10/10/2022

General Comment

Last week started with a better positive investment sentiment than has been the case in recent months. This has resulted in the rise of the main stock indices in the world’s largest economies and the positioning of investors in riskier options such as the euro, sterling, and the Australian dollar in terms of currencies and some commodities such as metals. From Wednesday onwards, however, the mood began to reverse again with large corrections in stock indices, strengthening of the dollar, and losses in commodity markets. OPEC’s decision to cut global oil production by 2 million barrels per day was crucial because the energy crisis is now expected to deepen further based on more expensive oil prices, as well as inflation pressures are expected to intensify. This situation became more pronounced on Friday after the announcement of new jobs in the United States. More specifically, in September, 263K new jobs were created in the US compared to 250K that the markets expected. This improved picture of the labor market has sent a signal to the markets that the Fed has the macroeconomic space to make aggressive new rate hikes, and if this is confirmed, money will become more expensive and liquidity tighter. The improved U.S. economic picture was confirmed throughout the week by other announcements such as PMI indicators.

On the European continent, the situation continues to remain critical concerning the war in Ukraine and the impact it is creating on European economies. The strike on the Crimean Bridge, which was one of the symbols of Russian domination in the region, raises concerns that Russian aggression will increase and that the potential use of nuclear weapons is even closer. President Putin described the incident as a” terrorist act ” and heralded retaliation. Recession in many Eurozone countries is considered inevitable by many analysts and this is already reflected in the macroeconomic results of the Eurozone, as we will see below.

Of crucial importance is the week that has just begun for the US economy and, by extension, the rest of the world. Inflation for September is announced on Thursday and any large deviation from the expected value will create a domino effect of expectations for the Fed’s behavior in the near future. The day before, the release of the minutes of the Fed is expected, where we will learn the intentions of the bankers without taking any decisions though. The next decision to raise interest rates in the US is in early November with the probability of an increase of 0.75%, having risen to 82%, following recent developments. The week is also important for the British economy as the unemployment rate and GDP are announced in the United Kingdom. Other important developments include the International Monetary Fund meeting, the announcement of inflation in China and Germany, and retail sales in the United States. On Monday, the United States has a public holiday due to Columbus Day.

SP500

Last week, the US SP500 index closed upward, at 3,650 points and gains of 1.25%. The uptrend of the index at the beginning of the week did not have the corresponding continuity and from Wednesday onwards, the pressures that appeared were intense, resulting in a violent fall from the week’s highs to 3,820 points. Investors are trying to decipher the Fed’s next moves, through the state of the U.S. economy and inflation prices. In this sense, the recent cut in oil production based on the OPEC decision, which led to a rally, was an aggravating factor for stock indexes because it is a move that is expected to weigh on inflationary pressures. Similarly, the good picture in the US labor market was interpreted, as announced on Friday through the NFPs, as space is given to the Fed to further harden its stance, with new interest rate increases. Following these developments, a 0.75% increase on the November decision, is now the most likely scenario. The rally at the beginning of the week, with total gains of almost 6% in two days that came from the quarter change and from the expected profits of companies that may exceed expectations again, was not continuous and we saw a return to the downtrend of the index. If there is a solid break out below 3,600 points, we may see a further decline while any move towards 3,750 points creates more optimism. We prefer short positions for one more week.

DAX40

The German DAX40 index moved upward last week, closing at 12,258 points, with gains of 2.35%. The index followed the general course of the other indicators and over-performed in the logic that the Eurozone will not tighten liquidity so much because the coming recession does not leave much room. The ECB has already made two rate hikes and may do more by the end of the year, but divergence with other central banks, notably the Fed and the Bank of England, may remain or widen. The news from Germany continues to disappoint: the trade balance has shrunk noticeably, PMI indicators are consistently low, and retail sales, factory orders, and industrial production are at negative prices on a yearly basis. A return of the index below 12,000 points will probably cause more nervousness while it is necessary, in the first phase at least, to exceed 12,435 points to partially return to a positive climate. We may try short positions for one more week.

FTSE100

The British FTSE100 index moved significantly upward last week, closing at 6,994 points, gaining almost 2.35%. After a strong rally on Monday and Tuesday, with the index exceeding the 7,000-point milestone, we saw a return of corrective movements that were not capable of reversing the positive sign of the week. Recent developments with rising oil prices have brought back nervousness in equity markets, amid an energy crisis that is also hitting the UK. The government’s setbacks after the cancellation of the tax rate reduction program also brought nervousness. The downgrade by Fitch for the British economy was another blow to investment sentiment. Central bankers reiterate, however, that the Bank of England has the tools to fight high inflation and so markets expect another big interest rate hike at the meeting early next month. The announcements of the unemployment rate and GDP this week will show whether there is room for that or whether the size of an upcoming recession can influence decisions. As long as the index is below 7,000 points, the downward channel is strong. Above 7,030 points and closer to 7,110 points (last week’s high), the climate is improving. Short positions is our selection for the current week.

Gold

Gold was bullish last week, closing at $1,702 and gaining more than 2%. The upward rally at the beginning of the week was impressive for gold, but it could not rise until the significant resistance of $1,746, which is the highest price since the end of August. The recent negative developments with the extra sanctions on Russia and the blowing up of the Crimean Bridge reignited negative investment sentiment. The good macroeconomic picture of the United States, as expressed through the robust labor market announced on Friday, stimulated confidence in new big interest rate hikes by the Fed, and this would hurt liquidity and commodities and metal markets. September inflation in the US to be announced on Thursday, inflation in China to be announced on Friday and Fed minutes on Wednesday, will have a dominant role in gold prices this week. If inflation persists at high levels, the logical thing is to see new pressures on gold prices, perhaps below $1,660. If inflation has de-escalated, however, an upward reaction could bring prices to the region of $1,746. We prefer short positions this week.

US Oil

Last week’s oil futures closed at $93.25, with gains exceeding 17%. It was one of the most bullish weeks of recent months but it makes perfect sense based on the 2 million barrels per day drop in oil production, as OPEC announced Wednesday. The United States expressed its dissatisfaction with this decision and brought back to the table the prospect of No Oil Producing and Exporting Cartels – NOPEC. NOPEC is a U.S. Congressional bill originally introduced in 2000 to lift state immunity from national oil companies (NOC) of OPEC member countries. Saudi Arabia has warned the United States that if NOPEC is activated, it will stop selling oil in dollars. The U.S. can also react by releasing oil from its strategic reserves, but it is uncertain whether such a move can bring prices back. The only feasible way for prices to fall is through the negative development of a decline in demand from a possible recession in economies. If there is a quick de-escalation of prices below $90, we may see a further fall but above $97.65, the $100 range becomes the prevailing scenario. We prefer short positions this week.

EURUSD (Euro vs US Dollar)
Last week was bearish for EURUSD which opened at 0.9782 and closed at 0.9741. The week had started strongly upward with the exchange rate touching even 1: 1 but from Wednesday onwards the picture changed completely, the dollar strengthened significantly while the euro had big losses. OPEC’s decision to cut global oil production has heightened concerns in the Eurozone over the energy crisis and energy adequacy in the coming winter. On Friday, with the announcement of new jobs in the United States above market expectations, exchange rate pressures increased after markets perceived that the Fed would continue with aggressive rate hikes that would boost the dollar. The picture in the Eurozone is already pointing to recession. PMI indicators are consistently announced below 50 and below market estimates, and retail sales in August fell 2% year-on-year. If the announcement of inflation in the United States on Thursday is such that it reinforces markets ‘ perception of new Fed rate hikes, then the downtrend for EURUSD will likely continue, and multi-year support at 0.9535 may be threatened. If, however, the opposite picture prevails (in the event of de-escalation of inflation in the US), we may see the exchange rate strengthen. We may try sell positions this week.

GBPUSD (Great Britain Pound – US Dollar)

Last week was bearish for GBPUSD, which opened at 1.1162 and closed at 1.1092. Following recent developments in the UK about the mini budget and the purchase of debt through bonds by the British government, the financial news was relatively calm but the decision of the government to withdraw the previous decision to reduce tax rates, caused upset and nervousness. PMI indicators in the United Kingdom did not hold any surprises, while the 10-year bond auction by the British government closed at a rate of 4.12%, significantly higher than the 3.09% of the previous auction. But the downgrading of the credit profile of the UK economy by Fitch came and dealt a decisive blow to the already vulnerable sterling lately. The most important role in the fall of GBPUSD, however, was the strong strengthening of the US dollar from the middle of the week onwards. By then, sterling had managed to recover up to the price range of 1.15 but the pressures exerted were too great and the fall in the exchange rate was sharp. This week is important for the dollar as the Fed minutes and US inflation for September are announced, but equally important for the UK, with GDP and the unemployment rate announcements that will show the state of the British economy. If the current picture continues then the parity can be found below 1.10. Any upward reaction will make sense above 1.1225 and as we get closer to 1.15 but for the current week, we still prefer sell positions.

USDJPY (US Dollar – Japanese Yen)

USDJPY moved upward last week, opening at 144.62 and closing at 145.37. The strengthening of the US dollar, especially from the middle of the week onwards, was the main reason for this upward movement. An important factor was also the rise in bond yields, with the U.S. 10-year strengthening and closing the week at 3.89%. On the Japanese side, inflation was announced for September at 2.8%, a price lower from the 3% expected by markets and from 2.9% the previous month. This development reinforces the confidence of the markets that the Bank of Japan will continue its very loose monetary policy and negative interest rates, even if the government has recently intervened in the foreign exchange market. Given the lack of major announcements from Japan’s economy this week, the dollar and bond yields will continue to dominate its trend formation. Resistance in the 145 price range is very critical and so it is not excluded that we will see corrective movements so we may try sell positions this week.

EURJPY (Euro – Japanese Yen)
Practically unchanged was the last week for EURJPY which opened and closed in the price range around 141.60. In the first two days of the week, the exchange rate was on the rise, especially on Tuesday, with the announcement of low inflation in Japan that reinforced confidence that the Bank of Japan will continue its loose monetary policy. The euro, on the other hand, weakened sharply from Wednesday on the announcement of a reduction in oil production by OPEC and the strengthening of the US dollar, while worsening investment sentiment. Crucial for the further downward trend of the exchange rate is the bearish breakout of the milestone price to 140 and we may try sell positions this week.

EURGBP (Euro – Great Britain Pound)

Slightly bullish was the last week for EURGBP which opened at 0.8756 and closed at 0.8778. The downgrading of the UK economy by Fitch changed the upside of sterling that had dominated for several days. So, the exchange rate followed an upward trend which took back the sterling’s gains on Monday and led to further losses. The UK economy expects major announcements this week (GDP and unemployment rate) and based on the rest of the international economic developments from Europe to America, we may see new upward trends, toward the 0.90 range. Buy positions is our selection for the current week.

USDCAD (US Dollar – Canadian Dollar)

Last week was bearish for USDCAD, which opened at 1.3810 and closed at 1.3733. The U.S. dollar may have strengthened since midweek, but the big increase in oil prices, due to OPEC’s decision to cut global production, led to a big strengthening of the Canadian dollar. Oil is the main export commodity for Canada’s economy and is in strong correlation with the country’s currency. Also, expectations of new rate hikes by the Bank of Canada strengthened after the Bank’s head, Tiff Macklem, spoke out about how it is clear that interest rates will continue to rise. The picture of Canada’s labor market was also encouraging after the unemployment rate fell to 5.2% in September from 5.4% in August. If this exchange rate picture continues into the current week, it is not excluded that we will see prices approaching the critical resistance of 1.35 so we may try sell positions this week.

USDCHF (US Dollar – Swiss Franc)
The USDCHF had an uptrend last week after opening at 0.9849 and closing at 0.9947. The upward momentum of the US dollar from Wednesday onwards, pushed the exchange rate much higher, approaching the significant resistance and price milestone at 1: 1. Low inflation in Switzerland has thrown the bar with expectations of new interest rate increases in the country, but on the other hand, it seems that the United States will continue in this area aggressively, especially after the macroeconomic space emerging from the latest economic announcements. The unemployment rate in Switzerland remained unchanged at 2.1% but this mattered little to the course of the pair. This week, the most important role will be played by announcements from the United States and in particular by the price of inflation for September. If the results strengthen the dollar, we may see a 1:1 split, otherwise, we may see the exchange rate heading toward 0.9730 support. We prefer buy positions this week.

AUDUSD (Australian Dollar – US Dollar)

Last week was bearish for AUDUSD, which opened at 0.6401 and closed at 0.6357. The decision by the Bank of Australia to raise interest rates by just 0.25% (from 2.35% to 2.60%), weakened the country’s dollar after markets expected more increase. This event combined with the strengthening of the US dollar resulted in the 4th consecutive downward week for the exchange rate. Negative factors were also the fall in the prices of commodities such as gold and copper and the announcement of the trade balance for Australia for September at $ 8.32 billion, well below expectations of more than $ 10 billion. AUDUSD found itself at a new 2.5-year low and the trend is visibly bearish. The only case for an upward reaction is the weakening of the US dollar if the price of inflation that will be announced on Thursday allows it but we’ll prefer sell positions for one more week.

Bitcoin

Bitcoin closed at $19,445 with gains of just over 2% last week. The upward reaction in the middle of the week, up to almost $20,500, did not have the corresponding continuity since there is no enough fuel that will lead cryptocurrencies to higher price levels. The strong correlation that has developed lately between cryptocurrencies and the rest of the markets, mainly the NASDAQ due to its technological nature, has depressed prices. One notable fact, however, is the large decrease in volatility that has been observed for three weeks. Bitcoin is moving in a narrow band between $18,150 and $20,500 and there is a possibility that this large decrease in volatility will lead to an explosion, without it being easy to estimate its direction. The splitting of the upper and lower prices of this zone could be an indication. The announcement of inflation in the US will be key this week. We may try long positions.

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.