12/12/2022

General Comment

Having left behind a relatively calm week for the financial markets, without significant announcements and developments, we have entered a very critical week since there are important issues that can cause repeated changes in the trend and high volatility in the markets, as we will see below. Going back to last week, there were clear corrective trends in the major equity markets but no high volatility. The investment community is waiting for central bank decisions on interest rates and monetary policy and trying to get information about the next moves. Inflation announcements are the main factor driving central bank decisions along with statements by executives who make specific estimates and report specific positions.

The week had started positively with U.S. PMI indicators having a particularly positive result but ended with a shock because the producer price index (a precursor to inflation) was announced higher on Friday, partly casting doubt on the perception of easing the Fed’s aggressive policy of raising interest rates. On the European continent, the GDP of the third quarter of 2022 had a positive impact because it was announced to increase by 2.3%. The fact is, however, that there is a clear concern about an upcoming recession in the main economies and this was reflected some extent in the strong corrective trends of the equity markets last week. Bond yields had an upward reaction toward the end of the week, with the U.S. 10-year closing at 3.58%. However, the divergence between the yield on the 10-year bond, compared to the yield on the 2-year bond, which is at 4.34%, is an indicator used by economists to identify a possible upcoming recession.

In the geopolitical field, nothing has changed, with the war in Ukraine continuing with unabated intensity and the European Commission ready to announce a new package of sanctions against Russia. China, based on the recent decisions of the government, has relaxed the restrictive measures for the pandemic, but this fact seems to have not helped the psychology of the markets.

Apart from the stock indices, which as we said were under strong pressure, the commodities had a downward trend, from low intensity such as gold to high intensity such as oil. The U.S. dollar rebounded due to a reduction in risk appetite by the investment community leading to safer options such as the U.S. currency. Finally, we saw a small recovery for Bitcoin and the cryptocurrency market, which in no way reflects expectations for a strong upward reaction after the recent fall.

We entered a critical week with announcements and decisions that will judge the course of the markets for the next period. In the United States, inflation for November is announced on Tuesday, while the Fed’s decision to raise interest rates is expected on Wednesday. The next day, a possible decision to raise interest rates is also announced by the European Central Bank, while a press conference follows with possible estimates for the next moves. Inflation in the Eurozone is also announced on Friday. The same backdrop is in the UK: November inflation is announced on Wednesday and the Bank of England announces its decision on interest rates on Thursday. The three most important central banks are very likely to announce an interest rate hike within the same week. Regarding the other economic announcements, the announcement of retail sales in the US, China, and the United Kingdom, the announcement of the unemployment rate in the United Kingdom, PMI indicators in many economies, the announcement of interest rates in Switzerland, and the unemployment rate in Australia are considered important. Let’s all fasten our seat belts because the week will have many ups and downs and high volatility.

SP500

The US SP500 index closed with a sharp correction last week, at 3,968 points and losses close to 3.30%. Almost all week there have been downward trends as the climate of fears and worries about a possible recession that may hit the US economy has returned to some extent. The concerns were not allayed either by the positive result of the PMI indicators on Monday or by the amazing result that the Michigan Consumer Confidence Index had on Friday. On the contrary, the producer price index, which was higher in November, created new nervousness because it brought back to the fore the big issue of inflation and whether the Fed is indeed going to have looser interest rate hikes in the near future. This week began with the statements of Janet Yellen, who believes that inflation in 2023 will be much lower but also said that there is a risk of recession. If the drop continues below 3,910 points, we may see increased nervousness. Given the criticality of this week (announcement of inflation and interest rates), volatility is expected to be increased and needs a net and stable excess of more than 4,000 points to improve the climate. We may try long positions this week.

DAX30

The German DAX40 index declined last week, closing at 14,369 points, with losses of 1.15%. It was the first purely downward week in two months and it seems that the nervousness in the markets moved to Europe as well. Europe has long been beset by the energy crisis and the possibility of a difficult and recessionary winter in the economy is high, but lately, many voices say that all this is excessive. The ECB, despite recent and likely upcoming increases, still has low interest rates and so the shares of several European countries are currently attractive. Germany, last week, had a neutral effect on economic announcements on PMI indicators, industrial production, and factory orders, compared to the numbers estimated by the market. This week is critical due to the announcements of interest rates from the ECB and inflation in Germany and the Eurozone and an upward break out above 14,620 points will help the climate. Last week’s lows, close to 14,200 points, are the next support in case the correction continues. We prefer long positions this week.

FTSE100

The British FTSE100 index declined last week, closing at 7,481 points, with losses of almost 1.20%. The upward rally that started from mid-October onwards was interrupted for the time being. It seems that the investment community, given the announcements of inflation and interest rates in the United Kingdom but also in other strong economies, is holding a wait while nervousness and some fears of a possible recession have returned to some extent. Last week had a few minor economic announcements for the UK but the week that has just begun has many important ones: the announcement on inflation, the decision on interest rates, and announcements on the unemployment rate, industrial production, GDP, and retail sales are the ones that stand out. Close to 7,650 points, it is the price that is high for many years and so it is a strong resistance. If the correction continues, support at 7,400 points is critical but under a positive view, we may continue with long positions this week.

Gold

Slightly corrective was the previous week for gold, with a close at $1,809 and losses close to 0.15%. The slight recovery of the dollar stopped for the moment the upward rally of gold, which about 1.5 months ago was in the price region of $1.650. The week had started with strong downward trends, mainly due to the positive results of PMI indicators in the US that gave confidence to a part of the market that the Fed has room to make big new rate hikes. From then on, we saw a recovery that could not make the sign of the week positive. The announcements of inflation and interest rates in the US, the Eurozone, and the UK that will be released this week, may be decisive for the course of the markets in the near future and especially for commodities such as gold. Near $1,825 there is strong price resistance and a several-month high, and a break out above those levels will be a signal of euphoria. On the contrary, a downward turn below $1,775 will be rather a signal of nervousness and worries. We may try short positions this week.

US Oil

Last week’s oil futures closed at $71.46, with losses approaching 11%. The re-opening of the lockdown in China created temporary optimism but based on more mature thoughts, it seems that it will take a few months to normalize the situation in the economy and return demand to high levels. Oil prices have not even recovered from the rupture of the Keystone pipeline that joins Canada with the US. TC Energy was forced to stop supply after the oil losses, but the reduced supply did not help oil prices to recover. There is widespread concern about a significant slowdown in global growth that could significantly reduce oil demand, so prices have fallen to a year-low level, before the start of the war in Ukraine. Technically there is room for an even bigger correction, but the announcements on interest rates and inflation in the US, the Eurozone, and the UK will play an important role this week. A hope of price recovery, there may be above $73.60 and we may try long positions this week.

EURUSD (Euro vs US Dollar)
Last week the EURUSD was unchanged as it opened and closed around 1.0525-1.0530. The week had several phases since it started falling for the exchange rate on the basis of the strengthening of the dollar, and continued upward when positive economic announcements came out for the Eurozone but on Friday with the new strengthening of the dollar due to the strengthened producer price index in the US, we saw new downward trends prevail. There was a waiting attitude with conflicting views due to the announcements and decisions of the current week. On Tuesday, inflation in the United States is announced and the investment community will learn whether its de-escalation in rates will continue or not. The next day there is a Fed decision on interest rates and according to the FedWatch tool, the prevailing scenario with a probability of 78% is an increase of 0.50%. This scenario is in line with recent statements by Fed chief Jerome Powell, who stressed that the pace of rate hikes is expected to ease, starting in December. There is a decision on interest rates on Thursday from the European Central Bank where things are more blurred because there are some estimates for an increase of 0.50% and other estimates for an even greater increase such as 0.75%. The perception of markets based on announcements, rumors, and statements about the movements of central banks will be the dominant issue that will concern the exchange rate and may determine its trend for the next period. Above 1.06, we may see the uptrend that has started since the end of September, strengthen further so we may try buy positions this week.

GBPUSD (Great Britain Pound – US Dollar)

Slightly bearish was the last week for GBPUSD, which opened at 1.2271 and closed at 1.2254. During the week there were mixed trends for the exchange rate, with a downward start and a rise towards the end. Given the lack of economic announcements for the UK these movements in the exchange rate mainly reflect the movements of the dollar. The dollar had a mixed sign during the week but its relationship with the sterling was also in equilibrium because the most likely scenario for the current week is a 0.50% increase in interest rates by the Fed and the same increase by the Bank of England. The points that can differentiate one currency from the other are the inflation rates that will be announced for November and the statements of the press conference of the central banks of the two economies about their next moves. There are plenty of other economic announcements such as retail sales and PMI indices, GDP, and industrial production but monetary policy and interest rates are definitely at the forefront. An excess above 1.2350 will give a new upward breath to the exchange rate, while if there is a shift to 1.20, it is not excluded that the downward scenario will prevail. We prefer buy positions for one more week.

USDJPY (US Dollar – Japanese Yen)

The previous week was bullish for the USDJPY, opening at 134.49 and closing at 136.52. The most important part of this rise took place on Monday as we saw stabilizing trends in the coming days. On Monday there were statements by Bank of Japan Chief Hirohiko Kuroda that brought back the country’s currency to its familiar weak position. Earlier, views had emerged to change loose monetary policy, but Kuroda was clear: very loose monetary policy will continue even if inflationary pressures increase. It was a clear signal that caused upward trends in the exchange rate and then there was no significant differentiation because the dollar had stabilized trends and bond yields remained almost unchanged. The current week is dominated by the announcement of inflation in the US and the decision on interest rates by the Fed, and therefore these factors will largely judge the trend and volatility. A further rise above 138 is needed to further consolidate the upward reaction, but a possible loss of 135 may restore the downward trend that has been prevailing for a few weeks. We may try buy positions this week.

EURJPY (Euro – Japanese Yen)
Bullish was the last week for EURJPY which opened at 141.62 and closed at 143.79. The expectations of the investment community regarding the next moves of central banks are the determining factor influencing the exchange rate at this time. The European Central Bank is preparing to raise interest rates next Thursday, while the Bank of Japan, based on the latest data, is set to continue its loose monetary policy and negative interest rates. Some positive news about the Japanese economy, mainly concerning the GDP of the third quarter of 2022, went rather unnoticed since central banks are in the foreground. Above last week’s high of 144.60, we may see an extension of this upward reaction. But if there is a downward turn towards 140, the downward scenario probably prevails so we’re keen to try sell positions this week.

EURGBP (Euro – Great Britain Pound)

Slightly bullish was the last week for EURGBP which opened at 0.8571 and closed at 0.8583. In the current week, the central banks of both economies (the Eurozone and the UK) will announce inflation and the decision on interest rates. An increase in volatility and possible changes in the exchange rate trend is therefore the expected behavior. Interest rate decisions and the press conferences that will follow through which we will learn more about future central bank moves will have a leading role. Crucial is the support in the price range of 0.8545 for the further fall in the exchange rate. It takes a solid reaction above 0.87 to change the downward trend and we may try buy positions this week.

USDCAD (US Dollar – Canadian Dollar)

Strongly bullish was the last week for USDCAD, which opened at 1.3453 and closed at 1.3641. The Bank of Canada on Thursday raised interest rates by 0.50%, from 3.75% to 4.25%. This development confirmed market expectations and thus did not particularly benefit the Canadian dollar. In addition, the minutes of the decision did not mention any new interest rate increases in the coming period, leading many investors to consider it as a dovish stance. The U.S. dollar was slightly strengthened, helping to lift the exchange rate, but the biggest factor was the huge drop in oil prices. Oil is closely linked to the Canadian dollar as the country’s main export commodity. If there are successive splits of 1.37 and 1.38, the way will have been opened for 1.40. A reverse of this trend will likely make sense below 1.34 but we may try buy positions for one more week.

USDCHF (US Dollar – Swiss Franc)
The USDCHF had a downward course last week since the opening was at 0.9380 and the closing was at 0.9344. The exchange rate had divergence from the strengthening of the US dollar and therefore its downward trend is due to the strengthening of the Swiss franc. In addition to the Fed announcing the rate hike on Wednesday, a similar decision will be made by the Bank of Switzerland on Thursday. While in the United States an increase of 0.50% in interest rates is expected, in Switzerland the most likely scenario is that interest rates will remain unchanged without excluding possible surprises that are capitalized by the strengthening of the country’s currency that we see. In addition, Switzerland presents a good macroeconomic picture, with unemployment falling in November to 2%. There has been a clear downtrend for about a month and a half, which may strengthen further below 0.93. Reversal of this trend will begin to transpire above 0.95 but sell positions is our selection for the current week.

AUDUSD (Australian Dollar – US Dollar)

Slightly bullish was the last week for AUDUSD, which opened at 0.6780 and closed at 0.6797. The Bank of Australia, as expected, raised interest rates by 0.25% on Tuesday, from 2.85% to 3.10%, while the announcement of the minutes left open the possibility of further increases at the next meetings. A significant boost to the Australian dollar was given by the strong trade balance announced for October that far exceeded expectations. However, China’s image was problematic as PMI indicators, imports, exports, and trade balance were far below market estimates. Even inflation rose strongly after it hit 1.6% in November, significantly above the 1% markets had expected. All of these are obvious results of the recent lockdown in China. Based on the attitude of the Bank of Australia and the good economic image of the country, its currency is strengthening and it is not excluded that it will strengthen further if technically there is an excess above 0.6850. A possible strengthening of the US dollar could, however, swing the exchange rate towards 0.65 again so we may try sell positions this week.

Bitcoin

Bitcoin prices were unchanged last week, as the week closed at $17,091 with subtle losses of 0.13%. The shock from the FTX case continues, and concerns in the ranks of cryptocurrency investors remain. Ark Invest CEO Cathie Wood said of FTX founder Sam Bankman-Fried that he didn’t like Bitcoin because he couldn’t control it but she reiterated her positive outlook on cryptocurrencies and her optimistic stance on price recovery. The positives of the week certainly include the fact that cryptocurrencies did not follow the strong corrective course of the rest of the markets (mainly equity markets) but at the beginning of this week, Bitcoin lost $17,000, having a downward trend. The most important support remains close to $15,500 and a loss of it can lead to an uncontrolled fall because in that price range and the cost of mining Bitcoin and therefore a lower price makes its production unprofitable. We may try short positions for one more 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.