05/06/2023

General Comment

Two main issues occupied the financial markets in the past week and caused an upward rally in the last two days. The first issue was the settlement and the resulting agreement on the debt ceiling in the United States. The deal had been looming since last Sunday when there had been a verbal agreement between President Biden and Republican McCarthy. In the early days of the week, there were some consultations and uncertainties but on Thursday the deal was finally passed giving a bullish signal to markets. The final agreement is valid until early 2025.

The other big issue has to do with the announcement of the labor market in the United States on Friday. More specifically, markets expected 190K new jobs in May while the announcement showed that 339K new jobs were finally created. That big difference brought a breath of optimism to markets that continued the rally until the last trading hours of the week.

In addition to these two major issues, the markets ‘ perception of the Fed’s behavior had an important role too. At the beginning of the week, the prevailing scenario is that on June 14 there will be a new increase of 0.25% in interest rates but towards the end of the week the picture was reversed.

Outside the United States, we also had significant developments in the European area. Inflation in the Eurozone decelerated further and ended May at 6.1% from 7% the previous month. Christine Lagarde’s speech at a conference of German banks was also important for the European economy, as she stressed that the issue of high inflation remains on fire and heralded at least two more interest rate hikes.

With this picture we reported, U.S. stock indexes hit new multi-month highs in an environment of positive sentiment. Most European stock indexes also closed positively. Most commodities performed a positive picture, while in the foreign exchange market, the dollar weakened while higher-risk currencies such as the euro, sterling, and the Australian dollar strengthened. We also saw a strong de-escalation in the bond market with the US 10-year bond closing that week in the region of 3.70%. Finally, as far as cryptocurrencies are concerned, they could not follow the course of the rest of the markets, having a declining week.

The current week is a week of waiting for the United States in relation to the Fed’s decision on June 14. The rest of the world is dominated by the announcement of inflation in China on Friday, announcements of retail sales, the producer price index, GDP in the Eurozone, interest rates in Canada and Australia, and PMI indices in most of the world’s economies.

SP500

With bullish trends, the US SP500 index closed last week, at 4,282 points and profits of 1.83%. Last Sunday there was a verbal agreement on the debt ceiling in the United States between President Biden and Republican McCarthy. However, in the first few days of the week, there was uncertainty as this agreement had to be voted on and ratified. As the days went by this uncertainty brought a correction to the markets and the SP500 but on Thursday after the vote, there was a bullish rally of relief. The rally continued on Friday on labor market announcements in the United States as we saw in general comment. So, the index has reached prices we haven’t seen since last August. The current week doesn’t contain many announcements or developments about the U.S. economy, but markets will try to anticipate the Fed’s decision on interest rates on June 14. Therefore, the perception of the markets for this event will affect the SP500 greatly. According to the FedWatch tool, the probability of no hike is currently 78%. There may be a correction after the big rise and therefore we prefer short positions this week.

DAX30

The German DAX40 index was mildly bullish last week, closing at 16,051 points, with profits a bit more than 0.40%. European equity indices were affected by the good news of the United States both in terms of the debt ceiling deal and in terms of the impressive labor market, but it is obvious that they cannot have the same performance since different conditions apply. First of all, Christine Lagarde in a speech to German banks stressed the need for additional actions by the European Central Bank and in essence heralded two new interest rate hikes. This move alone may pressure markets in the future. Moreover, the announcements of the German economy did not bring much optimism. The unemployment rate was unchanged at 5.6% in April while the harmonized consumer price index fell to 6.3% from 7.6%. Retail sales fell by 4.3% in April, year-on-year. Since the DAX40 is close to critical resistance close to 16,300 points we may see corrective trends prevail and therefore we may try short positions this week.

FTSE100

The British FTSE100 index moved slightly downward last week, closing at 7,607 points, dropping about 0.26%. As long as inflationary pressures persist in the UK so the markets ‘ perception of fresh interest rate rises, and quantitative tightening of monetary policy will pressure equity markets. Last week and this week had no major scheduled economic news, so expectations from the Bank of England and analyses of the future of the British economy dominated markets. The index tried in April to exceed the 8,000-point milestone but it seems that it is not ready yet. A sharp correction has followed with six consecutive falling weeks and following this trend, we will choose short positions this week.

Gold

The previous week was slightly bullish for gold, with the next month’s futures closing at $1,952 and profits close to 0.40%. Gold has been bullish throughout the week but on Friday performed a sharp correction due to the strengthening of the U.S. dollar, following the announcement of the labor market in the United States. The rise was driven by concerns about the debt ceiling deal, the weakening dollar, and the increased likelihood of new rate hikes by the Fed. All three conditions changed by the end of the week but the correction in gold was such that it did not prevent the week from having a positive sign. It is not ruled out that markets will follow Friday’s trend for further correction and so we will choose short positions this week.

US Oil

Last week was bearish for oil with the next month’s futures closing at $71.74, with losses approaching 1.30%. The week was split in two for the oil prices with the first half of it there were upward trends but from Thursday onwards there were strong corrective pressures. The debt ceiling deal and a strong labor market picture in the United States helped the market develop confidence that demand will remain high, and so oil from weekly lows close to $67 developed a strong uptrend without covering all losses though. On Sunday there was the meeting of OPEC+ members that markets had been looking forward to. According to Reuters, “Saudi Arabia will make a deep cut to its output in July on top of a broader OPEC+ deal to limit supply into 2024 as the group seeks to boost flagging oil prices. Saudi’s energy ministry said the country’s output would drop to 9 million barrels per day in July from around 10 million barrels per day in May, the biggest reduction in years“. This news caused a sharp rise in the price of oil in the opening week to above $ 74, but as time goes on that gap seems to be catching up. We would prefer long positions this week.

EURUSD (Euro vs US Dollar)
Last week was mildly bearish for EURUSD as it closed at 1.0707, about 20 pips lower than the closing price of the week before. In the first three days of the week, the exchange rate had stabilized, but on Thursday it was particularly buoyed by an improvement in investment sentiment around the world as a result of the debt deal in the United States. Improved sentiment typically favors higher-risk currencies such as the euro relative to the U.S. dollar. On Friday, however, things changed dramatically after the very strong labor market picture in the United States boosted the dollar, and so the week ended with small losses for the exchange rate. Apart from the two dominant Eurozone news stories last week that we saw in the general commentary (inflation at 6.1% and Christine Lagarde’s announcement of new interest rate hikes), the rest of the Eurozone news was not particularly positive. Manufacturing, as expressed by the PMI indicator, continues to be under pressure while industrial production fell by 5.2% in May. The euro this week will have a dominant role in the EURUSD due to the lack of announcements in the United States and the several announcements in the Eurozone: PMIs, retail sales, GDP, and producer price index. We may try buy positions this week.

GBPUSD (Great Britain Pound – US Dollar)

Bullish was the last week for GBPUSD, which opened at 1.2333 and closed at 1.2448. The exchange rate had been on an upward trend throughout the week, so the strengthening of the dollar on Friday, which triggered a correction to GBPUSD, was not able to reverse the positive sign. On Wednesday, Catherine Mann, a policymaker of the Bank of England, said more needed to be done when it comes to interest rates in the UK. It was clearly something that helped sterling. Markets ‘ perception of the Fed’s actions had reversed course since they started with the impression that on June 14 there would be an increase in the interest rate while towards the end of the week, the dominant scenario was that there would not be one. This Fed decision in about 10 days is crucial for all exchange rates containing the US dollar. We prefer buy positions for one more week.

USDJPY (US Dollar – Japanese Yen)

USDJPY moved downward last week, opening at 140.56 and closing at 139.93. In the whole week, there was a downtrend for the exchange rate but on Friday with the impressive strengthening of the U.S. dollar, due to the NFPs, the losses were mitigated. A bearish factor was indeed the decline in the bond yields. The macroeconomic picture of Japan’s economy is positive. Unemployment fell in April to 2.6%, from 2.8% in March. Also, there are stabilizing trends in industrial production as the climate improves and losses are balanced. Finally, the PMI indicator for manufacturing is consistently above 50, indicating there is expansion. An important announcement for next week is Japan’s GDP will also show the state of the economy and will probably be an indication of the Bank of Japan’s stance in the future. We may try buy positions this week.

EURJPY (Euro – Japanese Yen)
Bearish was last week for EURJPY which opened at 150.57 and closed at 149.86. The euro was unable to strengthen itself even if Christine Lagarde announced further interest rate hikes in the near future. Japan’s good macroeconomic picture, combined with market expectations that a very loose monetary policy will one day end, boosts the yen. Another factor in the bearish course of the EURJPY was the de-escalation in European bond yields strongly related to the exchange rate. Sell positions is our selection for the current week.

EURGBP (Euro – Great Britain Pound)

Last week was bearish for EURGBP, as it opened at 0.8678 and closed at 0.8599. The British pound was among the big winners of the past week, while the euro was unable to gain strength. Markets seem to be more convinced by the Bank of England’s determination to raise interest rates further than the European Central Bank. The macroeconomic picture of the Eurozone has also been problematic lately. Since the pair is in a balance during the last months, we may try buy positions this week.

USDCAD (US Dollar – Canadian Dollar)

Bearish was the last week for USDCAD, which opened at 1.3607 and closed at 1.3477. The USDCAD during the week was sharply bearish, and the strengthening of the U.S. dollar on Friday was unable to reverse the situation. The rally in oil prices from midweek onwards helped the Canadian dollar significantly. The strong macroeconomic picture of Canada’s economy also played an important role: the country’s GDP in the first quarter of the year grew strongly by 3.1%, well above market expectations showing that the country has not been affected by recessionary pressures due to recent interest rate hikes. OPEC’s production cut announcement over the weekend may push oil prices even higher and so we may try sell positions this week.

USDCHF (US Dollar – Swiss Franc)
The USDCHF had an upward course last week as the opening price was at 0.9052 and the closing price was at 0.9088.  It was the fourth bullish week in a row for the exchange rate not so much because of the U.S. dollar but rather of the weakness of the Swiss franc after very low inflation was announced in the country and giving the impression to markets that new interest rate hikes by the Swiss National Bank are no longer needed. The country’s macroeconomic picture was mixed based on last week’s results. The GDP rose in the first quarter by 0.3%, slightly above market estimates but the KOF indicator, retail sales, trade balance, and PMI all performed below expected. Under these circumstances, the upward trend may continue, and therefore we may try buy positions this week.

AUDUSD (Australian Dollar – US Dollar)

Bullish was the last week for AUDUSD, which opened at 0.6519 and closed at 0.6605. It was a clear upward week for the exchange rate since apart from Friday, the US dollar was weak, and the Australian dollar also had reasons for strengthening. Reserve Bank of Australia chief Philip Lowe said on Wednesday: “Will do what is necessary to make sure inflation comes back to its target range in the next few years”. It was clearly a bullish sign for the Australian dollar. The economic announcements from Australia mainly related to the PMI index were positive while some turbulence in manufacturing in China appeared but normalized on Thursday after the Caixin PMI index for manufacturing was announced in China above 50. It is not excluded that the upward reaction will continue and therefore we may try buy positions this week.

Bitcoin

Last week, Bitcoin was bearish and closed at $27,125 with losses close to 3.40%. Bitcoin was unable to take advantage of the strong rally in traditional markets since Thursday, even though investor sentiment improved markedly and investors could opt for higher-risk solutions such as cryptos. There are some rumors about the regulation of the cryptocurrency market in the United States that could raise some concerns, but we think the problem is deeper. Cryptocurrencies had developed a strong correlation with traditional markets, and especially with the tech industry like the NASDAQ index. It seems that this correlation is starting to weaken: the NASDAQ index is at multi-month highs, but Bitcoin continues to weaken. At the opening of this week, it has already been below $27K, and if this trend continues it could threaten support at $25,800. 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.