28/11/2022

General Comment

It was a decidedly calmer week, compared to previous ones, for financial markets since both the Thanksgiving holiday in the US and the lack of important macroeconomic announcements, significantly reduced volatility. Equity markets continued to rebound, especially from Wednesday onwards when the Fed minutes were announced. According to these minutes, there is a strong possibility that large interest rate increases in the US will stop. We remind you that four increases of 0.75% have preceded this year, but the probability of an increase of 0.50% in the next meeting in December, now exceeds 75%. Perhaps the next increases based on this logic will be even smaller. This perception of markets causes a positive feeling since the liquidity problem will not be as acute nor money as expensive as predicted. In this way, not only US stock indexes but also European ones are positively affected, even if there is a clear commitment from European Central Bank officials that large interest rate increases will be needed since the problem of inflation in the Eurozone remains. There has also been strong pressure on the dollar since, based on these developments, the final interest rate in the United States will not be as high as expected. On the contrary, other currencies such as the euro and the British pound have been on the rise.

In addition to them, a new problem arises in China as COVID cases continue to increase the rate and in addition, some deaths appeared. So, China continues the very strict lockdown in several provinces, resulting in global concern about a recession and supply chain disruption as much of Western production continues to be in China. In Europe, it seems that the discussion of imposing a ceiling on energy prices is at an impasse, since not only are there serious disagreements between member states, but the current price of Russian oil is much lower than the proposed price in the ceiling. All this is in a heavy climate due to the ongoing war in Ukraine.

As we mentioned above, most major equity markets strengthened while the dollar suffered significant losses. In the commodities market, there were mixed trends after gold continued to strengthen but oil prices continued the sharp downward trend. Bond yields also moved downward with the U.S. 10-year sitting below 3.70% for the first time since early October. The positive climate in the markets does not seem to have helped the world of cryptocurrencies that continued with low volatility, without an obvious trend for the second week in a row.

After the holidays and the relaxed mood in America, the week is coming back at a brisk pace. The announcement of new jobs in the United States dominates (Non-Farm Payrolls – NFPs) which will show to some extent the state of the American economy before the new decision on interest rates. On Wednesday, the US GDP for the third quarter of 2022 is announced, and on the same day, Fed chief Jerome Powell has an important speech. The same day is also announced inflation in the Eurozone, an announcement that could directly affect the next ECB decision.

SP500

The US SP500 index closed last week with upward trends, at 4,033 points and gains that exceeded 1.50%. Catalytic was the announcement of the Fed’s minutes last Wednesday where the bank’s intentions for easing its aggressive policy of raising interest rates were published. It is not only the signs of de-escalation of inflation but the four big increases that have preceded it, if they continue there is a fear of a big blow to the economy and a great recession in intensity and duration. During the Thanksgiving holiday, nothing changed substantially but towards the end of the week, the developments in China with the strict lockdown and the protests have created a concern, mainly concerning the supply chain. The index needs a clear upward break out above 4,050 points to continue its upward reaction with momentum while logically below 4,000 points, some of the gloom and pessimism may return. We may try short positions this week.

DAX30

The German DAX40 index moved up last week, closing at 14,557 points, with gains of 0.70%. Europe may be beset by an energy crisis, high inflation, and a high probability of recession, but the DAX40 has eight consecutive bullish weeks and overall gains of more than 22%. The late winter has reduced the energy consumption for heating and so for now the reserves remain full. Also, the relatively low interest rates in the Eurozone (relative to other central banks such as the Fed) have not yet created big problems of liquidity and expensive money. Finally, the macroeconomic results in Germany are from decent to positive: the producer price index was reduced in October, the PMI indicators in November are above market estimates, the business climate is improving and the German GDP grew in the 3rd quarter of 2022 by 1.3%. If there is an approach of 16,000 points, it is not excluded that we will see the upward trend strengthen. On the contrary, the approach of 14,000 points may raise concerns so we prefer short positions this week.

FTSE100

The British FTSE100 index moved upward last week, closing at 7,496 points, gaining more than 1.40%. The index follows the overall optimistic climate of recent weeks at the international level, having six bullish weeks in a row and overall gains approaching 10%. The new government, announcements, and economic policy implementations have somewhat calmed the markets. Even the yield on the British 10-year bond, which had long exceeded 4% in October, is now just above 3%. All the statements of the central bankers, of course, converge on the fact that new big interest rate increases are coming from the Bank of England, but as the PMI and public borrowing indicators showed, which fell sharply in October, the economy in the UK is still holding out. The index has come very close to the price range of 7,600-7,700 points which are multi-year highs and there may be some corrections if these levels are approached that is why we prefer short positions this week.

Gold

Gold was bullish last week, closing at $1,770 and gaining more than 1%. Gold received significant help from the fall of the US dollar, in which it is denominated, having an inverse relationship most of the time. Also, the increased cases of COVID in China, the strict lockdown, and the protests in the country worsen investment sentiment and the economic climate, even if the concerns are currently under control. The current week with the announcement of GDP, the labor market, and Jerome Powell’s speech in the US is important for the course of gold. Inflation in the Eurozone is also an important factor. The recent bullish rally in gold, for about a month, needs an upward break out of $1,790 to continue. Last week’s lows near $1,720 are the obvious close support in the event of a downward turn in gold but we’d try long positions for one more week.

US Oil

Last week was bullish for oil with next month’s futures closing at $76.47, with losses of more than 4.60%. There are strong concerns about oil demand, mainly due to the lockdown in China and the decline in consumption it has caused as economic activity shrinks. The situation does not seem to change, even if there are strong reactions and protests in the country, because the cases of COVID are increasing. A negative development is also the G7 proposal for a cap on Russian oil at $70, since according to news sources, at this price (perhaps below) Russia sells oil to some Asian countries. In the US, however, inventories continue to decline, a sign that demand remains high in the country. At $76 there is significant support for oil prices because we haven’t seen lower prices for a year or so. Early this week, that support has already broken down, with oil even going below $74. The downward trend therefore continues and it remains to be seen how far it can go but, in any case, we’re keen to try short positions this week as well.

EURUSD (Euro vs US Dollar)
Bullish was the last week for EURUSD which opened at 1.0321 and closed at 1.0391. A decisive factor in the rise in the exchange rate was the weakness of the US dollar, especially after the announcement of the Fed’s minutes. From these minutes we learned that there is a clear intention of the central bankers in the US to reduce the rate of increase in interest rates, starting from the next meeting in December where the most likely scenario is a 0.50% increase. Volatility declined reasonably towards the end of the week due to the U.S. public holidays but was preceded by some announcements that affected the pair. In the United States, durable goods orders rose 1% in October but PMI indicators did not have a positive result. In contrast, the PMI indicators in the Eurozone were all above market expectations. Given the importance of the announcement of new jobs in the United States (NFPs) and the announcement of inflation in the Eurozone, this week we expect higher volatility and bigger moves. If the upward reaction for EURUSD continues we may see an excess of significant support of 1.0480 or even higher prices so we may try buy positions this week.

GBPUSD (Great Britain Pound – US Dollar)

Bullish was the previous week for GBPUSD, which opened at 1.1891 and closed at 1.2087. The US dollar weakened due to the expected decline in the pace of interest rate rises in the US, but the sterling also performed remarkably through statements from the Bank of England, which converged on the result that we should expect tighter monetary policy and higher interest rates in the UK. More specifically, Huw Pill said that there must be additional actions to combat inflation so it can return to 2% levels. Dave Ramsden said that in his view, monetary policy needs to be tightened but that always depends on the state of the economy. Catherine Mann said the Bank of England had warned early and effectively about new interest rate increases. Based on these statements, the upward reaction of the sterling was logical and so the exchange rate managed to close above 1.20 for the first time since last August. In the case of a continued uptrend, the nearest resistance is at 1.23 so we may try buy positions for one more week.

USDJPY (US Dollar – Japanese Yen)

Last week was bearish for USDJPY, opening at 140.30 and closing at 139.12. The weakening of the US dollar after the announcement of the Fed’s practices and the continued de-escalation of bond yields are pushing the exchange rate lower. Based on this data we should see stronger downward trends for the USDJPY but the Japanese currency cannot recover after the continued loose monetary policy and negative interest rates by the Bank of Japan. Inflation in Tokyo was announced to be particularly high, at 3.8%, a rate we haven’t seen in several years and this may alarm the country’s central bank if it hasn’t already. Former Bank of Japan board member and nominee deputy governor of the central bank Sayuri Shirai, urged the bank to be more adaptive on the issue of interest rates and reconsider the issue of quantitative easing. Below 137.65 we may see an acceleration of downward movement while any reaction above 140 may mean an upward counterattack but sell positions is our selection for the current week.

EURJPY (Euro – Japanese Yen)
Slightly bearish was the last week for EURJPY which opened at 144.82 and closed at 144.64. It was a favorable week for both the euro and the yen but the Japanese currency prevailed marginally, mainly due to the de-escalation of European bond yields. In Europe, interest rates are expected to rise soon, based on the high inflation that persists in the Eurozone, while in Japan, although there has been a regime of very loose monetary policy and negative interest rates for a long time, perhaps the price of inflation that seems to be slipping may force the leaders of the Bank of Japan to change their views. Below 142.55 we may see the development of a downward trend that may even lead to 140 so we prefer sell positions this week too.

EURGBP (Euro – Great Britain Pound)

Last week was bearish for EURGBP which opened at 0.8673 and closed at 0.8591. It was a week when the British pound had strong upward trends and prevailed over all other major currencies. The Bank of England intends to fight the issue of high inflation, with new large increases in interest rates, as at least mentioned in the latest statements of bank executives. Of course, there is a similar intention in Europe, but on the one hand the state of the European economy, on the other hand, the bureaucracy and the delays that are observed, do not give room for immediate and drastic moves. Critical downwards is the price zone of 0.85 while a dynamic reaction above 0.88 is needed to overcome the strong downward trend that has started since the end of September. We may try sell positions this week.

USDCAD (US Dollar – Canadian Dollar)

Practically unchanged was the last week for USDCAD, which opened and closed around the price range of 1.3265 – 1.3370. This balance was caused mainly due to the weakness of the US dollar but also the weakening of the Canadian dollar through the continued fall in oil prices. This lack of trend could not be changed even by the speech of Bank of Canada’s head Tiff Macklem, who stressed that inflation in the country remains high and widespread and that new interest rate increases are needed to combat overheating in the economy. On a macro level, retail sales in September in Canada remained in negative territory but were announced above market expectations. The current week is dominated by the announcement of the labor market in the US and Canada, and more volatility is expected. Below 1.3220, the downtrend gains more points while a net reaction above 1.35 is needed to have a better chance of reversing the bearish trend that has started since the beginning of October. We may try buy positions this week.

USDCHF (US Dollar – Swiss Franc)
The USDCHF had a downward course last week since the opening price was at 0.9534 and the closing price was at 0.9449. The influence of the weakened dollar on the exchange rate was clear since we had neither important announcements nor important news from Switzerland. So, the downward move almost entirely reflected the weakness of the dollar after the announcement of the Fed’s minutes. The current week, however, is much more important because, in addition to the announcements of the US GDP and the US labor market, there are also announcements of inflation and GDP in Switzerland. So, this crossroad for the USDCHF is crucial: if the price drops below 0.9355, the strong downtrend that has started for about a month and a half will probably strengthen but in the event of an upward reaction above 0.96, there are increased chances of recovery. We prefer sell positions for one more week.

AUDUSD (Australian Dollar – US Dollar)

Bullish was the last week for AUDUSD, which opened at 0.6658 and closed at 0.6750. The weakness of the US dollar was characteristic and favored almost all other currencies that form a pair with the US currency. The Australian dollar, however, had an upswing since Tuesday, when the statements of the head of the Bank of Australia Philip Lowe, brought to the fore an increase in interest rates of 0.50%, following previous increases of 0.25%. If this happens, there will be a new upward breath for Australia’s currency. The negative news for the Australian dollar certainly includes the great crisis in China, with strict lockdowns that limit economic activity and visibly affect connected economies such as Australia. The AUDUSD is very close to the significant resistance of 0.68 which is the highest price in about 2.5 months. We need to see an upward break out of this resistance for there to be continuity in the rise while a possible turn below 0.66, favors the downward scenario. We may try sell positions this week.

Bitcoin

Bitcoin was slightly bullish last week, as it closed at $16,424 with gains close to 1%. Early this week, however, the price of Bitcoin falls by almost 2%, which means that there was no upward reaction in real. The storm in the world of cryptocurrencies continues, after the events of FTX. Other large companies in the industry, such as Genesis and BlockFi, seem to be facing problems since the climate of fear and mistrust has forced many investors and traders to make withdrawals and this creates a strong liquidity issue. But there is now another, perhaps more serious, issue. The price of Bitcoin has come very close to the cost of mining, which means that the production of Bitcoins may become unprofitable and so many mining companies may go bankrupt. Below $15,500, we will see a two-year low and this may bring a new wave of worries and liquidations so short positions is our selection for the current week.

IMPORTANT DISCLAIMER

The information in 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.