17/10/2022

 

US INFLATION PERSISTS

General Comment

The United States inflation announcement for September was the most central benchmark for the global financial markets this week. In August inflation was at 8.3% and for September markets expected a price of 8.1%. The final result, which was 8.2%, created mixed emotions and contradictory movements in most asset classes. The immediate reaction of the markets was the strengthening of the dollar and the correction of the main stock indexes, based on the perception that the Federal Reserve will be forced to become even more aggressive, with new interest rate hikes since the monster of inflation does not seem to be easily tamed. In less than an hour, however, the mood changed, equity markets started an upward rally while the dollar was losing ground. On Friday the sentiment reversed again, with strong pressures on stock indexes and a new strengthening of the dollar. A picture that captures the nervousness in the markets, the lack of clear direction, and the contradictory messages.

Based on the macroeconomic results, the US economy continues to be in a better position than Europe and the rest of the world’s economies. More specifically, retail sales in the United States and the Michigan Consumer Confidence Index were above market expectations. In contrast to this picture, inflation in Germany is still high at 10.9%, the auction of 10-year bonds by the German government closed at an interest rate of 2.33% while the trade balance in the Eurozone closed in August with a huge hole that touched 50 billion euros. There are also significant developments from the United Kingdom with reversals in the decisions of the British government and the expulsion of the recently appointed Finance Minister Kwasi Kwarteng, who was replaced by James Hunt.

Returning to Europe, there is no solution to the great energy crisis affecting the Old Continent, as the war in Ukraine continues unabated. New problems spring from the fact that a new wave of coronavirus is underway. In recent speeches, European Central Bank President Christine Lagarde reiterated that the problem of high inflation remains the dominant issue in the Eurozone and heralded new big interest rate hikes. This week, a proposal for a common line and possible measures against the energy crisis will be discussed at the European Union leaders ‘ summit, with a proposal for a common gas supply platform for all countries on the table.

With conflicting market movements, the week finally ended with small losses for stock indexes, except for the German one, and with a strengthening of the US dollar. Most commodities such as gold and oil had strong losses while bond yields moved upward with the U.S. 10-year surpassing the 4% threshold. Finally, Bitcoin and most cryptocurrencies, following the course of the rest of the markets, found themselves in a climate of pressure.

The week that has just started is much calmer regarding the news in the United States. In the rest of the world, however, the announcement of inflation in the Eurozone, the United Kingdom, Japan, and Canada stands out, and the rates will largely determine the future movements of central banks. The announcement of GDP in China, retail sales in the UK, and consumer sentiment in the Eurozone close the cycle of important announcements for this week. Investors are already looking to the Fed’s next rate hike decision, due on Nov.2 with the likelihood of a 0.75% increase now particularly high.

SP500

The US SP500 index closed last week with corrective trends, at 3,598 points and losses of just over 1.40%. The index had a mild downward slope until Thursday and the announcement of inflation in the US. Immediately after the announcement, the intense downward pressure was exerted, based on the perception of the markets that the high inflation that persists, will force the Fed to take more measures, further limiting liquidity and making money even more expensive. In about an hour, however, the climate reversed and followed a strong upward reaction that brought the SP500 well above 3,700 points. From the middle of Friday onwards, the situation changed again, the indicator found itself in a cyclone of strong pressures, as a result of which the week ended with losses. This high volatility and the changes in the trend indicate precisely the nervousness of the markets, the uncertainty, and the conflicting views. Everyone’s eyes are on the Fed’s next decisions, with the likelihood of a 0.75% rate hike at the November meeting now particularly high. Beyond that, however, there is the December meeting and eight other meetings in 2023 so things are still very unpredictable. The new support that has been formed is at 3,500 points while any upward reaction that will exceed 3,735 points, generates new expectations for recovery. We prefer short positions this week.

 

DAX40

The German DAX40 index moved up last week, closing at 12,371 points, with gains of 0.90%. The announcement of inflation in the US has also strongly affected European markets since the Fed’s moves usually act as a precursor for other central banks. The German index though outperformed other European and mainly American indices. The ECB is not as aggressive on interest rate hikes, leaving breaths of liquidity. In addition, Friday was softer than the losses of other markets due to statements by German Finance Minister Robert Habeck, who stressed that the recession in the country will last three quarters, starting from the last quarter of 2022 and that it will be 0.4% in 2023. These statements somewhat appeased markets that fear a larger and more widespread recession. Inflation and bond yields in Germany continue to be at very high levels while the wholesale price index for September increased by 20% compared to last year. DAX40 needs an upward jump of more than 12,700 points to improve the climate somewhat, and any approach of 12,000 points exacerbates the situation. We may try short positions this week.

 

FTSE100

The British FTSE100 index moved significantly lower last week, closing at 6,831 points, with losses of more than 2.30%. The UK Government is in a throe of a political crisis, just weeks after taking office, and there are scenarios even for the government to fall. The Truss government seems to be making a 180-degree turn on the recently announced mini-budget, with the new leadership of the Ministry of Finance proposing an increase in corporate tax rates instead of cuts. These expectations did not sound pleasant from British equity markets already affected by the disappointing announcements on the economy, since GDP, industrial production, manufacturing, and trade balance are in a deep red. The only exception was the slight decline in the unemployment rate, from 3.6% to 3.5% in August. The inflation announcement on Wednesday is the central event of the week, along with possible developments for the Truss government. The most important support for a possible continuation of the downtrend is at 6,710 points so we prefer short positions this week too.

 

Gold

Last week for gold was bearish, closing at $1,649 and losses exceeding 3%. The week had started downward but from Thursday onwards the losses widened and thus lost all the gains of the previous two weeks that had driven gold close to $1,740. The recovery of the US dollar and high bond yields (the US 10 – year bond exceeded 4%) put a lot of pressure on gold. High inflation in the United States has worsened sentiment in almost all commodities, including gold. The Fed’s next announcements of possible interest rate hikes are the most important factor that gold investors have their eyes on. Any new and high liquidity restriction will probably hurt gold prices. $1,621 is the lowest price since April 2020, and apparently, every downward breakout of this level increases the likelihood of expanded losses. A quick reaction above $1,700 may change the climate and we may try long positions this week.

 

US Oil

Last week’s oil futures closed at $85.54, with losses of more than 8%. These losses came to take back the rise we had seen for oil, following OPEC’s recent announcement to cut production by 2 million barrels per day. The main reason for the new correction is market fears of a global economic recession accompanied by a decline in oil demand. These fears are confirmed after the report of the International Energy Agency (IEA) revising demand estimates downwards, while expressing fears about demand from China, due to ongoing lockdowns in many Chinese cities. The rise of the dollar (in which oil is denominated) is another factor pushing down prices. If the pressures continue, the oil may find itself below $80 again, and only a shift in negative investment sentiment can reverse the climate of falling prices. We may try short positions this week.

EURUSD (Euro vs US Dollar)
Slightly bearish was the last week for EURUSD which opened at 0.9730 and closed at 0.9723. It was a strange week for the exchange rate, which had sideways trends until Wednesday, a significant rise on Thursday, and a fall on Friday. The announcement of inflation in the United States was the event that increased volatility, causing conflicting movements from noon on Thursday onwards. The US economy continues to show a better picture than the European one, as the macroeconomic results show. Markets are trying to assess the next moves of the central banks of the two economies. According to the Fed MarketWatch, the probability of a 0.75% rate hike by the Fed, in its November 2 decision, now stands at 97.2%. In the Eurozone, there are commitments by central bank officials for new rate hikes, but they cannot be quantified or predicted to the same extent as in the US. Following the announcement of inflation in the Eurozone on Wednesday, markets will get a better picture of the ECB’s future moves. Technically speaking, below 0.9630, the likelihood of a downtrend is greatly enhanced so we may try sell positions this week.

 

GBPUSD (Great Britain Pound – US Dollar)

Bullish was the last week for GBPUSD, which opened at 1.1064 and closed at 1.1179. The pair, despite all the setbacks of the British government, recovered based mainly on the temporary weakness of the dollar. The replacement of the newly appointed Minister of Finance Kwasi Kwarteng by James Hunt is seen as an attempt by the British Prime Minister to signal to the markets how errors in recent decisions are recognized. The new Finance Minister has already stated that the government went too fast, too far, concerning the tax program that had been announced and proposed an increase in tax rates and a reduction in spending to regain economic credibility. The program of the government’s repurchases of bonds, which was finally in the order of 2 billion pounds, was also completed. The UK had important economic announcements as we saw above in the analysis section of the FTSE100 index. Eyes are now on the inflation announcement for September next Wednesday and of course on the Fed’s decision on interest rates on November 2. From these expected developments, if the dollar strengthens and the exchange rate falls below 1.10 again, then the downward trend may return more sharply. We prefer sell positions this week.

 

USDJPY (US DollarJapanese Yen)

USDJPY moved up sharply last week, opening at 145.39 and closing at 148.74. The exchange rate continued its upward rally for the ninth week in a row, comfortably breaking the previous record high of 147.63 recorded in October 1997. The U.S. dollar contributed little to this explosive rise, with bond yields playing a more important role as the U.S. 10-year climbed above 4%. But the main reason for the strong upward movement is the continued divergence in monetary policy between the two countries ‘ central banks. The Fed has already made four major rate hikes this year and all indications are that the Bank of Japan will continue its very loose monetary policy and negative interest rates. The Japanese producer price index rose 9.7 percent in September, but that doesn’t seem to change anything. The announcement of industrial production and much more inflation this week, are expected to have a more important role. The trend is upward but such a sharp rise to such high prices can lead to corrections, at least temporary ones. We may try sell positions this week.

 

EURJPY (EuroJapanese Yen)
Strongly bullish was the last week for EURJPY which opened at 141.46 and closed at 144.68. The euro is not strong enough to justify such an explosive rise, but Japan’s currency is experiencing one of the biggest weaknesses in its history. The Bank of Japan seems wedded to its program of loose monetary policy and negative interest rates. The government, through the mouth of Japanese Finance Minister Shun’ichi Suzuki, reiterated its intention to intervene again in the foreign exchange market if the need arises and if the high volatility and the fall of the yen are such as to allow it. This, however, did little to the Japanese currency. The pair is now very close to the strong resistance of 145.65 which is a high price of about eight years and so some possible corrective moves cannot be ruled out so we sell positions is our selection for the current week.

 

EURGBP (Euro – Great Britain Pound)

Last week was bearish for EURGBP which opened at 0.8790 and closed at 0.8699. The euro and sterling are going through a period of weakness, on the one hand, due to the negative investing sentiment that dominates the markets and on the other hand due to the peculiarities of the two economies. Europe faces a widespread energy crisis and the possibility of a strong recession next winter. The UK, on the other hand, is also facing the same situation, but the new government has been backtracking on cutting tax rates and easing through its recent bond-buying program. However, the replacement in the Ministry of Finance, as we have seen above, was seen by the markets as a step in the right direction since the new Minister of Finance James Hunt, is considered more friendly to the markets. Below 0.86, we may the recent downward trend accelerate further while above 0.8870, the upward rebound has a better chance. We prefer buy positions this week.

 

USDCAD (US Dollar – Canadian Dollar)

Bullish was the last week for USDCAD, which opened at 1.3750 and closed at 1.3880. The mild strengthening of the US dollar combined with the weakening of the Canadian dollar due to the de-escalation of oil prices brought this result. There has been a strong upward rally for the exchange rate since mid-August which results in a rise of 1,110 pips and the highest prices in the last two and a half years. The U.S. dollar has been rallying while oil prices, after the recent rise caused by the decision to cut production by OPEC, are starting to de-escalate again. Canada’s economy had no major economic announcements last week but this week is dominated by the announcement of inflation and retail sales that may provide more information on the Bank of Canada’s next moves. The trend is upward, and if it continues, the exchange rate will quickly find itself in the region of 1.40. The possible reversal of the trend presupposes a downward break out of 1.35 at least in the first phase. We may try sell positions this week.

 

USDCHF (US DollarSwiss Franc)
The USDCHF had an upward trend last week after opening at 0.9945 and closing at 1.0055. For five consecutive weeks, the exchange rate has risen sharply, mainly due to the strengthening of the US dollar. The announcement of inflation in the United States for September had a positive effect on the US currency, and the USDCHF stands on the significant resistance of 1.0065, which is the highest value since May 2019. It is noteworthy that this rise came after the speech of the head of the Swiss National Bank Thomas Jordan, who at the meeting of the International Monetary Fund, stressed that price stability is the most important priority and that there will be a tight monetary policy soon. These statements however did not help the Swiss franc because inflation rates are kept low and so the Bank of Switzerland has no significant reason to raise interest rates. If the uptrend continues and there is a solid break out of 1.0065, the pair has room to rise until the next resistance to 1.0240. A reset below 1: 1 can create temporary corrective trends. We may try sell positions this week.

 

AUDUSD (Australian Dollar – US Dollar)

Last week was bearish for AUDUSD, which opened at 0.6354 and closed at 0.6201. Undoubtedly the US dollar is in a very strong position, a position which strengthened further after the announcement of inflation in the United States at the price of 8.2%. In contrast, the Australian currency is extremely weak at the moment with five consecutive weeks of sharp fall. The recent rate hike by the Bank of Australia of just 0.25% has already created a divergence between the Fed and the Bank of Australia’s interest rate policy. There are signs that inflation in Australia is beginning to de-escalate at a higher rate than in the US, and so this divergence may increase in the future. We’ll find out more on Tuesday with the announcement of the Reserve Bank of Australia minutes and perhaps on Thursday with the unemployment rate announcement for September. Inflation in China was announced at 2.8%, a value that markets had expected and so there was no particular reaction from markets. Any continuation of the downtrend for a sixth week could bring the pair to the verge of 0.60. We need to remind you that at the beginning of the pandemic in March 2020, AUDUSD had been found until 0.55. Without an upward reaction, at least up to 0.65, we cannot talk about a trend reversal but we’re keen to try buy positions this week.

Bitcoin

Last week, Bitcoin closed at $19,264 with losses close to 1%. Bitcoin and most cryptocurrencies have completed 4 weeks of low volatility. More specifically, Bitcoin in these 4 weeks has moved in a small range, from $18,810 to $20,470. Because volatility in markets generally has the characteristics of mean reversal, it is not excluded that we will see an explosion of volatility shortly: it seems that investors are expecting something important. Cryptocurrency losses from exchange hacking have increased in recent times, which greatly reduces reliability. Cryptocurrencies have for some time been aligned with other higher-risk markets (e.g., shares of the NASDAQ100 index) and react to the macroeconomic aggregates announced and to the decisions of the central banks. The upper and lower limits of the price band mentioned above ($20,470 and $18,810) are the obvious local resistance and support respectively and may give us an indication of the direction in the case of an explosion of volatility. We prefer 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.

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