19/12/2022

General Comment

Many important news and announcements were included in the last week. Decisions were taken and announcements were made that will probably mark the course of the markets for some time to come.

Taking things from the beginning, in the United States, we saw a de-escalation of inflation for another month as in November its price was at 7.1%, well below the 7.7% in October, even below the 7.3% that the markets expected. This development triggered positive psychology, on the grounds of how the Fed would soften its stance on monetary policy and interest rates as Jerome Powell had already heralded. The next day we learned of the Fed’s decision to raise US interest rates by 0.50%. It was another sign that the Fed’s aggression was de-escalating after several of the previous increases were of the order of 0.75%. So, the climate improved further with markets rallying. But the climate changed almost immediately because Jerome Powell, in the press conference that followed, welcomed the decrease in inflation but said that there is still a long way to go to fight it effectively, heralding a continuation of tight monetary policy and a continuation of interest rate increases. Equity markets reacted negatively and the next day the negative economic announcements concerning retail sales and industrial production in the United States, further worsened the climate, resulting in the week closing in a deep red. From Thursday onwards, the dollar began to strengthen significantly but did not manage to balance the losses of the week.

We have also had significant developments on the European continent. On Thursday the European Central Bank announced a 0.50% interest rate hike. That was more or less expected, but what surprised markets were Christine Lagarde’s press conference, which essentially stressed that monetary policy will tighten further and that new interest rate hikes are more than certain. It was a harsher attitude compared to the perception that had been formed. The next day we saw some confirmation: inflation in the Eurozone in November stood at 10.1%, slightly above the 10% of the previous month, essentially showing that the measures taken by the European Central Bank are not yet delivering the expected return. All these developments have strengthened the euro.

In the rest of the world, we have also had significant economic developments, mainly in relation to central banks. Interest rate decisions were made by the Bank of England and the Bank of Switzerland, as we will see below. Many were the announcements of macroeconomic figures that gave a signal of the state of the economies.

In addition to equity markets in the red in most of the world’s major economies, the commodities market had mixed signs with gains and losses while small changes occurred in bond markets, with the U.S. 10-year yield closing the week at 3.49%. The general situation did not leave unaffected even the cryptocurrencies that also had a negative performance.

While we wait for all these important developments to mature and affect the markets with more mature thinking, we have already entered the last week before the holiday season and the economic announcements are of less importance. GDP and durable goods orders announcements in the US, inflation in China and Japan as well as business and consumer sentiment in the Eurozone and Germany stand out.

SP500

The US SP500 index closed with strong downward trends last week, at 3,872 points and losses of more than 2.30%. The announcement of reduced U.S. inflation on Tuesday caused euphoria in equity markets after many investors saw decompression from the big interest rate hikes that have been made repeatedly this year by the Fed. The positive climate continued on Wednesday with the announcement of a 0.50% increase in interest rates, as Jerome Powell had predicted in recent statements. The turning point, however, for the change in investment sentiment, took place shortly after, in the press conference that followed. Jerome Powell expressed concern that the issue of inflation has not been resolved and that the Fed must continue aggressively to address it. The SP500, which had almost reached 4,200 points after about 4 months, began to suffer big losses and the negative climate worsened the next day when announcements on retail sales and industrial production came to confirm the fears and create new losses for the index. PMI indicators also had a negative impact on Friday and so, a week that had started with positive signs ended with heavy losses. Negative development for the index is the break out of supports at 4,000 and 3,910 points, while if the downward trend continues, even 3,700 points may be threatened. A bullish break out above 4,000 points would smooth things out somewhat so we may try long positions this week.

DAX30

The German DAX40 index moved lower last week, closing at 13,991 points, with losses of 2.90%. European markets were strongly affected by the negative climate that dominated the US from Wednesday onwards, while on Friday, Christine Lagarde’s announcements of continued tight monetary policy worsened things, so the index came below 14,000 points for the first time since early November. Germany’s economic announcements have not been able to shake the psychology of the markets: inflation persists at particularly high rates and in November it was announced at 11.3% (harmonized index of consumer prices) and the economic sentiment remains negative. The producer price index continues to rise after strengthening by 14.9% in November and the better-than-expected PMI indicators were not able to influence the equity markets to a large extent. A sustained stay below 14,000 points could lead to further losses, and a dynamic response above 14,200 points is needed for the DAX40 to recover. We prefer long positions this week.

FTSE100

The British FTSE100 index declined last week, closing at 7,343 points, with losses of almost 1.55%. British equity markets came under intense pressure from Wednesday onwards, strongly influenced by the announcements in the US. The losses, however, were not so heavy and this was due to two main reasons. The Bank of England raised interest rates by 0.50% on Thursday as expected, but two members who voted against are raising expectations that the bank’s future moves may not be that aggressive. The second reason has to do with the relatively decent picture of the UK economy: GDP, trade balance, industrial production, and manufacturing had a good picture in October while the interest rate at the 10-year bond auction was reduced. On the contrary, the labor market and retail sales had negative results, but the overall picture was not disappointing. Fears of a larger correction of the FTSE100 will intensify as it approaches 7,000 points. Above 7,450 points, however, we may see new recovery trends so we may try long positions this week.

Gold

Last week for gold was bearish, closing at $1,803 and losses close to 0.35%. These losses occurred in a week that was accompanied by dollar losses and thus had a special character. Developments in central banks and their expected future decisions on monetary policy and interest rates take precedence, following the interest rate increases we saw last week. The losses, however, were not strong because the negative investment sentiment that is forming favors low-risk options such as gold. One of the competitors in this role, which is bonds, does not seem to have a serious impact on prices because their yields for about two weeks have been almost unchanged. If gold falls below $1,775, the negative picture could get worse. $1,837, which is the highest price of gold in the last six months or so, is the most significant resistance if there is a turn in prices upwards. We may try long positions this week.

US Oil

Last week was bullish for oil with next month’s futures closing at $74.50, with gains approaching 4.30%. The strengthening of prices at the beginning of the week was greater and oil was close to $78 on Thursday, but the perception of the markets in relation to future central bank moves and the negative macroeconomic results brought back the intensity fears of an upcoming recession that may sharply reduce oil demand. A positive tone in prices was given by reduced inflation in the US and the apparent easing of the situation in China, with the partial lifting of the lockdown in many areas and the gradual return to normality. Oil has recovered significantly from the $70 that it was ten days ago and if it exceeds $78, it may perform even bigger profits. A possible shift to $ 70 again, however, will be a strong signal for possible new losses. Long positions is our selection for the current week.

EURUSD (Euro vs US Dollar)
Bullish was the last week for EURUSD which opened at 1.0527 and closed at 1.0525-1.0584. By early Thursday, the exchange rate had an explosive rise that had taken it up to 1.0735, which is the highest price since early June. Reduced U.S. inflation, along with the 0.50% rate hike by the Fed, had noticeably weakened the dollar. But the sense that the problem of inflation in the US is not so simple to solve, and the negative economic news that followed, changed the climate and strengthened the dollar. U.S. retail sales fell 0.6% in November while industrial production fell 0.2% in the same month. At the same time on Thursday the European Central Bank announced a 0.50% increase in interest rates and given the severe inflation problem in the Eurozone, Christine Lagarde announced that monetary policy would necessarily have to tighten further and that there would have to be new interest rate increases in the future. Inflation in the Eurozone was announced on Friday at 10.1%, confirming the severity of the problem. So, although the dollar rebounded from Thursday onwards, the strengthening of the euro resulted in the exchange rate closing in the upward territory. The next obvious resistance is at 1.0735 but if the dollar’s strengthening continues, below 1.0480 a stronger downtrend may begin to form. We’d be keen to try buy positions this week.

GBPUSD (Great Britain Pound – US Dollar)

Last week was bearish for GBPUSD, which opened at 1.2249 and closed at 1.2135. The week had started upward for the exchange rate as the dollar was weakening and the sterling had reasons to have upward trends. Several macroeconomic announcements had a positive sign for the United Kingdom, while the slight de-escalation of inflation announced on Wednesday, to 10.7% for November (from 11.1% in October) did not fundamentally change the climate because the problem of strong inflationary pressures remains acute. On Thursday, the Bank of England announced a 0.50% increase in interest rates, in full line with market expectations, but the sterling began to suffer because after the vote was announced, we learned that two members of the bank voted for interest rates to remain unchanged. There was therefore a rift in the unanimity of the decision, raising reasonable questions about whether similar decisions on rate hikes are to be announced in the future. The same situation continued on Friday, with the negative announcement of retail sales in the UK driving the exchange rate to fresh losses. If the continuation of the same situation pushes the GBPUSD below 1.20, we may have new stronger losses as well. A decisive bullish break out above 1.23 in the first phase and above 1.2450, will confirm and further consolidate the uptrend that has formed for about three months and we may try buy positions this week.

USDJPY (US Dollar – Japanese Yen)

The previous week was slightly bullish for the USDJPY, opening at 136.44 and closing at 136.64. This slight rise was in divergence with the weakening of the US dollar and with bond yields that were left essentially unchanged. The reason lies in the weakness of the yen, after the recent statements of the head of the Bank of Japan Hirohiko Kuroda about the continuation of loose monetary policy. This climate did not change either with the announcement of the producer price index in Japan, which strengthened significantly to 9.3% in November or with the positive economic announcements that Japan had. The manufacturing index, imports, exports, trade balance, and PMI indices were announced above market expectations. It was the second in a row upward week for the exchange rate and before it confirms its recovery needs to exceed the milestone price of 140. The downtrend will have returned if we see the average below 135 and of course below the strong support of 133.60 which is the lowest price for the USDJPY for about four months. We may try buy positions this week.

EURJPY (Euro – Japanese Yen)
Bullish was the last week for EURJPY which opened at 143.72 and closed at 144.67. It was the second week of a rise for the exchange rate that seems to surpass a mini-downward trend that had appeared from the end of November. The reason is the strengthening of the euro following the recent increase in interest rates by the European Central Bank and new expectations for even tighter monetary policy in the Eurozone. The acute problem of inflation does not leave much room for a different policy. By contrast, continued loose monetary policy and negative interest rates in Japan continue to weaken the yen. Based on the above, a further rise in the exchange rate sounds quite reasonable, but prices above 148 are multi-year highs and thus may cause corrections but we’re keen to try buy positions for one more month.

EURGBP (Euro – Great Britain Pound)

Strongly bullish was the last week for EURGBP which opened at 0.8532 and closed at 0.8715. The recent strengthening of the euro due to the ECB’s interest rate rise, and markets ‘ perception of how new increases may occur in the near future, have helped the exchange rate move higher. The Bank of England also raised interest rates by 0.50% but some members of the central bank who voted against this decision raised legitimate concerns about the continuation of this policy and so the sterling suffered losses. If the same conditions prevail and the perception of markets remains the same, the exchange rate could move even higher so we prefer buy positions this week.

USDCAD (US Dollar – Canadian Dollar)

Last week was bullish for USDCAD, which opened at 1.3626 and closed at 1.3695. Bank of Canada chief Tiff Macklem said in a speech earlier this week that there were positive signs of inflation de-escalating, but that a clearer picture would emerge in the spring. These statements were interpreted rather in a negative tone for the Canadian dollar and thus the exchange rate strengthened even though the US dollar weakened and even though oil prices strengthened. Canada’s retail sales and GDP are announced this week, so we will have a better picture of the country’s economic situation. The exchange rate, however, has been showing a strong upward rally for a few weeks now that may strengthen further and approach the price range of 1.40 but we prefer sell positions this week.

USDCHF (US Dollar – Swiss Franc)
Unchanged remained the price of USDCHF last week after opening and closing was in the 0.9330 – 0.9340 zone. Although the producer price index rose in November much less than market estimates, the Bank of Switzerland moved to raise interest rates by 0.50%. There was therefore a balance of the franc with the dollar since a corresponding increase in interest rates was made by the Fed too and so the week was essentially neutral for the exchange rate. Swiss Bank chief Thomas Jordan mentioned in the press conference that there was likely to be further action in the foreign exchange market, but he avoided committing to the final price of interest rates. There is a strong downtrend from mid-October onwards for the exchange rate and so an excess of 0.95 is required for there to be a reasonable chance of recovery. However, if the price zone of 0.92 breaks out, the road will have been opened for 0.90 and we may try sell positions this week.

AUDUSD (Australian Dollar – US Dollar)

Last week was bearish for AUDUSD, which opened at 0.6784 and closed at 0.6685. Australia’s economic news is not considered negative as the labor market has had a strengthened picture, with the unemployment rate unchanged at 3.4%, but many new jobs have been created, above market expectations. The negative picture for the Australian dollar comes from China, which has had disappointing results in its economic announcements. Retail sales in November fell by 5.9% while industrial production was announced below market estimates. Contributing to the pressure on the exchange rate is the economic sentiment that has worsened and removed some investors from high-risk options such as the Australian dollar. The U.S. currency gained momentum from the middle of last week onwards, and if that continues, we may see prices below 0.65 percent support. The continuation of the upward rebound passes through the upward break out of 0.69 but we may try sell positions this week.

Bitcoin

Last week, Bitcoin closed at $ 16,749 and lost 2%. Bitcoin and most cryptocurrencies followed the general downtrend of the markets although the losses were less than expected, based on their high volatility. This can be interpreted either positively as a better performance or negatively as a lack of interest in cryptocurrencies by investors. The investment climate remains on a negative trajectory after the arrest of the founder of FTX in the Bahamas which gave images that many would not want to see and did not imagine a few months ago about such a large exchange. In addition, new concerns have arisen about Binance as well. Binance-owned crypto asset BNB has the third-largest market capitalization after Bitcoin, Ethereum, and two stable coins. The reason is rather the large outflows-withdrawals of many investors worried after the collapse of FTX. New concerns surfaced last Friday when accounting firm Mazars Group stopped its collaboration with Binance and other cryptocurrency companies. The main support for Bitcoin remains in the price zone of $15,500 and if it breaks out, we may see stronger losses. We prefer 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.