26/06/2023

General Comment

The statements of Jerome Powell, head of the Fed in the United States, during his semi-annual testimony to Congress on monetary policy, caused concern in the financial markets. More specifically, Jerome Powell appeared hawkish announcing two more interest rate hikes in the near future. He also emphasized that inflation remains at very high levels and that the effort to combat must be intensified, while he almost ruled out reducing interest rates this year. However, he reiterated that the economy remains strong in many macroeconomic indicators, including the labor market. These statements brought turmoil in the markets and thus stock indices in the USA had a correction while the European indices followed with corresponding reductions.

We also had important developments in the rest of the economies, such as the United Kingdom with an increase in interest rates by the Bank of England as we will see below. We also saw an increase in interest rates from the Swiss National Bank.

In Eurozone, the situation remains more or less the same as on Friday the mood turned more negative after the announcement of PMI indicators, below market expectations.

As per the non-financial developments, the global community became alarmed during the weekend. The Wagner private military company initiated a rebellion against the government of Russia which could lead even to a civil war. This crisis ended very soon though, due to the intervention of Belarusian President Alexander Lukashenko who spoke to Prigozhin at Putin’s request, brokering a settlement in which Wagner fighters agreed to halt their advance and return to their base in exchange for a guarantee of their safety.

 The US dollar strengthened amid the climate we described above while other higher risk currencies such as the euro fell. Major commodities such as gold and oil also fell. The bond market had low volatility with the US 10-year bond remaining almost unchanged and closing the week in the region of 3.74%. However, the rise of most cryptocurrencies has been remarkable, with Bitcoin above $30,000 after quite some time.

The week just started is more interesting in terms of news, announcements, and macroeconomic results. On Thursday the United States announces GDP for the first quarter of the year and on Friday the Eurozone announces May inflation. Other important news are durable goods orders and personal consumption expenditures in the US, retail sales and unemployment rate in Germany, GDP in the UK, and inflation in Canada, Australia, and Japan.

SP500

With bearish trends, the US SP500 index closed last week, at 4,348 points, and loss of 1.40%. The central event that defined the markets was the testimony of Jerome Powell to the US Congress at the semiannual monetary policy report. Jerome Powell was hawkish enough by saying that most central bank officials expect rates to rise further. It was a mini surprise after the hike paused in June but this decision was not the end of the war over inflation. Instead, moving more gradually will give policymakers time to assess how well higher rates are working to slow the economy. In any case, markets reacted negatively. Things got worse after some negative macro results as well. Initial jobless claims and PMIs (composite and manufacturing) were all announced below markets’ expectations. Actually, it was the first correction of SP500 after five consecutive bullish weeks and maybe the trend will prevail this week and that is why we’re keen to try long positions.

DAX30

The German DAX40 index was strongly bearish last week, closing at 15,830 points, with losses of a bit more than 3.20%. It was the heaviest correction for DAX40 of the last three months, on a weekly basis. First of all, the investing sentiment turned negative after Powell testified before Congress, with a hawkish stance that fired some new concerns about a global recession. During the last months, there is a strong correlation between the US stock indices and the European ones. Secondly, the macroeconomic results in Germany were not positive at all: all PMIs were well below what markets expected and especially the manufacturing was announced at 41 vs 43.2 which the markets estimated.   An indication of the correction’s heaviness is the fact that all the days of the week were bearish. It makes sense to expect a bullish reaction after this so we may try long positions this week.

FTSE100

The British FTSE100 index moved heavily downward last week, closing at 7,462 points, dropping about 2.35%. Like all the major stock indices, FTSE100 also had pressures from the global negative sentiment, mostly after hawkish Powell’s testimony in Congress.  Moreover, the UK news also contributed to this strong price correction. The UK inflation surprisingly stayed unchanged in May at 8.7% while most market analysts estimated a drop to 8.4%. It means that the BoE actions are not enough and more interest rate hikes are possible to come, even if the BoE rose the rates by 0.50% on Thursday. This was also a mini surprise as the prevailing scenario was a 0.25% hike. According to the monetary policy summary, we may see more hikes during the next months. High inflation, high interest rates, and further monetary tightening bring many fears to the markets for a strong recession. Friday’s results confirmed those fears as the retail sales dropped by 2.1% in May and all PMIs were below markets’ estimations. Below the support of 7,440 points, we may see a deeper correction so we may try short positions this week.

Gold

The previous week was strongly bearish for gold, with the next month’s futures closing at $1,930 and losses of more than 2%. As the US dollar recovered, the major commodities were under pressure. The investing sentiment worsened for two major reasons. First of all, according to Jerome Powell, we may see at least two more interest rate hikes in the USA in the following period and the reduction of the rates should be ruled out in the current year. Secondly, as the PMI results indicate, there was a deterioration in services and manufacturing in the USA in May. By the end of the previous week, gold touched the price area of $1,919 which was the lowest level of the last three months. There was a recovery on Friday which carries on at the beginning of the current week so we may try long positions.

US Oil

Last week was bearish for oil with the next month’s futures closing at $69.48, with losses approaching 3%. Besides the strengthening of the US dollar which is a fact that most of the time favors the bearish trend for commodities denominated in the USD, there were certain concerns & fears regarding the global oil demand. The Fed preluded new interest rate hikes, the Bank of England rose interest rates by 0.50% and the Swiss National Bank rose interest rates by 0.25%. This situation foreshadows a slowing in the global economy and a possible recession. Weak PMI data in most of the major economies aligns with this consideration. According to Energy Information Administration, the oil inventories in the USA had increases and decreases in various categories so it was rather a neutral factor. It makes sense though that the oil price is in a sideways movement in the last 1.5 months, being in a tight price channel so if the price returns above $70 this week, we may try long positions.

EURUSD (Euro vs US Dollar)
Last week was bearish for EURUSD as it opened at 1.0940 and closed at 1.0095. The US dollar was back on an upward trajectory after three declining weeks after Jerome Powell’s testimony in the US Congress, showed that there are serious thoughts at the Fed for at least two more interest rate hikes. The head of the Fed also almost ruled out a cut in interest rates this year, which is a change from what was in place in the previous period. This situation made the investing sentiment more negative by weakening the euro which is considered a higher risk currency for the markets. The Eurozone on the other hand had no positive news as the PMI indicators announced on Friday were all below market estimates. Important this week are the announcements of GDP in the US and inflation in the Eurozone, but the long-term uptrend for the exchange rate has not changed, the target remains at 1.10 and under this perspective, we will choose buy positions this week.

GBPUSD (Great Britain Pound – US Dollar)

Bearish was the last week for GBPUSD, which opened at 1.2817 and closed at 1.2714. The economic calendar for the United Kingdom was full last week. The Bank of England surprised the markets by raising interest rates by 0.50% against expectations of a 0.25% increase, but this was perfectly reasonable as inflation continues to be very high. On Wednesday, inflation for May was reported at 8.7%, the same rate as April but well above the 8.4% that markets were expecting. There was also a large increase in the retail price index, while the producer price index had a decline. The rest of the macroeconomic announcements for the United Kingdom were rather negative and so sterling was not able to benefit from the rise in interest rates. Combined with the strong dollar, the exchange rate fell. However, this decline was not able to change the long-term uptrend and so we will continue with buy positions this week as well.

USDJPY (US Dollar – Japanese Yen)

USDJPY moved upward last week, opening at 141.70 and closing at 143.61. The strong US dollar was definitely a catalyst for this rise and as the bond yields remained almost unchanged, it was not a contributor. On the contrary, the Japanese currency continues to weaken since with the announcement of the Monetary Policy Minutes in Japan we saw the intention of the central bank to continue the very loose monetary policy. The head of Ueda Bank stated that “The Bank of Japan will patiently maintain an easy monetary policy to stably and sustainably achieve the 2% price target accompanied by wage growth”. The pair has touched its highest price of the last 8 months and some corrections may occur, especially if the dollar returns to its weakness, that is why we may try sell positions this week.

EURJPY (Euro – Japanese Yen)
Bullish was the last week for EURJPY which opened at 155.02 and closed at 156.55. The previous week was bullish too but the uptrend was heavier because the euro was stronger. Euro was not strong in the last week as the investing sentiment was sour and the Eurozone macros were negative. The point is that the Japanese currency was much weaker because according to the announced monetary policy statement from the Bank of Japan, the loose monetary policy and the negative interest rates will continue. As the EURJPY is at its highest price of the last 15 years, it makes sense to see some retracements so we may try sell positions this week.

EURGBP (Euro – Great Britain Pound)

Last week was bullish for the EURGBP, as it opened at 0.8530 and closed at 0.8563. Both the euro and the sterling were under pressure last week as a risk-off mood dominated the markets but the EURGBP performed a bullish reaction. This reaction is not based to clear fundamental reasons as the high inflation in the UK will cause, most likely, higher interest rates compared to the Eurozone rates. So, we must spot the bullishness of the last week to a technical reaction as the pair was in an oversold zone, having a heavy downtrend for more than two months. It means that the bearish trend may return and that is why we prefer sell positions this week.

USDCAD (US Dollar – Canadian Dollar)

Slightly bearish was the last week for USDCAD, which opened at 1.3192 and closed at 1.3180. Although the US dollar was strong and the oil prices dropped (a factor that usually weakens the Canadian dollar) the USDCAD kept on falling for one more week. Maybe the markets assess that the Canadian economy is in better shape than the US economy. Canadian retail sales recovered impressively in April, rising by 1.1% from -1.5% in the previous month. Also, investors and traders consider that the Bank of Canada may apply new interest rate hikes this summer. The US GDP announcement this week is crucial for the pair. In any case, the downtrend of the last 4 weeks is really strong so we may try sell positions for one more week.

USDCHF (US Dollar – Swiss Franc)
The USDCHF had an upward course last week as the opening price was at 0.8936 and the closing price was at 0.8969.  The strong dollar dominated the pair even if the Swiss National Bank rose the interest rates by 0.25%, from 1.50% to 1.75%. Although inflation in Switzerland is not at a very high rate (the second lowest in the G20 at 2.2%), there are certain expectations that the Swiss National Bank will hike the rates again by 0.25% in the next session in September. Although the Swiss franc is strong enough according to the above considerations, the US dollar is the absolute dominator of the pair because the USDCHF followed its strength. The pair could not break out the milestone price of 0.90 and if the USD returns back to its weakness the downtrend will continue so we may try sell positions this week.

AUDUSD (Australian Dollar – US Dollar)

Strongly bearish was the last week for AUDUSD, which opened at 0.6876 and closed at 0.6675. Besides the strength of the US dollar that favored the pair’s drop, there were certain reasons for the Australian dollar to drop as well. According to the meeting minutes from the Reserve Bank of Australia, in the next meetings, we may see two more interest rate hikes by 0.25%. This could bring the target rate to 4.85% but no further hikes are in plans so the rate will remain lower than the US one which is already at 5% – 5.25% with two more hikes to be expected. Furthermore, on Monday the People’s Bank of China decreased interest rates from 3.65% to 3.55%. The only factor that strengthened the Australian dollar was the good results of the PMI indicators. Now the major attention is on the current week’s announcements: inflation in Australia on Tuesday, US GDP, and PCE on Thursday and Friday accordingly. A possible turn to weakness for the USD may cause a bullish recovery for the AUDUSD so we may try buy positions this week.

Bitcoin

Last week, Bitcoin was heavily bullish and closed at $30,477 with profits close to 15.70%. The main issue of the previous week that caused this explosion in the crypto asset class was the application of the BlackRock ETF to the US Security and Exchange Commission. There are rumors that BlackRock has insights that its application will be finally approved. This ETF will not be like the others based on Bitcoin futures but on the spot market with Coinbase as its custodian. Bitcoin performed more than 20% since the filing, above $30K but it also performed a mild correction during the weekend.  In any case, it seems that the attempt of BlackRock is a very serious movement for regulation in the crypto world and this has caused a wind of optimism amongst the crypto community. Bitcoin managed to reach the very critical price threshold of $30K but it takes a solid breakout above $31.5 for the uptrend to carry on. Maybe Bitcoin will stay in the $30K area for some time before there is fresh news so without an obvious trend, we’d better stay out 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.