14/08/2023

General Comment

The developments around inflation and the impact it can have on international economies mainly concerned the financial markets in the past week. Inflation last Thursday was announced in the United States at 3.2% for July, up from last month’s 3% but below the 3.3% that markets had expected. So, while inflationary pressures intensified last month, market reactions were modest, because it was somehow expected. The inflation news continued on Friday in the US with the announcement of the producer price index, where it appeared that the setback was even worse after the index rose by 0.8% in July, compared with 0.2% last month and 0.7% expected by markets.

Based on this data markets and analysts are trying to decipher the Fed’s next moves. Most analysts are converging on the fact that the cycle of rising interest rates has ended without ruling out a small possibility of another 0.25% increase. Mary Daly, the head of the San Francisco Fed, said inflation remains high and the Fed’s next moves are data dependent.

A completely different picture prevails in China. Based on the latest result, the country entered a state of deflation after in July the Consumer Price Index fell by 0.3%. This situation once again reveals a potential problem for China’s economy that has been expressed with both lower growth rates and declines in imports and exports in the past months. Markets expect a stimulus package to be announced by China’s leadership that will reignite the economy for domestic demand since negative inflation and growth slowing allow and perhaps force it.

There have been no major economic announcements in Europe, but since high inflation persists and macroeconomic outcomes in the Eurozone are not positive, there is a disagreement over whether the European Central Bank should and can raise interest rates further or should not risk a recession in the eurozone.

Most European and U.S. stock indexes continued their correction, while the U.S. dollar rose against its main rivals for the fourth week in a row. In the commodity sector, the picture was mixed: gold fell further, while oil rose slightly. The bond market continued its upward trend with the U.S. 10-year bond yield outperforming and closing the week above 4.15%. As per the cryptos, it’s been a good week for Bitcoin and most cryptocurrencies.

The current week is also important for the course of the markets and so volatility may be maintained at high levels. The Fed announces its minutes (FOMC) on Wednesday while important are the inflation announcements in the Eurozone on Friday and in the UK on Wednesday. Markets are looking forward to a lot of interest in China’s industrial production announcements and retail sales on Tuesday.

SP500

With mild bearish trends, the US SP500 index closed last week, at 4,464 points, and loss of 0.31%. The downtrend of the previous week continued after increased inflationary pressures created concerns. The Consumer Price Index rose in July from the previous month while so did the producer price index, which even rose above market expectations. Based on this data, markets are trying to assess whether there will be a new rate hike by the Fed, something that until before the inflation announcement had very little chance of confirmation. Philadelphia Fed chief Patrick Harker said interest rate cuts would begin sometime next year, but that statement preceded the inflation announcements and was ignored by markets. Regarding company announcements, some tech companies like Microsoft showed results below market expectations and that was another reason for concern. A mini downward trend that started at the end of July seems to be consolidating and therefore we may try short positions this week.

DAX30

The German DAX40 index was bearish last week, closing at 15,832 points, with losses a bit more than 0.75%. The problems of the German economy begin to reflect in the main stock markets. Inflation in Germany remains at particularly high levels and was announced last week for July at 6.5% (harmonized index of consumer prices). Industrial production also continued to shrink after declining by 1.5% in June, compared with the previous month. Also, a manufacturing-based country like Germany has been very much affected by the problematic picture China has been presenting lately in terms of growth, imports/exports, and deflation. It is also clear that the German index has been affected by the overall negative sentiment that dominated the markets last week, mostly caused by the higher inflationary pressures that were announced in the USA. Although the correction of DAX40 so far has not altered the upward trend, the conditions are not favorable for recovery at the moment and so we will choose short positions this week too.

FTSE100

The British FTSE100 index moved downward last week, closing at 7,524 points, dropping about 0.53%. The UK index may have had losses, but these were significantly smaller than the rest of the main European and US indexes. Things, during this period in the British economy are operating somewhat upside down. There was a lift for the index on Wednesday and Thursday as most analysts see the poor economic situation in the UK as leaving little room for big interest rate hikes by the Bank of England. On the contrary, the impressive picture and results announced on Friday sank the index because they create the impression that the British economy is withstanding interest rate rises. The picture was indeed impressive: GDP grew by 0.4% in the second quarter of this year compared to the previous year, industrial output rose by 1.8% in June, manufacturing grew by 2.4% and finally, the trade balance managed to be below five billion pounds. The continuation of the downward picture garners the most chances for the FTSE100 and so we may try short positions for one more week.

Gold

The previous week was bearish for gold, with the next month’s futures closing at $1,945.5 and losses of more than 1.60%. Two major factors led to this fall in gold prices. The first was the strengthening of the dollar occurring due to the increased inflationary pressures announced last week in the United States, relative to the Consumer Price Index and relative to the producer price index. The second reason is the rise in bond yields. The U.S. 10-year exceeded the 4.20% threshold last week for the first time since last November. Bond yields typically operate competitively, as a safe investment haven, to gold prices. On a technical level, the next main support for gold prices is close to $ 1900 which gives plenty of room for short positions this week as well.

US Oil

Last week was slightly bullish for oil with the next month’s futures closing at $83.04, with profits a bit above 0.50%. At this period there is competition between two factors that one tends to drive up prices and the other to drop them. The factor that tends to push up prices is announced production cuts and some expectations of new cuts in global oil production in the new year, mainly from Saudi Arabia and other OPEC countries. The factor holding down prices has to do with demand and the problematic picture of the Chinese economy, as presented in the latest announcements. China is the world’s largest oil consumer and any economic slowdown hurts oil demand. OPEC seems to disagree with this picture because it recently revised its forecast for global oil demand upwards, expecting a climb in global oil demand by 2.44 million barrels per day in 2023, and 2.25 million barrels per day in 2024. While oil prices easily exceeded resistance at $83.50, it seems for now that the next resistance at $85 is insurmountable for the moment. We may try short positions this week.

EURUSD (Euro vs US Dollar)
Last week was bearish for EURUSD as it opened at 1.1010 and closed at 1.0944. The strong U.S. dollar prevailed for another week on the exchange rate, even though on Thursday after the announcement of inflation in the United States there was a slight upward reaction. Inflation moved slightly up last month, rising to 3.2% from 3% but markets were expecting an even bigger rise of 3.3%. That temporarily negatively impacted the dollar, which returned to its familiar strength when the producer price index was announced above market expectations on Friday. This slightly increased the likelihood of the Fed making another 25-basis point interest rate hike before completing the cycle. On the other hand, Europe is not going through its best days, as economic results are deteriorating, and inflation remains high. Markets are awaiting the announcement of the Fed’s minutes on Wednesday and inflation in the Eurozone on Friday, but it seems that the dollar has gained momentum which if it continues could push the exchange rate to several lower levels therefore, we will choose sell positions this week.

GBPUSD (Great Britain Pound – US Dollar)

Bearish was the last week for GBPUSD, which opened at 1.2742 and closed at 1.2692. The exchange rate moved downward for another week (the fourth in a row) but clearly at a lower rate than before. The U.S. dollar continued its strength mainly due to an upward inflation reaction and the strong macroeconomic picture that the US. But the UK had an unexpectedly positive picture last week through its announcements. GDP, industrial production, manufacturing, and the trade balance were all announced above market expectations and in positive territory and so sterling took some upward breaths. Inflation for the UK will be announced this week, which will largely determine the course of sterling and perhaps the decisions of the Bank of England in the near future. Bank of England economist Huw Pill said he expected inflation to fall to 5% this year but nothing can be sure regarding the future action of BoE. Significant are also the announcements of both unemployment and retail sales this week. However, if the dollar continues its upward course, the exchange rate could not be ruled out heading towards 1.25 and so we may try sell positions this week.

USDJPY (US Dollar – Japanese Yen)

USDJPY moved strongly upward last week, opening at 141.66 and closing at 144.95. The strong U.S. dollar prevailed globally at the exchange rate, creating a strong upward trend that was reflected on all days of the week. Expectations of a new rate hike by the Fed following the slight rise in inflation and the very strong macroeconomic picture of the United States presented recently are factors that significantly strengthen the U.S. dollar. As far as the Japanese currency is concerned, it remains in a state of extreme weakness since, according to all market expectations and the statements of Bank of Japan executives, the very loose monetary policy will continue. During the week, however, there was another reason for the dollar to rise against the yen. Japan’s bond yields have been on an upward trend for several weeks but last week U.S. bond yields went up quite a bit and Japanese yields fell so Japan’s currency weakened even further. The price range of 145 is a very critical resistance since it is the highest price in the last nine months. it is therefore not excluded from a downward reaction and for this reason, we may try sell positions this week.

EURJPY (Euro – Japanese Yen)
Bullish was last week for EURJPY which opened at 155.99 and closed at 158.65. The Eurozone may continue to have problems with high inflation and slowing growth, but recent interest rate hikes by the European Central Bank and expectations of possible new increases have boosted the euro considerably against the yen. The Japanese currency continues to weaken after the loose monetary policy continues, but in the last week, Japanese bond yields have fallen, weakening the JPY even more. Japan’s GDP and inflation are announced this week and combined with the announcement of inflation in the Eurozone, it may create increased volatility for the exchange rate. But the recent rise has driven the price of the EURJPY to a 15-year high, and some downward reactions are justified so sell positions is our selection for the current week.

EURGBP (Euro – Great Britain Pound)

Last week was slightly bearish for the EURGBP, as it opened at 0.8627 and closed at 0.8619. The EURGBP seems unable to escape the 0.85 – 0.87 zone that has been trapped for several weeks. The euro and sterling have significant weaknesses currently, mainly due to the negative image of the Eurozone and UK economies respectively. There are expectations for new rate hikes from the two central banks, but it seems that economies and expectations of slowing growth are dominating this period. The UK has several major announcements this week and the Eurozone announces inflation, so volatility may rise relative to its reduced rates of recent weeks. We may try buy positions this week.

USDCAD (US Dollar – Canadian Dollar)

Bullish was the last week for USDCAD, which opened at 1.3357 and closed at 1.3444. It was the fourth in a row upward week for the USDCAD which seems to be dominated by the US dollar’s superiority this period. The U.S. currency continues to rise, especially after the slight increase in inflation for July, which has reignited market expectations of another rate hike by the Fed at one of its upcoming meetings. The strength of the U.S. dollar does offset the rise in oil prices that we’ve been seeing lately and that traditionally favor the Canadian dollar. The week contains important announcements for both economies after the Fed announces its meeting minutes and Canada announces inflation on Tuesday. We may try buy positions for one more week.

USDCHF (US Dollar – Swiss Franc)
The USDCHF had an upward course last week as the opening price was at 0.8703 and the closing price was at 0.8762. The exchange rate has been slowly but steadily strengthening over the past four weeks, mainly based on the strengthening of the US dollar. The USDCHF has been in an oversold price zone lately and so such a reaction is entirely justified. In addition, very low inflation in Switzerland almost removes the scenario of new intervention by the SNB, while a small rise in inflation in the United States may signal another increase in interest rates. As for Switzerland’s macroeconomic results, last week saw a slight deterioration after the unemployment rate climbed slightly from 2% in June to 2.1% in July. We will prefer buy positions for one more week.

AUDUSD (Australian Dollar – US Dollar)

Bearish was the last week for AUDUSD, which opened at 0.6667 and closed at 0.6494. The Bank of Australia’s decisions recently to leave interest rates unchanged have weakened the country’s dollar. An important factor in the weakness of the Australian dollar is also the deterioration of the economic situation in China. China is showing evidence of deflation and economic slowdown which is directly affecting Australia’s economy. There is, of course, an expectation of a stimulus package from China in the near future, but that is still on the plans. Markets will watch with interest the new announcements on the Chinese economy that have to do with industrial production and retail sales, as well as the announcement of the unemployment rate in Australia. Technically speaking, there is a strong resistance in AUDUSD in the price range of 0.6455 and if there is a downward breakout, then maybe the downtrend will accelerate further. We may try sell positions this week.

Bitcoin

Last week, Bitcoin was bullish and closed at $29,284 with profits close to 0.85%. It was a slight upward reaction for Bitcoin after three declining weeks, which of course does not signal something great and does not give birth to any hopes of a big recovery. Those hopes are limited because Bitcoin has failed to close the week above the milestone price of $30K. The expectations of the markets in relation to the application submitted to the SEC for the bitcoin ETF was something that made the world of cryptocurrencies very excited, but it is also slowly starting to fade. There is a potential dispute between the SEC and major cryptocurrency companies such as Binance and CoinBase that could be further targeted by the regulator and worsen the sentiment in the crypto industry. We need a sustained recovery above $30k and as long as this is not the case, we will continue to be fans of the downtrend therefore 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.