07/11/2022

 

HIGH VOLATILITY AND MANY TREND CHANGES – MARKETS ROAR

General Comment

Looking back on last week, we would say it was one of the most interesting weeks for financial markets in recent months. Most of the news and developments came from the United States. Last Wednesday, the Fed’s decision on interest rates was announced, with a 0.75% increase, as most analysts expected. Along with interest rates, the monetary policy report was published, which was in line with many analysts ‘ estimates that the Fed will soften its stance on its future decisions on new rate hikes. The immediate reaction of markets was a strengthening of stock indexes and a fall for the dollar. A short time later, however, at the press conference, the head of the bank Jerome Powell, turned everything upside down. Jerome Powell said the inflation problem is still very acute and that interest rates at the end of the chain of increases will eventually be higher than they expected. After those statements the market turned, stock indexes had strong corrective pressures, the dollar strengthened and bond yields shot up. This situation remained until Friday when the new jobs in the United States were announced. The result was better than expected and so the situation changed again: a strong rise in equity markets and a fall for the dollar. Contributing to this reaction was the reduced cost of labor, giving some hope that the issue of inflation is beginning to be controlled. That’s how the week ended.

There is a completely different situation in Europe. The markets were turned with their ears and eyes to the speeches of the head of the European Central Bank Christine Lagarde. Christine Lagarde gave contradictory signals in relation to the bank’s next moves. She clearly stressed that the issue of inflation remains but added that a possible recession is not enough to control prices. The target remains to reduce inflation to 2%, but according to Christine Lagarde, the next moves will also be determined based on economic developments.

An important event for the past week was the increase in interest rates by 0.75% by the Bank of England, which disproved some expectations that spoke of a smaller increase.

Finally, in the week that ended, we saw a drop in the US stock indices while the corresponding European ones had significant gains. In the commodity market, we had a significant rise in oil and the main metals such as gold and copper. Bond yields moved upwards with the US 10 – year closing at 4.16%. Finally, the cryptocurrency market reacted upward.

The current week is calmer regarding important news but stands out the announcement of inflation in the United States next Thursday. The figure that will be announced is crucial because a contraction in inflation will strengthen the easing scenarios of the Fed, while if inflation persists, then the Fed will probably continue to move aggressively. The announcement for inflation in China on Wednesday is also important. The announcement of retail sales in the Eurozone, GDP in the UK, and the Eurogroup meeting also stand out.

SP500

The US SP500 index closed last week with corrective trends, at 3,772 points and losses of 3.80%. The whole week was downward with the exception of Friday but its upward reaction was not enough to reverse the situation. However, Wednesday was more downward, especially in the press conference he gave after the decision on interest rates by the Fed. At the time of the announcement and based on the text on monetary policy, a climate of euphoria had been created that pushed the index above 3,900 points. But some statements at the press conference were enough to bring back the gloom as markets ‘ hopes for smaller rate hikes at the next Fed meetings seem to be disproved. The good picture of the US labor market, as announced on Friday, combined with the fall in labor costs in October, partially restored the positive climate, but without being able to talk about a strong upward reaction: it was a rise of 1.25%. Inflation announced on Thursday will be key. Below 3,700 units a strongly downward channel is created while the continuation of the upward reaction gains points above 3,900 units. We prefer short positions this week.

 

DAX40

The German DAX40 index moved up last week, closing at 13,509 points, with gains of 1%. Given Friday’s big rise, the weekly positive picture is attributed to the overall positive climate that prevailed in the equity markets. It is also true that until Friday, the DAX40 had significantly smaller losses than the US indices. The reason for this is the market estimates for the next moves of the ECB. We may have seen a recent increase in interest rates of 0.75% but Lagarde’s statements and the general economic climate do not allow the view of the very aggressive stance of the ECB to prevail. In addition, Germany had a decent picture based on last week’s announcements: a decent performance in the trade balance, a stabilization of the unemployment rate at 5.5%, and PMI indicators, better than expectations. The next resistance is close to 13,600 points but a possible shift to 13,000 points will probably mean holding back the uptrend that has been forming for five weeks. We may try long positions this week.

 

FTSE100

The British FTSE100 index moved significantly upward last week, closing at 7,345 points, gaining almost 3.80%. The index had signs of a strong rise since Thursday, following the announcement of a 0.75% rate hike and the press conference that followed. The likelihood of a recession lasting several quarters limits the likelihood of new large interest rate increases from the Bank of England, so liquidity will not be much more constrained. The new government also seems more stable and friendly to the markets, with its announcements garnering positive feedback. We will have a better and clearer picture of the UK economy next Friday, after the announcement of the country’s GDP. If there is a break in last week’s high price, above 7,375 points, it is not ruled out that the rise will strengthen. A reversal of the trend is signaled as the index approaches 7,000 points and we may try short positions this week.

 

Gold

Gold was bullish last week, closing at $1,685 and gaining close to 2.30%. Friday was one of the most bullish days for gold in recent months and was enough to give a positive sign to the week. Tight monetary policy and new possible big interest rate hikes by the Fed had depressed gold prices, but the U.S. labor market picture on Friday and the overall improvement in sentiment showed how thirsty the market is for positive news. The great drop of the US dollar was a catalytic factor, let’s not forget that gold is denominated in US dollars. All eyes now turn to the announcement of inflation in the United States for October. A possible de-escalation of inflation may soften the Fed, but if inflationary pressures persist, new large rate hikes should be considered highly likely. It is not excluded that we will see corrective pressures prevail, even though Friday’s climate was particularly positive for gold so we may try short positions this week.

 

US Oil

Last week was bullish for oil with next month’s futures closing at $92.55, with gains approaching 4.80%. The stabilizing trends we were seeing until Thursday was followed by Friday’s big rise. Almost all commodities, such as gold and copper, rose significantly. The reasons for the rise in oil prices were many, coming from different sources. A possible extension of the embargo on Russian oil and a possible easing of the lockdown in China are factors that have to do with production and demand respectively. Also, Friday’s weak U.S. dollar and estimates on the Fed’s next moves greatly influenced the upward rally. Given the conflicting trends due to embargoes in the EU and due to a possible increase in demand in China, an important role will be played by the course of the dollar, which largely depends this week on the announcement of inflation in the US. At $93.60 there is significant price resistance for oil and if we see prices heading toward $90 again, maybe the week will be corrective. We prefer short positions this week.

EURUSD (Euro vs US Dollar)
Practically unchanged was last week for EURUSD which opened and closed around the price range of 0.9960. The European continent shows signs of shrinking economic activity. On Monday, Eurozone GDP was announced which strengthened by just 0.2% in October while inflation picked up significantly and was announced at 10.7%. The unemployment rate also remained unchanged at 6.6%. But more important for the euro were the statements of Christine Lagarde who gave some speeches during the week. She referred again to the issue of high inflation, the issue of an upcoming recession, and the energy crisis, but the conclusion is that her statements did not help the European currency in particular. The exchange rate moved mainly based on developments from the United States and the US dollar. By Friday it was on a sharp downward path, reaching the price range of 0.9730. But the announcement of new jobs in the United States changed the situation, EURUSD had a strong upward rally which took back all previous weekly losses. The week that has just begun will move into the realm of announcing inflation in the United States next Thursday. If the upward reaction of the exchange rate continues above 1:1, it is possible to see a further rise but if inflation in the US is such that it strengthens to the dollar, then below 0.9730, scenarios are reinforced how EURUSD could find itself at new multi-year lows. We prefer sell positions this week.

 

GBPUSD (Great Britain Pound – US Dollar)

Last week was bearish for GBPUSD, which opened at 1.1574 and closed at 1.1373. The exchange rate had a downward trend until Friday, but from then on, due to the weakening of the US dollar, we saw a rise which, however, was not strong enough to change the sign of the week. This is mainly due to the weakness of the sterling. The Bank of England’s 0.75% interest rate hike calmed markets somehow, but the press conference of the Bank’s head Andrew Bailey brought a climate of pessimism. Andrew Bailey said the country may be at the highest inflation risk in the history of the monetary policy committee. He also said interest rate increases would continue but a possible recession could be strong in both intensity and duration. If Friday’s upward reaction continues and the exchange rate manages to be above 1.15, then there are hopes for a return to the upward trend. Of course, if the dollar strengthens then not only will last week’s low at 1.1140 be threatened but maybe 1.10 as well so we may try sell positions this week.

 

USDJPY (US DollarJapanese Yen)

Last week was bearish for USDJPY, opening at 147.74 and closing at 146.63. It was the third consecutive downward week for the exchange rate, even if these falls are not accompanied by large losses and high volatility. The three main factors influencing the pair at this time are the U.S. dollar, the Japanese yen, and bond yields. The yen and bond yields support the rise in the exchange rate as the Japanese currency is weak and yields continue their upward course. But the dollar seems to act as a strong counterweight to these two factors and its weakness is enough for the USDJPY to move downwards. Japan appears to be continuing its very loose monetary policy and negative interest rates after their continuation was reported by Bank of Japan chief Kuroda, following the announcement of monetary policy minutes. Japan’s macroeconomic results were not bad: industrial production, retail trade, and the PMIs had a positive sign. If the US dollar, however, returns and recovers, then we will probably see a rise in the exchange rate, while below 145 the downward mood will strengthen. We prefer buy positions this week.

 

EURJPY (EuroJapanese Yen)
Last week was bearish for EURJPY which opened at 146.95 and closed at 146.01. Weekly losses could have been greater but Friday’s rebound limited them. The decline is not so much due to the strength of the Japanese currency as to the weakness of the euro as most European economies are on the brink of a great recession, an unprecedented energy crisis, and the highest inflationary pressures of recent decades. The fall for the euro rate will be further strengthened if there is a downward split in support to 143.70. Upwards, we remind you that the price range of 148.40 is the highest price for the exchange rate for about 8 years. Sell positions is our selection for the current week.

 

EURGBP (Euro – Great Britain Pound)

Strongly bullish was the last week for EURGBP which opened at 0.8584 and closed at 0.8754. It was a good week for the euro mainly from Friday onwards and a bad week for the sterling even though the Bank of England raised interest rates by 0.75%. The future for Britain’s economy seems bleak, at least on the basis of statements by the head of the Bank of England, who stressed that the country is perhaps in the biggest inflation crisis in the history of the Monetary Commission. The coming recession and very high inflation in the UK complete the negative puzzle. The next target for a possible continuation of the climb is resistance at 0.8870. we may try sell positions this week.

 

USDCAD (US Dollar – Canadian Dollar)

Last week was bearish for USDCAD, which opened at 1.3611 and closed at 1.3480. All the drop in its entirety came from the weakness of the US dollar on Friday, since until then the exchange rate had been on the rise. These upward trends had ignored rising oil prices and statements by Bank of Canada chief Tiff Macklem that gave a hint of continuity to interest rate hikes. The fall in the United States dollar after the announcement of the new jobs was accompanied by good news for Canada’s economy as well. In October, markets expected 10,000 new jobs in Canada’s economy, but according to the announcement, new jobs exceeded 100,000. Therefore, in addition to the weakness of the US Dollar, the Canadian dollar contributed to the large drop in the exchange rate. The price range where USDCAD is currently located is significant support and a low price of about 2.5 months. We prefer buy positions this week.

 

USDCHF (US DollarSwiss Franc)
The USDCHF had a downward course last week since the opening was at 0.9961 and the closing was at 0.9940. The exchange rate until Thursday had touched 1.0150 but the strong weakening of the US dollar caused significant downward pressure and so the USDCHF was again below parity. Inflation in Switzerland was announced on Thursday, which contracted to a satisfactory extent after being at 3% in October, well below September’s 3.3%. There are therefore some indications that the Swiss central bank has no particular reason to raise interest rates again and the Swiss franc is weakening. But all this until Friday when the sweeping fall of the dollar dragged the exchange rate to a low. The price range of 0.9840 is the next support. We may try buy positions this week.

 

AUDUSD (Australian Dollar – US Dollar)

Upward was the last week for AUDUSD, which opened at 0.64 and closed at 0.6470. The picture for the exchange rate is almost identical to the rest of the exchange rates that contain the US dollar: a decline until Thursday and a big rise on Friday. The Australian dollar, as a currency directly linked to the commodity market, was also supported by the rise of commodities, especially gold and copper. In the news and announcements area, the Bank of Australia raised interest rates by just 0.25%, as markets had expected, and this decision did not help the country’s currency. In its monetary policy announcement for Australia, there was a downward revision to economic targets and expectations for new rate hikes. Above 0.6520 and especially above 0.6550 it is possible to see stronger upward trends but if the dollar gets strong again, we may see bearish trends so we may try sell positions this week.

Bitcoin

Bitcoin was slightly bullish last week, which closed at $20,907 with profits close to 1.40%. Bitcoin and most cryptocurrencies continue a mild upward trend that has formed since the end of September, which is currently not able to fill investors and fans of cryptocurrencies with optimism. There is an inability to break out some critical price resistances and an inability to reach the price range at $25,000 which is considered a milestone for a further rise. So, the question arises whether Bitcoin’s course is a structured rise that can lead it to higher levels, or whether even a slight deterioration in the climate can cause strong corrective pressures. Any downward reaction below $20,000 raises concerns and unless there is a strong rise above $25,000, combined with sufficient trading volume, we cannot talk about a strong upward trend. 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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