24/10/2022

General Comment

A critical event that turned global financial markets upside down hid the end of last week. Taking things from the start, the week passed the US continued the previous trend and high volatility in most of the international financial assets. That included a strengthening of the U.S. dollar, downward trends in most major equity indexes, and a fall in most commodities. But a Wall Street Journal article published on Friday said, among other things, that after the expected 0.75% rate hike at the Fed’s Nov.2 meeting, the central bank is set to ease off its aggressive policy of raising rates and that the next hikes, if made, will be much milder. San Francisco Fed chief Mary Daly said the next 0.75% rate hike is likely, but such increases may not last forever. After this article and the statements, the mood changed dramatically: equity markets recorded a mini-rally, commodity prices rebounded while the dollar was under heavy pressure. Bond yields that had reached multi-year highs, with the US 10-year exceeding 4.34%, managed to de-escalate and so the week ended at 4.22%. The interpretation of markets and most analysts is that if interest rates do not rise as much as markets expect, there will not be as much liquidity stress in the markets and the coming recession could either be contained or avoided.

Despite the strengthening of the euro following the developments we analyzed above; Europe continues to be in a difficult situation. The energy crisis is the biggest problem in the Old Continent and despite all the efforts that are being made to find a solution, there is nothing standard on the horizon. The leaders of the European Union member states tried through their meeting on Friday to reach a cap on energy prices but without a final agreement. The matter remained open according to the statements of the president of the European Commission Ursula von der Leyen and we may see new efforts in the near future.

We also had significant developments in the United Kingdom with the resignation of the Truss government and with great uncertainty about the next steps. There are many scenarios on the table such as the return of Boris Johnson to the British government.

We also had events in China after the violent removal of the former general secretary of the Communist Party of the country Hu Jintao from the 20th Congress. The 79-year-old former president of China, serving from 2003 to 2013, was asked by officials to rise from his post. However, Xi Jinping’s re-election, for a third consecutive term in the party and state leadership, has probably ironed things out.

Having already entered the last week before the announcement of the US interest rate decision, the economic news that will be announced is quite significant. In the United States, the GDP announcement for the third quarter of 2022 dominates. In Europe, the central event is the decision on interest rates by the European Central Bank on Thursday, with a rise of 0.75% being the prevailing scenario that markets expect. Also important are the announcements of retail trades and GDP in China, inflation in Germany, interest rate decisions in Japan, and inflation in Australia. Finally, the PMI indicators that will be announced for the main economies of the planet will give a signal of economic sentiment in international markets.

SP500

The US SP500 index closed with strong upward trends last week, at 3,772 points and gains of 4.85%. At the beginning of the week, we saw the pressures that have been prevailing for several months continuing and the index reaching 3,500 points, but climate change on Friday was enough to turn the SP500 into a positive sign. Markets now have expectations that the Fed will be softer on future rate hikes, so liquidity and money costs will not hurt growth to the extent they expected. It remains to be seen this week if this development also signals a change in the downtrend since the SP500 had lost more than 26% since the beginning of the year. The results of some important American companies that have been announced so far are not negative. About 20% of SP500 companies have announced their results for Q3 2022, with 72% reporting Earnings Per Share (EPS) above expectations. Of course, it is the lowest profit growth since the corresponding quarter of 2020, but things could be worse. If the indicator manages to exceed 3,820 points, the scenario of continuing the upward reaction is strengthened so we may try long positions this week.

DAX40

The German DAX40 index moved up for the third consecutive week, closing at 12,855 points, with gains approaching 4%. European markets were affected by climate change on Friday and turned positive too. The index has been making a significant upward reaction since the beginning of October, when it was well below 12,000 points, without of course meaning that the issues of Germany and the rest of Europe have entered a path of resolution. Apart from the energy crisis and the difficult winter ahead, economic sentiment in Germany remains in sharply negative territory while the producer price index (a precursor indicator for inflation), rose in September to an annual level of 45.8%. Germany also raises the biggest objections to a European energy price control agreement. But if Friday’s positive sentiment in the US continues to prevail, Europe will probably also be affected and a positive signal for further growth will be a possible upward split above 13,000 points. We prefer long positions this week.

FTSE100

The British FTSE100 index moved upward last week, closing at 6,996 points, gaining almost 2.40%. Things in the UK are not at all positive and calm. The government crisis is hurting investment sentiment and the economic news being announced is disappointing. Inflation in September (Consumer Price Index) climbed back into double figures, at 10.1%. All other indicators (producer price index, retail sales index) were also above market expectations. The decrease in retail sales in the same month and at an annual level reached 7%. The climate is heavy but a political solution and a new more stable government that will avoid the setbacks of the previous one, combined with a more positive climate internationally, could push the index to higher levels if the milestone value of 7,000 points is first broken. In that case, we may try long positions.

Gold

Gold was bullish last week, closing at $1,662 and gaining close to 0.80%. All the rise is due to Friday’s move since until then gold was in a vortex of intense pressures, reaching close to $1,620. News of the Fed’s future moves, and a correction in the U.S. dollar, lifted gold above weekly lows which also was a 31-month low price. The factors that will affect prices are now many. If it is confirmed that the Fed, after the decision on interest rates on November 2, will have softer increases, gold will probably be favored. But now an important factor is the interventions (two in the last month) of the Government of Japan in the foreign exchange market. In the short term, the announcements of PMI, US GDP, and Eurozone interest rates are factors that will weigh on gold’s trend and volatility this week. If there is an approach of $1,700, we may see the rising scenario strengthen so we may try long positions this week.

US Oil

Slightly bullish was the previous week for oil with next month’s futures closing at $85.10, with gains approaching 0.80%. Based on Fed easing expectations in its forthcoming interest rate decisions, and based on losses in the U.S. dollar, oil rebounded slightly but not to the extent of the rest of the main commodities. Some positive news is also coming from China, as there will probably be a lifting of the lockdown in many provinces and so oil demand will recover. Of course, OPEC’s recent decision to cut production by 2 million barrels per day also applies but prices do not continue to move upward because there are concerns that an upcoming slowdown in the global economy will reduce demand. Another positive factor for prices was the announcement of a decrease in stocks in the US last week. By observing how the positive factors outweigh, the price rise scenario gathers some possibilities. Technically, there should be a breakout above $87.20. A possible inhibitor will be any US interventions, with the release of strategic oil reserves to control prices. We may try long positions this week.

EURUSD (Euro vs US Dollar)
Bullish was the last week for EURUSD which opened at 0.9721 and closed at 0.9857. Decisive was the rise in the pair on Friday after rumors that the Fed is not going to continue as aggressively with rate hikes at its upcoming meetings, beyond the one on November 2. Until Friday, the exchange rate had stabilized, mainly following the strengthening course of the US dollar. Inflation in the Eurozone declined marginally in September, to 9.9% against 10% in August. But the energy crisis and the difficulty of European Union leaders to agree on energy prices had not allowed the euro to reap potential gains. Given the importance of the announcements of the US GDP and the decision by the European Central Bank on interest rates in the Eurozone, this week is particularly important. A weak U.S. GDP will reinforce confidence that U.S. interest rate hikes need to be contained, and if markets ‘ expectations are verified against a possible 0.75% increase from the ECB, then we may see further strengthening of the euro. EURUSD is very close to the significant resistance of 0.9875 and if there is an upward break of these levels when does the way open for 1:1. We prefer buy positions this week.

GBPUSD (Great Britain Pound – US Dollar)

Last week was bullish for GBPUSD, which closed at 1.1292, more than 100 pips higher compared to the previous week’s close. The UK is in the throes of a new political crisis following the resignation of the Liz Truss government. Scenarios for the new government come and go, with conflicting polls and possible alliances in the background. The weakening of the US dollar, however, on Friday had a catalytic effect on the exchange rate, lifting it significantly from the price range of 1.1060 that had been found. It seems that the macroeconomic results in the UK are now on the back burner since the US dollar trend and the government crisis are the dominant events. The announcement of the PMI indicators is the only major economic announcement for this week but as we said dollar and the new government scenarios are in the foreground. An attempt to recover above 1.15, may help enough in a possible upward trend in the exchange rate so we may try buy positions this week.

USDJPY (US Dollar – Japanese Yen)

Last week was bearish for USDJPY, opening at 148.57 and closing at 147.59. The pair, by the middle of Friday, continued the explosive upward rally, reaching up to 152. But a series of events occurred that led USDJPY to a free fall. Publications and statements to pause the aggressive policy of raising interest rates in the US weakened the dollar. This was accompanied by a relative decline in bond yields that also created downward pressure on the exchange rate. The final event, however, was the new intervention of the Japanese government (second in the last month), with massive purchases of yen to support the domestic currency. The new exchange rate highs seem to have alarmed the government, which has made this intervention even though the Bank of Japan continues its loose monetary policy and negative interest rates. The bank has a decision meeting next Friday and the most likely scenario is that interest rates will remain at -0.1%. The USDJPY in its big correction touched 146 and if there is a downward break out of this low price, the fall may widen. We prefer sell positions this week.

EURJPY (Euro – Japanese Yen)
Bullish was the last week for EURJPY as it opened at 144.43 and closed at 145.56. On Friday there were strong downward movements for parity but they were not enough to negate the positive sign of the week. The Japanese government’s intervention in the foreign exchange market had to do mainly with dollars, while the recent weakening of the US dollar has to some extent reflexively strengthened the euro. Expectations for a 0.75% interest rate hike by the ECB diverge from the Bank of Japan’s expectations of maintaining negative interest rates. However, if the markets assess that Japan will make new interventions and if bond yields continue to decline, it is not ruled out that EURJPY will be well below 145 so we may try sell positions this week.

EURGBP (Euro – Great Britain Pound)

Last week was slightly bullish for EURGBP, which closed at 0.8728, marking a marginal increase compared to the previous week’s close. Throughout the week there was a mild uptrend although its opening was with a significant gap (distance between closing and opening). The government crisis in the UK is putting pressure on the sterling, pushing up the exchange rate, even if Europe is not in good shape. Most eyes are on the ECB’s decision to raise interest rates on Thursday with the scenario estimated by the markets talking of a 0.75% increase. Such a development combined with the continuation of the crisis in the UK could push the exchange rate higher, towards the resistance of 0.8870 so we may try buy positions this week.

USDCAD (US Dollar – Canadian Dollar)

Last week was bearish for USDCAD, as it opened at 1.3869 and closed at 1.3642. Oil prices may have had a slight boost, but this was not the determining factor for the large downward movement of the exchange rate. The weakened U.S. dollar following Friday’s reports and statements about the Fed’s behavior in the near future was the main reason. Subsequently, the announcement of inflation in Canada strengthened the country’s currency. In September, inflation rose to 6.9%, above markets ‘ expectations, while the price of non-food and energy inflation rose unexpectedly to 6% from the 5.6% markets had expected. These announcements boosted expectations for new interventions from the Bank of Canada. If the US currency continues to weaken it is not ruled out that we will see the exchange rate turn towards the price range of 1.35 and we may try sell positions this week.

USDCHF (US Dollar – Swiss Franc)
The USDCHF had a downward course last week after the opening was at 1.0042 and the closing at 0.9977. The exchange rate was strongly affected by the big fall of the dollar last Friday after until then it had touched the price range of 1.0150 which was the highest price since May 2019. The perception of the markets that the US central bank will not continue in the future as aggressively with interest rate increases pushed the US dollar too hard, so the pair fell below parity. In Switzerland, the only announcements about the country’s economy were imports, exports, and the trade balance which had a positive image. In September, the trade balance exceeded 4 billion Swiss francs. The next obstacle to the possible continuation of the USDCHF’s downtrend is the support near 0.9920 and we’re keen to open sell positions this week.

AUDUSD (Australian Dollar – US Dollar)

Upward was the last week for AUDUSD, which opened at 0.6207 and closed at 0.6381. The U.S. dollar suffered a big blow last Friday as there is now a sense that Fed interest rates will not be as high as markets expected in the long run. In Australia, the announcement of the central bank’s practices had contradictory signals since there is a clear commitment to new rate increases but after the recent increase of just 0.25%, the amount of these increases is the big question mark. China at its central bank meeting last Thursday left interest rates unchanged at 3.65%. China has been through a mini-political crisis, but Xi Jinping’s re-election seems to smooth things over. If the newly formed situation with the US dollar continues this week, we may see the exchange rate rise toward 0.65 so we may try buy positions this week.

Bitcoin

Last week, Bitcoin closed at $19,574 with gains close to 1.60%. Bitcoin was unable to take advantage of the positive sentiment in the other high-risk related markets and so stayed below $20,000. The world of cryptocurrencies continues to receive blows, mainly of a technological nature, concerning mainly security. After the recent breaches and losses of cryptocurrencies at record levels by hackers, came the decision of Freeway (a platform for staking on cryptocurrencies) to freeze withdrawals, with the corresponding token of the company FWT, losing 80% of its value in a few hours. The recent correlation of the crypto market with stock indices and especially the NASDAQ100 has raised expectations that if there is a general recovery in the markets, cryptocurrencies that have been under pressure for about 11 months will also come to an end. If this expectation is not confirmed, however, there will be a deterioration in the climate and the months-long support for Bitcoin at $17,600 will be threatened. It takes a reaction in the first instance above $20,500 and perhaps above $22,800 to change the climate. Short positions is our selection 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.