13/03/2023

General Comment

Jerome Powell’s speech during his regular biannual testimony to the U.S. Congress was the factor that affected markets more than anything else in the past week. The Fed chief said there would need to be new rate hikes, perhaps at a higher pace, to address the severe inflation problem and that the cost of raising rates would be less than the cost of not controlling inflation.

Market reactions were immediate. stock indexes suffered a big correction, the U.S. dollar began strengthening and bond yields posted an upward rally. In particular, the US 2-year bond exceeded 5%, increasing its divergence from the 10-year, which shows the negative investor sentiment that dominates. As a result of all of the above, the probability of a 0.50% rise in interest rates next week has now approached 70%.

The negative sentiment could not be reversed even with the announcement of the United States labor market (NFPs) which had a positive effect. Markets expected 205K new jobs to be created in February, and the announcement showed that 311K jobs were eventually created. This confirms once again that despite the negative thoughts and nervousness of the markets, the macroeconomic results are still decent.

Things got worse after the announcement of the SVB collapse. Silicon Valley Bank, which funds tech start-ups, has disrupted markets by hurting bank stocks after announcing major losses from a bond sale it was forced to make to cover deposit withdrawals from firms with financial difficulties. US Treasury Secretary Janet Yellen said there are a few banks she is watching closely as the SVB crisis has caused panic in markets. Regulators had been searching all weekend for prospective buyers in order to keep the bank running and save its customers ‘ deposits. The Federal Deposit Insurance Agency (FDIC) has already started the auction process, as the Wall Street Journal reported, citing well-informed sources. The news was confirmed by Finance Ministry officials to MPs, according to the same sources. US Treasury Secretary Janet Yellen had made clear that there was no case for a state bailout like the ones we saw in 2008.

As far as the European continent is concerned, the situation is gradually starting to deteriorate, as shown by the macroeconomic results. Retail sales in the Eurozone fell in February by 2.3% while GDP in the fourth quarter of 2002 remained unchanged, with a 0% change from the previous quarter.

In the rest of the world, all the lights have fallen on China and its post-lockdown recovery from the pandemic. It seems that this recovery is based on solid foundations, as at least the results announced by China show. Inflation has fallen to 1%, the trade balance in February soared above $ 116 billion, while lending also rose to very high levels.

By reviewing all of the above, we will see a rare phenomenon. The U.S. stock markets, and the U.S. dollar fell at the same time. It is a state of nervousness and worries as well as a belief that inflationary trends persist. Commodity markets were mixed with gold strengthening but oil weakening and finally, the cryptocurrency market had strong corrective tendencies as well.

In this climate of uncertainty, a week of important news and announcements began. Of course, the announcement of inflation in the United States on Tuesday stands out, followed by the Eurozone, which on Thursday announces its decision on interest rates and Friday announces inflation. Second of importance are announcements on retail sales in the United States and China, unemployment in Kingdom County, and the Michigan Consumer Sentiment Index.

SP500

With bearish trends, the US SP500 index closed last week, at 3,862 points and losses more than 4.50%. Powell’s speech in Congress causes serious concerns to the markets. Powell said that the inflationary issues are still very serious and that there may be an increasing pace on the next interest rate hikes. Markets reacted almost immediately with heavy losses due to the perception of higher interest rates that could cause extra growth slowing or even a recession. Also, the bad news from SVB added new concerns and fears because markets were afraid of a domino effect in the banking and/or financial sector with many similarities with the 2008 crisis. Both of those events caused a big correction to SP500, one of the biggest during the last months. There were also certain fears that the market opening of the current week could be a scary movie with even higher losses but for the moment this scenario has not been confirmed as the futures of SP500 are in profit. Critical is the CPI (inflation) announcement on Tuesday but despite the positive climate at the beginning of the current week, the problems are still there so we may try sell positions.

DAX30

The German DAX40 index was bearish last week, closing at 15,428 points, with losses close to 1%. The general market mood was negative so the European stock markets got affected as well. News from the US and the possible monetary tightening after Powell’s speech, combined with the fears that the collapse of SVB caused was enough to cause a correction. DAX40 had milder losses though because of the perception of the investors regarding the next steps of the Fed and ECB. Fed has already higher interest rates and it seems ECB will not reach such a height, even if a 0.50% hike has been announced in advance several times. It would mean that European stocks could be more attractive in an environment of lower money costs. The macros in Eurozone and Germany are in negative territory and this would not leave much room for ECB to become very aggressive. Retail sales in Germany dropped by 6.9% in February and industrial production along with the factory orders had worse results compared to the previous month. We prefer short positions for one more week.

FTSE100

The British FTSE100 index moved downward last week, closing at 7,748 points, losing more than 2.50%. FTSE100 performed serious losses after Powell’s speech. There is a higher probability of new & large interest rate hikes by the Fed and as a fact would affect the global economy. The fears caused by the SVB collapse accelerated the losses and the index had two-day losses (Thursday – Friday) that we had not seen for several months. Last Friday was a day of many announcements for the UK economy. Industrial production and manufacturing had bad results but the trade balance was above markets’ expectations.  The key announcement though was the GDP for the 4th quarter of 2022 which was increased by 0.3% vs 0.1% that markets estimated. A better situation in the economy leaves extra room for the Bank of England to apply more interest rate hikes and this is what the markets are afraid of. Given the significance of the announcements of the US inflation and the UK unemployment rate, we may try short positions this week.

Gold

The previous week was bullish for gold, with the next month’s futures closing at $1,871 and profits close to 0.50%. Gold had losses at the beginning of the week but the risk-off mood that prevailed after Powell’s speech favored safe-haven assets. Another reason for gold’s recovery was the weakening of the US dollar. The US macros as released by the NFPs (new job positions) were decent enough to support the scenario of higher interest rate hikes by the Fed. Another factor that strengthened the gold prices was the sharp de-escalation of the bond yields. Bond yields many times are a competitor asset to gold amongst investors who are looking for safe investing options. A very critical factor for all asset classes & commodities will be the US inflation announcement on Tuesday. If gold is able to surpass the resistance of $1,883, the bullish trend may become even stronger so we may try long positions this week.

US Oil

Last week was strongly bearish for oil with next month’s futures closing at $76.61, with losses more than 4%. The oil prices during the last period are in a balance that has caused a tight price range between $70 and $80. Since the production (supply) has not changed recently and according to OPEC is not going to change soon, the whole story has to do with the demand. The demand is higher in China in the post-lockdown era. China is the biggest oil consumer in the world and it shows strong signs of economic recovery. On the other hand, the rest of the world, including the US and Europe is in growth slowing that may turn into a recession and so it makes sense that the demand would lower. Last week though, after Powell’s speech and SVB the fears became stronger and the markers are afraid of a recession even more. We may try short positions in the current week.

EURUSD (Euro vs US Dollar)
Last week was a slightly bullish one for EURUSD which opened at 1.0623 and closed at 1.0638. The U.S. dollar strengthened sharply on Tuesday after Jerome Powell testified to Congress that monetary policy needed to tighten further and that a higher pace of interest rate hikes might be necessary. So EURUSD fell to 1.0525, a price we haven’t seen since mid-January. But then there was a bullish reaction, not only because the U.S. dollar was under pressure but also because the euro strengthened. The announcement of the strong labor market in the United States through initial jobless claims on Thursday and new jobs I(NFPs) on Friday weakened the dollar and brought back to the fore the possibility of a 0.25% rate hike in the Fed’s next decision. On the other hand, the decision on interest rates by the European Central Bank next Thursday with a high probability of a 0.50% increase, boosted the euro. This week is likely to see higher volatility, as the announcements of inflation in the US on Tuesday, interest rates on Thursday, and inflation on Friday in the Eurozone are significant. Interest rates in the United States will also be announced next week and markets get ready for it as well. If the recovery we have seen since Thursday continues above 1.07, the upside scenario prevails but if the announcements strengthen the dollar and the exchange rate goes below 1.0520, we may see further losses. We prefer buy positions this week.

GBPUSD (Great Britain Pound – US Dollar)

Unchanged was last week for GBPUSD, which opened and closed around 1.2030 – 1.2040. The week was divided into two phases, the first phase until Tuesday when the dollar strengthened significantly after Powell’s testimony to the U.S. Congress, and the phase from Thursday onwards where we saw the U.S. dollar decline significantly. The dollar has been moving for the past week based on markets ‘ perception of the interest rate decision to be made by the Fed on March 22. Before Powell’s speech to Congress, the probability of a 0.25% increase was very high, but from then on, a higher probability is the scenario of a 0.50% increase. In the UK, the country’s improved GDP announced last Friday probably leaves room for the Bank of England to fight inflation through interest rate hikes. This perception makes the sterling stronger. Next Tuesday is the most critical day for the exchange rate because it is announced in addition to inflation in the United States, and the unemployment rate in the United Kingdom. If the exchange rate gets below 1.20 again, we may see the downward trends dominate and therefore we will prefer sell positions this week.

USDJPY (US Dollar – Japanese Yen)

USDJPY moved downward last week, opening at 135.98 and closing at 135.07. The dollar, which had a phase of strengthening until Tuesday and weakening from then on, was a decisive factor in the trend of the exchange rate. Bond yields had the same picture with the U.S. 10-year moving above 4% during the week but on Friday it de-escalated sharply and closed at 3.70%. This was another bearish factor for the pair. Added to all this was Hirohiko Kuroda’s last speech at the Bank of Japan. Kuroda defended Japan’s loose monetary policy for a long period, saying the benefits to economic growth were great without putting heavy pressure on prices. He did not hesitate to mention that more quantitative easing could be implemented if needed. Such statements would logically weaken the yen too much, but the dollar and bond yields dominate the exchange rate at this time. Any new strengthening of the US dollar could drive the exchange rate higher, and that rise may accelerate if there is an upward split in resistance to 137.90 so we may try buy positions this week.

EURJPY (Euro – Japanese Yen)
Bearish was last week for EURJPY which opened at 144.45 and closed at 143.68. The particularities of the euro and the yen would normally favor the pair’s bullish trend. Eurozone will have (most likely) a 0.50% interest rate hike on Thursday and according to future data, we may see more hikes by the ECB. Japan left the interest rates unchanged in the negative area of -0.1% and Kuroda in his last speech underlined that the loose monetary policy has helped the economy and that extra easing may be applied if needed. The normal behavior for the EURJPY should be the uptrend scenario but the most critical factor which is the bond yields caused a downtrend. The European bond yields dropped sharply. Indicative is the German 10-year bond yield which opened the week at 2.67% and it is currently at 2.30%. The interest rates decision by the ECB and the inflation announcement in the Eurozone area may change things though, so we prefer buy positions this week.

EURGBP (Euro – Great Britain Pound)

Last week was bullish for EURGBP which opened at 0.8821 and closed at 0.8840. Both central banks (ECB and BoE) are ready to apply interest rate hikes as inflation remains at very high levels. Eurozone, according to all data and statements, will do it on Thursday and it will be a hike of 0.50%. The Bank of England has a higher probability to also increase the interest rates, after the UK GDP announcement on Friday. GDP was surprisingly good and a stronger economy leaves more room for interest rate hikes. If markets digest the hike from the ECB and if Christine Lagarde is not able to convince the markets, we may have a bearish turn for EURGBP so we may try sell positions this week.

USDCAD (US Dollar – Canadian Dollar)

Strongly bullish was the last week for USDCAD, which opened at 1.3599 and closed at 1.3823. The USDCAD ignored the weakness of the US dollar and it had a very strong uptrend, based on two factors: oil prices and Canadian economy developments. The oil prices had a significant correction of 4% last week and in such cases, most of the time the Canadian dollar suffers losses. The very important reason for the CAD’s weakness though was the interest rates decision from the Bank of Canada on Wednesday. In a time that almost all the major central banks do or plan to do interest rate hikes, the Bank of Canada left the rates unchanged at 4.5%. Bank of Canada Senior Deputy Governor Carolyn Rogers said “we decided to leave the policy rate at its current level of 4.50%.  It’s a conditional pause, though. If economic developments unfold as we projected and inflation comes down as quickly, then we shouldn’t need to raise rates further”. The currency of Canada had serious losses after this. In the current week, things may be much different and if the US inflation announcement on Tuesday allows it, we may try sell positions this week.

USDCHF (US Dollar – Swiss Franc)
The USDCHF had a strong downward course last week as the opening price was at 0.9359 and the closing price at 0.9212. The US dollar was weak and helped the pair’s bearish trend but not weak enough to justify such a drop. Since the market mood turned into a risk-off condition, safe-haven currencies like the CHF were favored. Also, Switzerland announced the inflation for February at 3.4%, significantly higher than the markets’ consensus of 2.9%. It gives the impression to the investing community that the Swiss National Bank may think of new interest rate hikes to fight the higher inflation. If this perception carries on, we may see further bearish trends so we may try sell positions for one more week.

AUDUSD (Australian Dollar – US Dollar)

Strongly bearish was the last week for AUDUSD, which opened at 0.6744 and closed at 0.6581. The pair could not take advantage of the US dollar’s weakness. The Reserve Bank of Australia increased the interest rates by 0.25%, from 3.35% to 3.60% on Tuesday. At the same time, the expectation for the Fed’s decision next week is for a 0.50% hike and this fact itself creates a divergence. Reserve Bank of Australia’s governor, Phillip Lowe said on Wednesday that the central bank is close to pausing interest rate increases as the common belief is that inflation has reached its peak. He also added that recent rate increases have moved monetary policy into restrictive territory. These statements were clearly in the dovish direction and that is why the Aussie became so weak. Two factors may reverse things:  the further weakening of the US dollar, especially after the inflation announcement, and the great recovery of China that will help the Australian economy. We may try buy positions this week.

Bitcoin

Last week, Bitcoin closed at $22,183 with losses close to 1.10%. The losses were much bigger during the week but Bitcoin had an uptrend rally during the weekend. Bitcoin and most of the cryptos were strongly affected by Powell’s speech regarding a higher pace of interest rate hikes and by the SVB collapse. The strongly negative investing sentiment prevailed and hurt the risky investing options like cryptos to a great degree. During the weekend, there were statements and opinions that SVB will not be a great danger to the financial and banking system and the crypto markets which are exceptionally open on Saturday & Sunday had a strong uptrend rally. This rally was carried on during the first hours of the current week, leading Bitcoin to the price area of $22,800 but negativity returned and currently, the price of Bitcoin has dropped to $22,180. 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.