03/07/2023

General Comment

We saw another positive week for the financial markets as the main stock indices in Europe and the US had a significant rise. The causes were many and varied but mainly they have to do with the positive macro-economic results, primarily in the United States, which further distance the scenario of a recession.

Taking things from the beginning, the week’s developments came mainly from two categories: from the speeches of central bankers and the economic announcements.

Jerome Powell in a speech emphasized during the week how new interest rate increases are imminent until the end of the year since inflation remains at high levels. Most likely the beginning of the new cycle of increases after the pause in June is to be made by the next decision at the end of the month, with the probability according to the FedWatch tool, exceeding 85%.

In a similar style, Christine Lagarde’s words about the Eurozone were about new increases in interest rates at the next meeting of the central bank should be considered a given, without however giving information about the next meeting which is in September. Obviously, the situation is data-oriented.

Such announcements of interest rate increases, and quantitative tightening should normally worry the markets, but the positive results remove this scenario of growth slowing or/and a recession. More specifically, in the United States, the GDP of the first quarter of the year was strengthened by 2% which shows how the recession scenario is far away. Also, the increase in durable goods orders by 1.7% in May further strengthens the scenario of a solid economy. But the most important element was announced on Friday, and this was the main reason for the jump in the markets. It has to do with personal consumption expenditures, which rose 3.8% in May, well below the 4.6% that markets had estimated, thus showing how inflation is picking up and leveling off.

In Europe, inflation is also shrinking, falling to 5.5% in May from 6.1% the previous month. Also, the unemployment rate in the Eurozone remained unchanged at 6.5%.

A significant contribution to the positive economic climate worldwide was also the positive announcement about manufacturing in China, with the PMI index soaring to 53.2.

Finally, there was also a psychological boost in the markets after Apple’s shares soared more than 1%, propelling the company’s market cap above 3 trillion dollars.

With what we saw above, gains for stock indexes in the world’s major economies mostly shot up on Friday. The commodity market had a mixed picture with gold weakening but oil strengthening. Due to the hawkish Fed, the US dollar also rose, while bond yields also moved higher with the US 10-year yield closing the week around 3.84%. As far as the world of cryptocurrencies is concerned, after the big rise that preceded it, last week was rather stabilizing.

The most dominant role in the current week is the announcement of the labor market in the United States on Friday (NFPs), while on Wednesday there is the FOMC, but without a decision on interest rates. Important announcements are of the PMI indicators in the main economies of the world, while again central bankers’ speeches will have a central role in terms of the markets’ perception of interest rates for monetary policy.

SP500

With heavy bullish trends, the US SP500 index closed last week, at 4,450 points and profits of 2.35%. This strong uptrend brought SP500 to its highest price since April 2022. Although Jerome Powell had a strong hawkish tone, practically heralding two or more interest rate hikes in the next Fed’s sessions, markets faced it with optimism, mostly based on the solid macros that the US economy performed: GDP 2023 Q1 rose by 2%, durable goods orders rose by 1.7% in May and personal consumption expenditures dropped to 3.8% in May from 4.3% in April. This last figure gave the perception that inflation is under control and despite the hawkish Fed, things will get better. A psychological boost came from Apple’s share which exceeded 3 trillion dollars in market cap. The next resistance if the uptrend continues is close to 4,640 points and we’re keen to try long positions for one more week.

DAX30

The German DAX40 index was bullish last week, closing at 16,148 points, with profits a bit more than 2%. The European indices, including DAX40, were affected by the positive sentiment that came from the US ones and the performance was more or less the same. Christine Lagarde presented the decision for a new interest rate hike at the next ECB session as given & made up but the markets reacted positively because the inflation pressures become softer in Eurozone and because the solid macro results make the recession scenario less likely. Inflation in Germany remains at high levels, announced at 6.8% in May (harmonized index of consumer prices) and the unemployment rate climbed to 6.7% from 6.6% in April. Retail sales dropped by 3.6% but the markets expected a reduction of 4.3%. It’s a positive fact for DAX40 that surpassed the level of 14,000 points without special difficulties and since the bullish trend may carry on, we’re keen to try long positions for one more week.

FTSE100

The British FTSE100 index moved upward last week, closing at 7,531 points, performing profits of 0.93%. Obviously, FTSE100 underperformed the rest major US & European indices and this is because the inflation issues in the UK are much stronger and most analysts expect very aggressive actions from the Bank of England, including tighter monetary policy and higher interest rates. Andrew Bailey underlined the big inflation problem and he said that the high interest rates will remain until it is resolved since inflation will persist more than was initially expected. He also mentioned that under these circumstances, a possibility of a recession becomes stronger. The macro results in the UK were not negative as the GDP remained in a positive area in 2023 Q1, announced at 0.2%.  We may try short positions this week.

Gold

The previous week was slightly bearish for gold, with the next month’s futures closing at $1,927 and losses close to 0.16%. One factor that helped in this result was the strengthening of the US dollar in which gold is denominated. Also, the strong data from the US economy, give a sign to the markets that a recession could be avoided, despite the high interest rates and expensive money through tight monetary policy. Jerome Powell said that two or maybe more interest rate hikes may take place by the end of the year. Interest rate hikes favor bond yields and bond yields are a major competitor to gold as a safe-haven asset. The US 10-year bond yield rose significantly last week under this news. On Thursday, gold dropped below $1,900 for the first time in the last 3.5 months and although it partially recovered, a new loss of this level may accelerate the downtrend and that is why we prefer short positions this week too.

US Oil

Last week was bullish for oil with the next month’s futures closing at $70.42, with profits approaching 1.35%. The positive macroeconomic results, mostly from the USA, created an advantageous perception regarding the oil demand and helped the price to recover above $70. The demand recovery was also confirmed by the lower inventories that were announced by the US Energy Information Administration. EIA announced a decline of 9.6 million barrels in crude inventories in the previous week, much lower than the markets’ estimations. The oil price uptrend could be even stronger but the dollar’s recovery along with the expectations of new interest rate hikes, prevented this fact. It is obvious though that the oil prices cannot escape the tight price channel that has been formatted in the last two months, from $66.80 to 74.70. The current oil price is in the middle of this channel and we may try short positions this week.

EURUSD (Euro vs US Dollar)
Last week was slightly bullish for EURUSD as it opened at 1.0904 and closed at 1.0909. Both currencies, the US dollar, and the euro, had strengthening tendencies after the statements of central bankers, Jerome Powell, and Christine Lagarde, were in the direction of further interest rate hikes. Also, both economies had de-escalation of inflation and positive macroeconomic results as we saw in the General Comment. The exchange rate seems to have found a temporary balance, below 1.10 and investors are looking for new news or developments for further moves. While the Eurozone was largely set for new rate hikes, for the Fed two or more new hikes were a mini surprise, boosting the US dollar and keeping the pair from going above 1.10. In this sense, we may prefer sell positions this week. Of course, the NFPs announcement on Friday may change things.

GBPUSD (Great Britain Pound – US Dollar)

Mildly bearish was the last week for GBPUSD, which opened at 1.2708 and closed at 1.2696. It is almost certain that both the United States and the United Kingdom will make new interest rate increases within the year. In this sense, the two currencies are expected to strengthen further but parity between them will be a race. Last week with the clear hawkish intention of Jerome Powell gave a ton more support to the dollar. Andrew Bailey was also clear enough about new hikes. Macroeconomic results were positive in both economies, with US GDP increasing by 2% in the first quarter of the year, while British GDP was also positive in the same period. There has been a recent weakness for the pair to break above the 1.2850 resistance and if the dollar continues to strengthen, we may see a further correction and therefore we may try sell positions this week.

USDJPY (US Dollar – Japanese Yen)

USDJPY moved upward last week, opening at 143.50 and closing at 144.28. The three main factors influencing the exchange rate all pointed to the upside. The US dollar strengthened after Powell promised to raise interest rates, bond yields moved higher, and the Japanese currency weakened further. In relation to the third factor, i.e., the Japanese currency, the speech of the head of the Bank of Japan Ueda played a catalytic role, as once again he emphasized the bank’s intention to maintain the very loose monetary policy and negative interest rates. These repeated statements over the last three months have led the exchange rate to an upward rally even if the dollar has not always been particularly strong. However, as the rate approaches 150, the possibility of intervention from Japan increases. Because this is something we have seen a few times in the recent past, it may happen again but we will prefer for the current week buy positions.

EURJPY (Euro – Japanese Yen)
Bullish was last week for EURJPY which opened at 156.40 and closed at 157.39. The uptrend for the rate continued for a third week in a row with the price now at its highest levels since August 2008. This development makes perfect sense as the Eurozone has already raised interest rates and according to all figures and statements will continue to do so while Japan insists on loose monetary policy and negative interest rates. According to this analysis, the uptrend should continue but the overbought levels and the possibility of new intervention by the Bank of Japan to support the currency cannot be ruled out. Trusting that this may happen at higher prices, we may try buy positions this week.

EURGBP (Euro – Great Britain Pound)

Last week was bullish for the EURGBP, as it opened at 0.8570 and closed at 0.8590. The week was essentially divided into two, with the first half showing an increase and the second half showing a correction, which, however, could not negate the positive sign. The euro, due to Lagarde’s statements and positive macroeconomic results strengthened more than the sterling even expectations from the Bank of England for monetary tightening policy and new interest rate increases are also strong. Given that the inflation problem is greater in the UK than in the Eurozone we may see another downward turn of the exchange rate and so we’re keen to try sell positions this week.

USDCAD (US Dollar – Canadian Dollar)

Bullish was the last week for USDCAD, which opened at 1.3178 and closed at 1.3244. Certainly, the strengthening of the American dollar played an important role in this upward reaction of the exchange rate, but the developments in the Canadian economy that contributed to the weakening of the country’s currency were also important. Canada’s inflation was reported for May at 3.4%, well below April’s 4.4%, leading many investors to believe that the Bank of Canada no longer has reason to be aggressive. The announcement was also negative for the country’s GDP in April, which remained unchanged even if expectations were for an increase of 0.2%. Canada’s dollar could not be helped by the increase in oil prices since these developments were stronger. It is not excluded that the upward reaction of the exchange rate will continue, and 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 0.8957 and the closing price was at 0.8950.  It is worth noting that this correction came in a week when the US dollar was strong and without particular reason for the Swiss franc to strengthen significantly. The only stable explanation is Switzerland’s positive results since retail sales in May performed better than market expectations, and the KOF leading indicator rose impressively to 90.8. There may also be technical reasons why there was a recent weakness for the pair to break above the 0.90 mark. If, however, the dollar continues to strengthen, 0.90 will likely break upwards and therefore we prefer buy positions this week.

AUDUSD (Australian Dollar – US Dollar)

Bearish was the last week for AUDUSD, which opened at 0.6677 and closed at 0.6855. The strengthening US dollar weighed down the exchange rate against the reasons the Australian dollar had to strengthen. More specifically, retail sales in Australia had a recovery in May by 0.7%, while the result of manufacturing in China as expressed by the PMI index was impressive. Inflation in Australia was announced for May at 5.6% and remains high even if the deceleration was significant. On Tuesday the markets expect a new increase in interest rates from the Bank of Australia by 0.25% but given that the dominant role is played by the American currency, which if it continues to strengthen will push the exchange rate further, we will prefer sell positions this week.

Bitcoin

Last week, Bitcoin was mildly bullish and closed at $30,6`6 with profits of 0.46%. It was rather a stabilizing week with relatively low volatility after the big profits that had come in the previous week. The crypto community still awaits the SEC’s response to the Bitcoin ETF of BlackRock but the surrounding atmosphere remains positive. There were many news and announcements lately regarding fresh interest rate hikes and positive economic data but the prevailing aspect is the Bitcoin ETF and all the rest come in second place. It’s very positive that the Bitcoin price managed to remain above $30K but maybe the ETF is not a solid reason for the Bitcoin to recover sustainably 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.