19/06/2023

General Comment

The impact on markets was positive after an important week that included announcements by the world’s main central banks as well as inflation announcements. Last Wednesday, the Fed left interest rates unchanged in the United States, something that had been expected in recent days as the probability of doing so had risen to 95%. Jerome Powell appeared optimistic that the measures being taken would eventually combat inflation and left the window open for possible new rate hikes at the next central bank meetings. The de-escalation in inflation had been confirmed the day before after it was announced that in May inflation de-escalated further to 5.3% from April’s 5.5%.

The next day it was the turn of the European Central Bank. The ECB raised interest rates by 0.25%, leaving hints of further increases. Central Bank chief Christine Lagarde confirmed hawkish policy saying there was still a long way to go with action and that it’s not still the time for pausing the rate hikes.

The third big central bank that made decisions on interest rates and monetary policy last week was the Bank of Japan. The BoJ left interest rates once again unchanged at a negative value of -0.1% and based on the press conference and statements, no change to this is forecast in the near future.

With all this, the markets have become convinced that the global economy is not in danger of a severe recession and that the growth path will continue. This was reflected in the reactions of the markets. Equity indices in the world’s main economies ticked up while in the United States, it could even be described as an upward rally. The U.S. dollar continued to lose for the third week in a row, while higher-risk currencies such as the euro and sterling rose significantly. In the world of commodities, there were no big fluctuations, and the sign was mixed as we will see below. Regarding the bond markets, the situation did not change significantly with the U.S. 10-year closing the week in the region of 3.77%. The cryptocurrency market also reacted positively with Bitcoin moving up after two weeks of downward trends.

The current week is clearly calmer without that meaning there will be no increased volatility. Two other major central banks are announcing their decision on interest rates. it’s the People’s Bank of China on Tuesday and the Bank of England on Thursday. Fed chief Jerome Powell’s testimony to Congress, inflation announcements in the United Kingdom and Japan, and PMI indices in the world’s major economies are also important. The current Monday is a United States public holiday (Juneteenth).

SP500

With bullish trends, the US SP500 index closed last week, at 4,410 points and profits close to 2.60%. The last time that we saw such a high price for SP500 was in April of 2022. It’s more than obvious that there’s a strong uptrend during the last months: the last 5 weeks were all bullish and from the beginning of March there were only 3 bearish weeks. The lower inflation (5.3% in May) that was announced on Tuesday gave a first boost to the index. The next day, the FOMC was hawkish enough, preluding one or two more interest rate hikes in the next Fed’s sessions but the SP500 had again a positive day as the markets are not afraid of the high-rate consequences anymore. Thursday confirmed the uptrend and only on Friday there was a mild correction as a result of a possible profit-taking. US macros had generally a positive sign: retail sales rose in May by 0.3% and the Michigan consumer sentiment index was announced at impressively high levels, 63.9 vs 59.2 of the previous month. Technically, the next major resistance is at 4,637 points but we may see many ups and downs until then, especially when profit-taking conditions are favored. We may try short positions this week.

DAX30

The German DAX40 index was mildly bullish last week, closing at 16,358 points, with profits a bit more than 2.55%. It was a strong bullish reaction after a period of three weeks of corrective pressures, as DAX40 was aligned with the rest of the major indices worldwide and especially with the US ones. This reaction was enough for the DAX40 to perform at a new all-time high price. Although there was a new hike in interest rates from the ECB on Thursday and potentially, we could see more hikes until the end of the year, European markets do not worry that much because they believe that the rate cycle won’t last as long as initially was expected. Another reason is that the higher rates and the monetary tightening have not produced a heavy recession as many analysts estimated.  Inflation in Germany dropped further to 6.1%, the economic sentiment improved and the wholesale price index was negative in May. We cannot exclude the case that in all-time high prices, some profit takers will appear so we could try short positions this week.

FTSE100

The British FTSE100 index moved upward last week, closing at 7,643 points, with profits of 1.07%. It was the first serious bullish reaction after the sharp downtrend that we saw during the last two months as the FTSE100 was favored by the global positive investing sentiment. It seems though that it underperformed other major indices like the SP500 and the DAX40. It’s maybe because the high inflation in the UK creates high expectations of further monetary tightening and more interest rate hikes. The inflation in the UK is going to be announced on Wednesday and markets expect just a mild de-escalation from 8.7% to 8.5%. As we see, inflationary rates are still much higher than the US and the Eurozone ones. A new 0.25% hike is expected by the Bank of England on Thursday but most likely more hikes are yet to come. We prefer short positions for the current week.

Gold

The previous week was slightly bearish for gold, with the next month’s futures closing at $1,970 and losses close to 0.30%. Gold was unable to take advantage of the new losses of the US dollar. Most likely, the markets focused on the press conference that followed the FOMC on Wednesday. Jerome Powell underlined at this press conference that inflation is dropping as a result of the Fed’s actions regarding interest rates and monetary policy. The equity markets are also aligned with this conviction by performing a bullish rally during the last weeks. It means that gold starts losing its hedging role as a counterweight to high inflationary pressures and it’s visible on its price action as it has formatted a downtrend since the end of April. Since the Fed seems determined to one or two more interest rate hikes, markets prejudge to some extent the end of the inflation problems, at least in the USA. By expecting that the gold downtrend will continue, we may try short positions for one more week.

US Oil

Last week was bullish for oil with the next month’s futures closing at $71.39, with profits of more than 6.10%. There were many reasons for this upward price rally. First of all, there was a demand surprising news from China as there was a significant increase in oil refinery throughput by 15.4% in May. China is the number one oil consumer in the world and every change in demand affects the prices. Secondly, the US dollar which was weak, mostly due to the unchanged interest rates of the FOMC, also favored the rise of oil prices. Finally, the positive market sentiment and the perception that a heavy recession is not a possibility anymore, create new expectations for higher demand globally.  Above $72, we may an acceleration on the bullish trend which may bring the prices to the area of $75 that is why we’re keen to try long positions this week.

EURUSD (Euro vs US Dollar)
Last week was strongly bullish for EURUSD as it opened at 1.0744 and closed at 1.0941. It was the most significant and biggest rise for the pair on a weekly level since last November. This was the result of central bank decisions, subsequent press conferences, and inflation announcements. The Fed’s decision to leave interest rates unchanged weakened the U.S. dollar a lot, even though in the press conference that followed Robert Powell hinted that there would be new rate hikes at upcoming meetings. By contrast, the European Central Bank raised interest rates by 0.25% while Christine Lagarde was clearer that this path would continue for some time to come. Inflation continued to de-escalate in both the United States (5.3% in May) and the Eurozone (6.1% in the same month) but the important thing was that international investment sentiment strengthened significantly after central bankers ‘ statements were deemed reassuring, significantly reducing the likelihood of a recession or other problems in the global economy. The exchange rate has reached very close to 1.10 and if it exceeds these levels, it may continue upward therefore, we will choose buy positions this week.

GBPUSD (Great Britain Pound – US Dollar)

Bullish was the last week for GBPUSD, which opened at 1.2552 and closed at 1.2822. With this upward movement, the exchange rate has managed to reach price levels that we have not seen since April 2022. It is the continued weakness of the U.S. dollar after the Fed stopped raising interest rates and the strengthening of sterling that are contributing to this outcome. The macroeconomic results announced for the UK last week can be judged as encouraging. The unemployment rate was announced at 3.8% in May, down marginally from April’s 3.9%. The country’s GDP for April also increased by 0.2%. There was a slight fall in industrial production and manufacturing, but the trade balance was again announced above market expectations. But the main factor for sterling’s strengthening is market expectations that the Bank of England will raise interest rates further. This is expected to be announced next Thursday and on Wednesday the inflation announcement will show whether this is necessary and whether it will continue. GBPUSD has room for further ascent at least to 1.30 and so we will choose buy positions this week.

USDJPY (US Dollar – Japanese Yen)

USDJPY moved upward last week, opening at 139.31 and closing at 141.86. The exchange rate managed to get back above 140 even though the U.S. dollar performed losses last week. Also, the small rise in bond yields does not justify this big upward move. It means that the main reason has to do with the weakening of the Japanese currency following the Bank of Japan’s new decision to leave interest rates unchanged once again at -0.1%. Bank of Japan Chief Ueda, in the press conference that followed, confirmed that this policy will not change anytime soon, and admitted that the yen is weak, stressing that this has both positive and negative effects on Japan’s economy. The statement that made sense, however, was that “the BoJ will patiently maintain the easy monetary policy as there is still a distance to go to stable 2% inflation”. It was a very sharp rise of the USDJPY and although the Japanese currency is not expected to strengthen soon, we may see bearish reactions so we may try sell positions this week.

EURJPY (Euro – Japanese Yen)
Heavily bullish was last week for EURJPY which opened at 149.73 and closed at 155.17. It was one of the biggest bullish movements for the exchange rate in recent years on a weekly basis, as the euro appeared particularly favored and the Japanese yen plunged into a path of great weakness. The European Central Bank raising interest rates again and leaving spikes for new increases in the near future gave a big boost to the euro. In contrast, the Japanese currency after the Bank of Japan’s decision to leave interest rates unchanged lost a significant part of its value. Given that the EURJPY is at its highest price since 2008, a pullback cannot be ruled out so we may try sell positions this week.

EURGBP (Euro – Great Britain Pound)

Last week was slightly bearish for the EURGBP, as it opened at 0.8536 and closed at 0.8531. The balance between the two currencies, the euro, and sterling, was evident last week after both strengthened. The euro was boosted by the European Central Bank’s decision to raise interest rates by 0.25% and expectations of new increases, but the sterling was also boosted by similar expectations from the Bank of England, especially as inflation in the UK remains very high.  Both currencies were also favored by the improved investing sentiment. Technically speaking, the exchange rate does not seem to be able at the moment to go away from the technical support of 0.8550 and therefore we will choose an upward reaction and buy positions this week.

USDCAD (US Dollar – Canadian Dollar)

Bearish was the last week for USDCAD, which opened at 1.3330 and closed at 1.3197. It was the third bullish week in a row for the exchange rate, a situation that mainly reflects the weakness of the U.S. dollar following the Fed’s decision to leave interest rates unchanged in the United States. There were no major announcements for Canada’s economy, but a favorable factor for the Canadian dollar was rising oil prices. This week in addition to developments in the United States, in the wake of the Fed’s decision and with Jerome Powell’s testimony to the U.S. Congress, there is a retail sales announcement in Canada that will show the state of the economy to some extent. We may try buy positions this week.

USDCHF (US Dollar – Swiss Franc)
The USDCHF had a downward course last week as the opening price was at 0.9012 and the closing price was at 0.8936.  After the upward reaction in the recent period, the exchange rate started again on its downward course mainly due to the weakening of the dollar. So, it found itself again below the significant price zone of 0.90, and this drop would probably have been even greater if the Swiss franc had had reasons to strengthen. The low inflation in Switzerland was confirmed last week as well by the producer price index, which was in negative territory, and it prevents possible thoughts for an interest rate increase by the Bank of Switzerland. However, the weak US dollar is enough to continue the downtrend and therefore we may try sell positions this week.

AUDUSD (Australian Dollar – US Dollar)

Bullish was the last week for AUDUSD, which opened at 0.6733 and closed at 0.6870. The weakened U.S. dollar and investor sentiment continuing to improve were key factors contributing to the exchange rate’s rise for the third week in a row. Also, the recent rate hike by the Bank of Australia came in contrast with the Fed’s decision to unchanged rates. Australia’s economy continues to perform impressively. The unemployment rate fell to 3.6% in May while employment had a strikingly positive balance with 76,000 new jobs. As for China, its economy is still below expectations, but that doesn’t mean it isn’t positive: industrial production grew by 3.5% and retail sales growth approaching 14%. The first occurrence of resistance in case of continuation of the upward course is at 0.70 and we may test it by trying buy positions this week.

Bitcoin

Last week, Bitcoin was bullish and closed at $26,340 with profits close to 1.55%. Although the week started with heavy pressures and on Wednesday Bitcoin dropped below $25K, there was a strong bullish reaction in the next two days and a sideways trend during the weekend. The cryptos ecosystem was very much affected by the improved market sentiment after the lower inflation in the US and the decision of the Fed for unchanged interest rates. Currently, the probability of a heavy recession is very low so instruments of higher risk such as the cryptos are favored. Also, low Bitcoin prices (below $25K) caused a new wave of buyers to appear, considering that this could be an opportunity. Some good news occurred for the latest regulatory issues of the SEC too. BlackRock, which is the biggest asset manager in the world, applied to SEC, by asking the Bitcoin ETF to be listed and traded on the Nasdaq stock exchange. Many analysts consider that this action is testing the SEC as it is a serious attempt of convincing them why the Bitcoin ETF should be approved. The breaking of the uptrend during the weekend though, brings new concerns that this could be a temporary bullish reaction 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.