20/03/2023

General Comment

There are two major issues that financial markets face currently. These two issues are closely related to each other. The first is central banks’ monetary policy decisions on interest rates to combat the high inflation that seems to persist. The second is the tremors in the banking system since after some mid-sized US banks, the case of Credit Suisse has caused huge concerns since it is clearly a much larger size.

Central banks seem not to have been significantly affected (regarding their decisions) by the banking crisis, and this is evident from the rise the European Central Bank did last week of 0.50% as it had announced for about two months. Christine Lagarde in her speech defended this policy saying that inflation that has been too high for a long time is the number one problem that needs to be addressed. In the United States, things seem to be milder. Until recently there was a high probability of a 0.50% interest rate increase in the meeting next Wednesday but after the recent news, the odds are divided (about 50-50) between 0% and 0.25%. This is also helped by the announcement of inflation that we saw last week, which decreased from 6.4% to 6% in a month.

As far as the banking crisis is concerned, the statements made were reassuring. There was a historic deal to buy Credit Suisse from UBS over the weekend, but it seems markets are not sharing that optimism. The Swiss National Bank provides liquidity in the order of 100 billion francs, Christine Lagarde stressed that the banking system in the Eurozone is strong, but markets are not yet convinced. The main problem focuses on the fact that banks are forced to liquidate bonds that they have bought with low yields and write losses since now the yields are much higher.

In the United States, the equity markets have reacted upward but in Europe, we saw strong corrective pressure. The U.S. dollar lost on the assumption that the Fed would not raise interest rates significantly, while other currencies such as the euro and sterling gained. The commodity market was mixed with gold making huge gains while oil performed very big losses. Bond yields have slipped significantly with the U.S. Treasury currently moving around 3.35%. Finally, cryptocurrencies are going through a very good phase with significant profits and a big rise.

The week that has just begun is particularly important. The decision on interest rates is announced in the United States, the United Kingdom, and Switzerland while China has already announced that it leaves it unchanged at 3.65%. Other major announcements are the inflation in UK, Japan, and Canada.

SP500

With bullish trends, the US SP500 index closed last week, at 3,917 points and profits of 1.40%. It was a mild upward reaction to the big fall that had preceded it, mainly due to markets ‘ perception that the Fed will be forced to be softer on rate hikes than markets had thought a few weeks before. Fear of contagion of the post-Silicon Valley Bank banking crisis is putting Fed policymakers on second thoughts. Positive signs were also on the inflation, which fell in February to 6% from 6.4% in January. The rest of the macroeconomic results announced in the US were decent and so the index found an opportunity to recover. There is uncertainty about the Fed’s interest rate decision next Wednesday where after a long time, opinions differ between 0% and 0.25%. This uncertainty can cause high volatility and given the problem in the banks we may see corrective moves for the index therefore we choose short positions this week.

DAX30

The German DAX40 index was strongly bearish last week, closing at 14,768 points, with losses approaching of 4.30%. Fears of serious problems in the European banking system dominated equity markets on the European continent. There were also hidden hopes that the European Central Bank would not eventually raise interest rates by 0.50%, but those hopes were disproved after Christine Lagarde appeared determined. Germany has had no other major economic announcements in the past week and so these two developments have dominated investors. The current week contains the announcement of the German PMI indicators but it seems that the downward trend continues and so we may try short positions this week.

FTSE100

The British FTSE100 index moved strongly downward last week, closing at 7,335 points, losing more than 5.30%. The British equity market was dominated by fears that a widespread banking crisis could pose a very serious problem. Macroeconomic results in the UK were positive with the unemployment rate remaining unchanged at 3.7%. This week, however, is particularly important for the British market since inflation is announced on Wednesday and the decision on interest rates on Thursday. Market expectations are of a slight decline in inflation and a 0.25% rise in interest rates. However, the climate continues to be negative and so short positions is our selection for the current week.

Gold

The previous week was sharply bullish for gold, with the next month’s futures closing at $1,993 and profits more than 6.50%. It was arguably one of the most sharply upward weeks for gold in recent years. Gold in times of fears and worries like the one we are now experiencing due to an impending banking crisis often acts as a safe-haven asset for too many investors. Gold was also favored by the weakening U.S. dollar. It was able to easily surpass the significant support at $1,975 and at the opening of this week, it is already above $2,000. However, it is not excluded that this huge increase will lead to corrections and so we may select short positions this week.

US Oil

Last week was strongly bearish for oil with next month’s futures closing at $66.34, with losses approaching 13.30%. Oil fell below $ 70 for the first time since late 2021. Fears of a generalized crisis that will hit banks and an upcoming recession that will curb too much oil demand are the main reasons for this price decline. The case for an upcoming recession is bolstered by market expectations of central bank decisions on interest rates. Christine Lagarde started by raising them by 0.50%, showing that the issue of inflation remains the dominant problem to solve. Current price levels are too low and may have created oversold conditions. Therefore, we may choose long positions this week.

EURUSD (Euro vs US Dollar)
Last week was a slightly bullish one for EURUSD which closed at 1.0664, about 30 pips than the close price of the previous week. The European Central Bank raised interest rates by 0.50% and this gave a boost to the euro because several voices were arguing that there will ultimately be no such increase because of the problems that are starting to emerge in the banking industry. On the contrary, the Fed has lowered the bar of interest rate expectations and the most likely scenarios are for a 0.25% increase or even to remain unchanged. Inflation in the Eurozone continues to be at particularly high levels after being announced in February at 8.5%. The rest of the macroeconomic data show soundness with industrial production moving into positive territory. If this situation continues, we may see the upward trend strengthen particularly above 1.0760 and therefore we prefer buy positions this week.

GBPUSD (Great Britain Pound – US Dollar)

Bullish was last week for GBPUSD, which opened at 1.2068 and closed at 1.2176. The weakening of the U.S. dollar had a key role in the exchange rate’s upward trend. Things around sterling remain murky as inflation and interest rate announcements are pending in the week that has just begun. Several analysts thought that interest rates would not rise anymore but expectations for Thursday are talking about a 0.25% increase. Such an increase may also be made by the Fed a day earlier, so we may see the exchange rate take a downward turn. We may try sell positions this week.

USDJPY (US Dollar – Japanese Yen)

USDJPY moved downward last week, opening at 134.50 and closing at 131.83. Although all statements from the Bank of Japan point to the conclusion that a very loose monetary policy is going to continue, the yen has strengthened significantly because it is considered a safe investment solution in times of crises, fears, and worries. The sharp decline in bond yields also played an important role. The current week contains important announcements for both the United States (interest rate decision) and Japan (inflation announcement). These announcements may flip the climate and see an upward reaction for the pair therefore we may try buy positions this week.

EURJPY (Euro – Japanese Yen)
Bearish was last week for EURJPY which opened at 140.79 and closed at 139.39. Although interest rates have been raised by the European Central Bank by 0.50% and loose monetary policy continues in Japan, the exchange rate has fallen significantly, and the reason is great concern that exists in the investment community and that pushes a large portion of investors into safe havens such as the Japanese currency. This week we will see a climate reversal and therefore we will attempt sell positions.

EURGBP (Euro – Great Britain Pound)

Last week was bearish for EURGBP which opened at 0.8835 and closed at 0.8754. Sterling strengthened significantly after now the most likely scenario for Thursday’s decision by the Bank of England is for a 0.25% interest rate hike. Such a scenario had small chances not long ago. So, the recent increase by the European Central Bank of 0.50% was already absorbed by the investment community and did not help the exchange rate rise. If this situation continues, we may see some more corrective pressures and therefore we prefer sell positions this week.

USDCAD (US Dollar – Canadian Dollar)

Bearish was the last week for USDCAD, which opened at 1.3805 and closed at 1.3733. The weakening of the U.S. dollar was the decisive factor that outweighed the large drop in oil prices (usually associated with Canada’s currency) and the Bank of Canada’s recent decision to leave interest rates unchanged. Industrial production and retail sales in Canada fell significantly last month. Last week’s correction may continue, and we shall therefore we may prefer sell positions this week.

USDCHF (US Dollar – Swiss Franc)
The USDCHF had a upward course last week as the opening price was at 0.9193 and the closing price at 0.9257. The big problem that surfaced at the Swiss bank Credit Suisse brought a wind of pessimism about the country’s economy. So, the fall in the US dollar could not be seen at the pair with a downward movement. But given that there is a solution to the problem of the bank, even if it still has not fully convinced the markets, we may see the currency of Switzerland recover and so we may try sell positions this week.

AUDUSD (Australian Dollar – US Dollar)

Bullish was the last week for AUDUSD, which opened at 0.6606 and closed at 0.6695. In addition to the weakening of the US dollar, which helped the exchange rate rise higher, the Australian dollar also had some reasons for strengthening. China continues to perform a very strong economic profile latest announcements in relation to foreign direct investment and retail sales. Australia has also shown a positive picture after unemployment in February fell to 3.5% from 3.7% in March. But it seems that this bullish reaction has no strength to continue and so we may revert to the long-term downward trend. We may try sell positions this week.

Bitcoin

Last week, Bitcoin closed at $28,054 with important profits close to 26.50%. The climate in cryptocurrencies has improved enormously, due to the recent issues of the traditional banking system that pushes many investors to alternatives such as cryptocurrencies. The perception that has dominated markets in recent days that bank interest rates could start falling in the second half of 2023 has also given a tone of optimism regarding the forthcoming liquidity. It is not excluded that we will see the rise widen so we prefer long positions this week too.

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.