13/02/2023

General Comment

During the last week, financial markets tried to digest the information from the previous period regarding the central banks’ decisions and the fundamentals that were announced. The market sentiment became sourer after the overreaction that we had seen and most of the markets entered into a weekly corrective mood.

After the 0.25% hike from the Fed, Jerome Powell was hawkish in his speech on Tuesday, underlining that the stronger-than-anticipated labor market may potentially bring higher inflationary pressure. Markets anticipated more interest rate hikes compared to the previous consensus.

In Europe, the ECB seems more determined as the problem of inflation is still very hot and another 0.50% hike in March is the most likely scenario. Although the recession case does not seem to dominate, there’s a difference between the US and the Eurozone. The US keeps on announcing positive results (Michigan Consumer Sentiment Index was announced at 66.4) but the Eurozone area is not on the same page. Retail sales dropped by 2.8% in January and the recession has more chance even if the energy problem is not as big as it was initially estimated. A piece of positive news for the global economy was the low inflation in China (2.1% in January).

Overall, the major equity markets were bearish and the US dollar performed profits against its major competitors. Most of the commodities had a mixed direction as we’ll see below. Upward trends had the bond yields with the US 10-year bond yields climbing to 3.75%. Finally, the crypto markets followed the bearish trend and performed losses last week.

The current week has the important announcement of the US inflation in January that is going to be announced on Tuesday. A further inflation de-escalation may bring back the positive sentiment in the markets because the Fed could be easier regarding the interest rate hikes decisions. Other important announcements in the US are the retail sales and the producer price index. Eurozone has important news to release: GDP, industrial production, and trade balance stand out. In the UK, there are also important announcements like the unemployment rate and retail sales and in the rest of the world, Australia will announce the unemployment rate and Japan the GDP.

SP500

The US SP500 index closed last week with bearish trends, at 4,090 points and losses that touched 1.10%. The sentiment of the markets became negative mostly based on the hawkish speech of Jerome Powell. The case of new interest rate hikes cannot be ruled out, especially after the very strong labor market that the US announced which may cause new inflationary pressures. The next move of the Fed is the number one issue that investors try to interpret in order to make up their minds regarding investing decisions. As per the earnings, many companies are going to announce results this week and this fact of course will also have a major factor on the markets’ perception. Of course, the inflation announcement on Tuesday remains the dominating factor and if we see a new de-escalation, that would be a positive sign for the markets. We prefer long positions this week.

DAX40

The German DAX40 index was bearish last week, closing at 15,308 points, with a loss of 1.08%. Obviously, the index got affected by the general negative mood of the markets last week. The scenario of a new interest rate hike by the ECB in March by 0.50% is a negative development for the equity markets. We need to remind you that another 0.50% took place some days ago. The hawkish ECB combined with the negative fundamentals in Eurozone and Germany are bearish reasons for the DAX40. Especially in Germany, industrial production and factory orders were announced in a negative area for January. Also, the consumer price index was announced as lower than the markets’ estimations but it’s still at a very high rate. We may try short positions this week.

FTSE100

The British FTSE100 index moved slightly lower in the past week, closing at 7,882 points, with marginal losses of 0.25%. The index managed to break out the all-time high price of 2018, above 7,903 points but the weekly close was below that level. During the current week though, the trend is bullish again and the FTSE100 is already above 7,900 points. We saw a mild correction on Friday, mostly due to the announcements that the UK economy released. The GDP was announced at 0% in the fourth quarter of 2022 and this fact satisfied the markets because at least, it’s not a recession figure. Positive (compared to the markets’ expectations) were the results for industrial & manufacturing production and the trade balance. Many analysts believe that the interest rate hikes by the BoE are over and since the recession scenario has now a smaller chance, the potential is higher. We prefer long positions for one more week.

Gold

Gold was practically unchanged last week, as the next month’s futures closed at $1,876 with no significant changes. Gold is being affected lately by a series of contradicting factors. The strong dollar of the previous week was a bearish factor. The higher bond yields also affected negatively the gold prices since both of these financial instruments are low-risk options and considered to be competitors. Another factor that the gold investors take into account is the behavior of the Fed. Last week there was a hawkish turn, according to Jerome Powell’s words. On the other hand, the negative sentiment of the markets that dominated last week favored safe-haven asset solutions such as gold. The long-term uptrend has not changed so far and each bullish turn may trigger gold to move higher that is why we may try long positions this week.

US Oil

Last week’s oil futures closed at $79.72, with important profits close to 9%. The solid recovery of the Chinese economy is the major reason for this mini-rally. Let’s not forget that China is the biggest oil importer and consumer in the world and lately there was a release from the lockdowns. Also, the fundamentals of China seem very solid as well so the markets anticipate that the oil demand will remain at high levels. On the contrary, the strong US dollar and US oil inventories which rose last week stopped the oil prices from further rise. To make to long story short, the investing community has a very good opinion regarding the demand in China but there’s not much optimism for the rest of the world. Technically speaking, the oil is moving in the zone of $70 – $82.65 for several weeks so we may try short positions this week, considering a possible correction.

EURUSD (Euro vs US Dollar)
Last week was bearish for EURUSD which opened at 1.0783 and closed at 1.0677. The US dollar returned to its strength and caused this drop to the pair. There is a divergence between the US and the Eurozone economy in two aspects. First of all, it seems that the ECB will be more hawkish in the next period as the high inflation insists in the Eurozone. There were some hawkish statements by Jerome Powell last week, but the general perception is that the Fed will not hike the interest rates significantly higher than the current rates. Also, the economic results in the USA are by far more solid than in the Eurozone. The scenario of a recession is much more likely in Eurozone than in the USA. The very strong US labor market that was announced at the beginning of the month, confirms this. Below 1.0650 we may see more bearish trends while it takes a pullback above 1.08 for the recovery case to become stronger. We may try buy positions this week.

GBPUSD (Great Britain Pound – US Dollar)

Slightly bullish was the last week for GBPUSD, which opened at 1.2032 and closed at 1.2056. Although the dollar was strong enough throughout the week, the pair had a strong bullish trend that stopped only on Friday after the release of the economic news in the UK. The last interest rate hike decision by the Bank of England was 0.50% with a 7-2 result in votes but the head of the bank Andrew Bailey said last week that there is a big concern about the inflation persistence and that is why the majority voted for interest rates hike. This statement was interpreted by the markets as a hawkish stance and helped the sterling to recover although, at the beginning of the week, the GBPUSD had dropped below 1.20. Below 1.1960 the bearish scenario prevails but a bullish breakout above 1.22 confirms the recovery attempt. Sell positions is our selection for the current week.

USDJPY (US Dollar – Japanese Yen)

The previous week was slightly bullish for the USDJPY, closing at 131.42, about 25 pips higher than the previous week’s close price. The pair had opened the week with a big gap at 132.42. The exceptional results of the US labor market that were announced on Feb, 03 still were influencing the markets causing this high gap of 125 pips. The only important announcement for the Japanese economy during the last week was the producer price index which was announced at 9.5%, significantly lower than the 10.5% of the previous month. It is another confirmation that the Bank of Japan may carry on with the ultra-loose monetary policy as most of the Japanese central bankers agree. The mild inflationary issue in Japan is a reason to maintain this policy. A possible game changer for the pair is the US inflation announcement on Tuesday and above 133 the bullish scenario becomes stronger. In that case, we may try buy positions this week.

EURJPY (Euro – Japanese Yen)
Last week was bearish for EURJPY which opened at 142.82 and closed at 140.33. The pair has a very big volatility because both the ECB seems active in hiking interest rates again (probably another 0.50% in March) and the Bank of Japan seems stuck to its loose monetary policy. The big fluctuations of the bond yields also play a role in the pair’s high volatility. If the pair stays above 140 and since the perception of the markets is that the ECB will be more hawkish than the BoJ, we may try buy positions this week.

EURGBP (Euro – Great Britain Pound)

Last week was bearish for EURGBP which opened at 0.8957 and closed at 0.8854. The European shared currency is generally strong in the period, as the ECB seems hawkish and most likely will hike the interest rates by another 0.50% in March. Of course, the economy of the Eurozone has serious issues as it is confirmed by the negative economic results. On the other hand, last week the sterling was really strong. The UK economy makes it better than the dark & grim outlook that has been estimated during the summer. Also, Andrew Bailey was hawkish enough in his latest speech, mentioning that the persistence of high inflation should be treated. The bullish trend of the pair though has not changed so far and any possible bullish recovery may bring it back so we prefer buy positions this week.

USDCAD (US Dollar – Canadian Dollar)

Last week was bearish for USDCAD, which opened at 1.3407 and closed at 1.3344. The Canadian dollar was favored by the big rise in the oil prices that we saw last week and by the positive results of the Canadian fundamentals. The net change in unemployment was 150K new job positions which was much higher than the 15K that the markets anticipated. This fact caused a new drop in the unemployment rate to 5%. Although the US dollar was also strong, the pair took a bearish course. This trend could be even sharper but the head of BoC Tiff Macklem sounded dovish in his latest speech. Tiff Macklem said that the interest rate hikes have hit the economy and if the economy develops as expected, no new hikes are needed. The major event of the current week is the US inflation announcement on Tuesday and if the result is a lower inflation rate, we may see the pair dropping even more, maybe to the 1.30 area. We prefer sell positions this week.

USDCHF (US Dollar – Swiss Franc)
The USDCHF was bearish last week, after the open was at 0.9276 and the close at 0.9236. The US dollar was strong enough but this case was not able to drive the pair to higher prices. The reason is that the head of the Swiss National Bank Thomas J. Jordan said that the inflationary pressures are beyond the control and the case of further policy tightening cannot be ruled out. It was the first hawkish statement after many weeks and it makes perfect sense that the Swiss franc got stronger. As per the economic results, the unemployment rate remained unchanged at 1.9% in January so it was ignored by the investors. It takes a solid breakout above 0.93 for the pair to recover its bullish trend and any drop below 0.9160 may cause more bearish pressures. We may try sell positions this week.

AUDUSD (Australian Dollar – US Dollar)

Unchanged was the AUDUSD last week after it opened and closed around the price zone of 0.6920. The strong outlook of the US dollar was balanced by the strength of the Australian dollar. According to the RBA statement, there will be more interest rate hikes in the following months. Most likely, these hikes will take place in March and May. It is a hawkish turn by the RBA which helps the Aussie recover. Other economic news in Australia like retail sales and trade balance had a decent performance but the great comeback of the Chinese economy is the factor that boosts the Australian economy. In the case of the US dollar recovery, we may see new bearish trends so we may try sell positions this week.

Bitcoin

Last week, Bitcoin closed at $21,789 with losses exceeding 5%. The crypto markets followed the trend of the major markets, mostly the technology stock markets. It was not the only reason for this bearish trend though. According to Coindesk, the U.S. Securities and Exchange Commission (SEC) announced charges against crypto exchange Kraken on Thursday, alleging its offering of a crypto staking-as-a-service program amounted to offering unregistered securities products in the U.S. To settle the charges, Kraken is paying $30 million and shutting all of its U.S. staking services. Staking is a major source of profits for crypto investors and this development caused nervousness. Also, many crypto protocols like Cardano and ETH 2.0 are based on the Proof-of-Concept mechanism for mining and the staking shutting down may hurt this industry as well. As the Bitcoin price approaches $20,000 the sentiment becomes more negative so we may try short positions this 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.