 0.2% in Q2 2022 was able to reverse things. Fears of a recession remain, especially now that markets believe the Bank of England will raise interest rates at a sharper pace, making hikes of 0.75% or 1% in the next meeting. Below 6,720 points, it is possible to see the fall accelerate because it is the lowest price for about 1.5 years so short positions is our selection for the current week.

 

Gold

Gold was bullish last week, closing at $1,668.5 and gaining just over 1%. The temporary weakening of the US dollar gave some upward breaths to gold, which has entered a sharply declining channel since mid-August and resulted in total losses of 10%. Persistent inflation is likely to lead central banks, especially the Fed, to new interest rate hikes and tighter monetary policy, and this is what commodity markets and gold are expected to suffer further from. The announcements of this week will be important for the price of gold. PMI indicators and the announcement of the US jobs market will affect the dollar, which if strengthened again, will return the gold to a downtrend. Above $1,678 and $1,696, more hope of continuing the upward reaction is born but we prefer short positions for one more week.

 

US Oil

Slightly bullish was the last week for oil with next month’s futures closing at $79.66, with gains of just over 0.50%. Concerns about a global economic downturn that will negatively affect oil demand continue. Demand from China is low and market perception has strengthened in this direction due to negative PMI index returns. Negative GDP in the US and the ongoing war on the European continent also contribute to this. But two factors push prices up. The hurricane in the Gulf of Mexico has caused production irregularities, but the main reason is market expectations that the OPEC meeting on October 5 may result in the announcement of a reduction in production to curb prices that have been on the decline for several months. That belief seems to be strengthening further in recent hours after oil opened the current week with a strong rise and is already moving towards $82. Above last week’s high, near $83, new upward momentum may develop so we may try long positions this week.

EURUSD (Euro vs US Dollar)
Bullish was the last week for EURUSD which opened at 0.9672 and closed at 0.9011. The week had started downward, following the general trend and leading the exchange rate to new multi-year lows, but from Wednesday onwards, an upward reaction began that gave some breath to the euro. The Eurozone had little reason for optimism since nothing has changed concerning the energy crisis, the war in Ukraine, and the pessimistic look of the markets for most European economies. This reaction should therefore be attributed more to technical reasons for the correction of the US dollar, which has seen an unprecedented rally for several months. As early as last Friday the rise began to fray, following the uphill trend of bond yields in the United States. Inflation in the Eurozone continued its upward trajectory but the unemployment rate remained unchanged at 6.6%. For the upward reaction to have continuity, there must necessarily be a break in the 1:1 parity, otherwise, every turn downwards will reinforce the already existing and formed many months’ downtrend. We may try sell positions this week.

 

GBPUSD (Great Britain Pound – US Dollar)

Significantly bullish was the last week for GBPUSD, which opened at 1.0796 and closed at 1.1161. The week had begun with huge pressures on sterling and the exchange rate driven to a record low price of 1.0317, well below the previous record set in 1985. Beyond that, however, a strong upward reaction began that led to a rise in the pair of 850 pips. The two strong interventions in the UK (the mini-budget and the bond market) were important developments for the country’s economy and triggered huge volatility. Most analysts now agree that the Bank of England’s next rate hike will be significantly larger than the previous ones and will be in the order of 0.75% or even 1%. If the exchange rate manages to approach the price range of 1.14, we may see a continuation of this upward reaction but below 1.10, the downward trend could return as sharply. We prefer buy positions this week.

 

USDJPY (US DollarJapanese Yen)

USDJPY moved upward last week, opening at 143.61 and closing at 144.71. It was the seventh consecutive bullish week for the pair which is one breath away from the significant resistance of 145. The recent foreign exchange intervention by the Japanese government has caused high volatility but has not been able to reverse the uptrend that has been taking place for many months. This trend continued even though the dollar had a correction last week, but on the one hand, the rise in bond yields and on the other hand the statements by the Bank of Japan about the continuation of very loose monetary policy did not allow the USDJPY to decline. The economic results announced by Japan were not negative: the unemployment rate remained unchanged at 2.5%, industrial production rebounded by a significant increase of 2.7% in August, and retail sales increased in the same month. If there is a bullish break out above 145 then the uptrend will consolidate even more while a shift to 140 will give more points to the downward scenario. We prefer buy positions for one more week.

 

EURJPY (EuroJapanese Yen)
Bullish was the last week for EURJPY which opened at 138.83 and closed at 141.87. The euro’s upward reaction combined with the continued weakness of the Japanese currency led the exchange rate to an impressive recovery above the milestone price of 140. EURJPY also received a big upward boost from the significant increase in European bond yields, with the German 10-year bond consistently above the 2% price, which is the highest price in 11 years. The price range of 145.65 continues to be the stronger resistance to the upward movement of the exchange rate while any downward reaction below 140 may turn the trend downwards. We prefer sell positions for the current week.

 

EURGBP (Euro – Great Britain Pound)

Last week was bearish for EURGBP which opened at 0.8951 and closed at 0.8770. It was a week that had one of the highest volatilities of recent years and that was mainly due to the sterling’s behavior. On Monday we saw an explosive rise in the exchange rate that brought it to the outskirts of 0.93 but from then on strong upward trends began for sterling and the EURGBP was well below 0.90. The perception of the markets that the Bank of England will act dynamically in the coming period and the announcement of the purchase of bonds by the British government gave wings to the British currency, but this sharp move is not ruled out to find an opposite reaction precisely because of the rapid fall so we may try buy positions this week.

 

USDCAD (US Dollar – Canadian Dollar)

Sharply bullish was the last week for USDCAD, which opened at 1.3594 and closed at 1.3825. For three consecutive weeks, the exchange rate has been explosive with total gains of more than 800 pips. It is important to emphasize that the rise last week took place with a simultaneous correction of the US dollar but also with little gains for oil which always affects the Canadian dollar. In addition, Canada’s GDP had a marginal but unexpected rise in July, an event that was supposed to boost the country’s currency. But it seems that the recent downturn in Canadian inflation may have led many analysts to believe that the Fed will be more aggressive in subsequent rate hikes than the Bank of Canada. The fact is, however, that the rise over the last three weeks is steep and not sufficiently justified and therefore some corrections cannot be ruled out so we prefer sell positions this week.

 

USDCHF (US DollarSwiss Franc)
The USDCHF had an uptrend last week after opening at 0.9824 and closing at 0.9872. Switzerland’s announcements did not favor the franc because it was below market estimates. Both retail sales and the ZEW survey of economic expectations did not have the desired effect. Markets are assessing how the Bank of Switzerland, after the two recent rate hikes. it will not continue as aggressively or at least as aggressively as the Federal Reserve. Of course, as the exchange rate approaches parity, sellers appear who consider the price to be an investment opportunity. As long as corrections occur in this price range, the downward scenario will dominate so sell positions is our selection for the current week.

 

AUDUSD (Australian Dollar – US Dollar)

Last week was bearish for AUDUSD, which opened at 0.6515 and closed at 0.64. The exchange rate has been pressed for three consecutive weeks, even if in the last week the US dollar, found itself in a corrective environment. Australian retail sales performed well in August but PMIs in China were announced below market estimates. The main reason the Australian dollar is under pressure, however, is the clipped expectations of the markets for the forthcoming increase in interest rates by the Bank of Australia in October. The rumors speak of an increase of only 0.25%, a value that is far from the aggressive increases that the Fed has made and is expected to continue to make. So AUDUSD was at its lowest price in 2.5 years, but it is not excluded that it will react upward having been at such a low price. We may try buy positions this week.

Bitcoin

Bitcoin was slightly bullish last week since it closed at $19,051 with gains of just over 1%. This week there was a divergence in the cryptocurrency market, compared to other higher-risk markets (such as equity indices), and cryptocurrencies probably harmonized based on the correction of the dollar and the upward reaction of gold prices. According to the Basel Committee on Banking Supervision, the exposure of large banks to cryptocurrencies is just $9.2 billion, which represents just 0.01% of their total exposures. This means that Bitcoin and most cryptocurrencies remain an investment option for retail investors and that they have not yet convinced institutional investors to enter strongly. At the current Bitcoin price levels and given the high energy costs, miners are particularly under pressure and so total mining was limited to 8,000 Bitcoins for September. Technically speaking, support at $ 17,600, which is the lowest price for Bitcoin since December 2020, is still standing, but if it breaks out, we may see prices in free fall. We prefer short positions for the current 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.

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