04/09/2023

General Comment

The developments and economic announcements last week were significant, to the extent that they significantly increased the volatility of the markets. High volatility started on Tuesday following the announcement in the United States of the Job Openings and Labor Turnover Survey (JOLTS), a monthly report by the Bureau of Labor Statistics (BLS) of the U.S. Department of Labor counting job vacancies and separations, including the number of workers voluntarily quitting employment. The result was much worse than expected (8.83 m vs. 9.46 m expected) and a phenomenon has been occurring quite often lately in the markets: the bad news is good news. That means markets felt that a negative labor market development could be pushed to signal a halt to the Fed’s rate-raising cycle, on the basis that the economy is under pressure and cannot afford new money-cost increases and higher interest rates.

This situation continued on Wednesday, as the GDP in the US for the second quarter of the year was announced below the expected (2.1% vs. 2.4%) and thus the belief mentioned above was further consolidated. Towards the end of the week, there was a slight downturn in the markets mainly due to the announcements of non-farm payrolls in the USA (187k vs. 170k expected) but already the positive sign of the week had formed.

In addition to the United States, markets also put their eyes on China, which announced a positive recovery in manufacturing and somehow calmed the markets that had serious concerns regarding the Chinese economy. In the Eurozone, the economy remains under pressure: consumer confidence fell further, inflation rose slightly from 5.1% to 5.3% last month, while manufacturing continues to shrink. This picture poses a dilemma for the European Central Bank because on the one hand inflation is still high and on the other hand the effects of tight monetary policy have already begun to cause significant damage to the economy and slow growth.

Equity markets, as we said above, had a strong upward reaction, while most commodities such as gold and oil also moved strongly upward. The U.S. dollar recovered towards the end of the week and had another week of gains. As for the bond market, there was a pullback for the second week in a row with the U.S. 10-year closing at 4.18%. Finally, for the second week in a row, there was a stand-off in the cryptocurrency investor community.

This week continues with important announcements not so much in the United States, where only the PMI for services is announced, but mainly in the Eurozone (Lagarde Speech, producer price index, retail sales, and GDP) while China announces trade balance and GDP. Interest rate decisions by central banks in Australia and Canada are also important.

SP500

With bullish trends, the US SP500 index closed last week, at 4,516 points and profits of 2.50%. The biggest portion of this rise came on Tuesday after the JOLTS announcement. It showed a weak situation in the US jobs markets and it was immediately interpreted by the markets as a factor that may push the Fed to end the cycle of the interest rate hikes. Until now, there have been several hikes to fight the high inflation and there were minimum consequences to the US economy as the unemployment rate remains low and the growth is still in a positive area. Markets assess that the Fed will not risk a recession, even a light one, especially now that the inflation has been de-escalated to the area around 3%. The GDP that was announced on Wednesday was positive indeed but just because it was below market expectations, it confirmed the markets’ perception regarding the Fed. Positive NFPs announced on Friday stopped this strong uptrend but the sign of the week had always been formatted. No important news, besides services PMI is expected this week for the US economy so we won’t rule out that the positive sentiment can carry on so we may try long positions this week.

DAX30

The German DAX40 index was bullish last week, closing at 15,840 points, with profits of 1.33%. DAX40 had a very bullish explosive beginning, the first two days of the week, and after that, there were consolidative movements that retained the positive sign. Germany did not have positive economic data but it didn’t weigh on the stock markets. German consumer confidence was in deep red while the inflation jumped in August to 6.4% from 6.2% the previous month. Retail sales dropped by 2.2% in July and the unemployment rate increased marginally from 5.6% to 5.7% in the same month. The German stock markets though had a positive sentiment for three main reasons. First of all, it was pulled upward by the global positive climate, especially from the USA. Secondly, China had an improved image in manufacturing and we must not forget the big correlation of the German to the Chinese economy. Finally, all this negative economic data in Germany & Eurozone lately may have caused concerns to the ECB regarding actions of further monetary tightening. We may try long positions for one more week.

FTSE100

The British FTSE100 index moved upward last week, closing at 7,465 points, earning about 1.70%. FTSE100 followed the global trend of the major stock indices worldwide. The positive sentiment in the USA and the improved manufacturing results in China helped the global indices enough. In the UK, the problem of inflationary pressures remains although the Bank of England has applied several interest rate hikes so far. It means that more actions are required and that is why is in a downtrend during the last 4-5 months. The results of the tight monetary policy are already obvious and markets are afraid that a recession in the UK won’t be avoided finally. The UK Monetary Policy Report that will be released on Thursday will help us learn more about the BoE’s intentions and thoughts. We cannot ignore the bullish reaction of the last two weeks and that the prize zone of 7,200 points acted like a strong support for the index so we will try long positions for one more week.

Gold

The previous week was bullish for gold, with the next month’s futures closing at $1,966 and profits of more than 1.20%. It makes sense that gold has two consecutive bullish weeks while the US dollar in the same period also performs profits. Usually, gold and the US dollar have a negative correlation as the gold is denominated in US dollars. After several interest rate hikes by the Fed, it seems that the jobs market in the USA remains at a decent level, at least according to the NFPs that were released last Friday. JOLTS brought some concerns and on the day that JOLTS was announced we saw the biggest rise in the gold during the last week. Lower inflation as it was expressed by the personal consumption expenditures and average hourly earnings along with the positive NFPs, caused a mild correction to the gold prices and we saw a pullback from $1,980. In any case, the week was profitable for gold which was helped by the declining bond yields which is a competitor asset class to the low-risk investing options. We will prefer long positions for the current week as well.

US Oil

Last week was strongly bullish for oil with the next month’s futures closing at $85.99, with profits close to 7.50%. It was the most profitable week for oil prices during the last 5.5 months. It was a combination of decreasing supplies and the anticipation of continued output cuts by OPEC that helped this rise. 1 million barrel per day cut, which was implemented in July and August, will be extended by another 1 million in October. Furthermore, the EIA Crude Oil stockpiles report showed a drop of 10.5 million barrels last week, which is one of the biggest decreases in the last few years. Another factor that lifted the oil prices was the improved results in Chinese manufacturing. Let’s not forget that China is the biggest oil consumer in the world and a rising manufacturing industry causes a higher oil demand. Finally, some negative results in the USA regarding the job market and the GDP have supported the perception of the markets that the Fed may stop the interest rate hikes. No more interest rate hikes mean a higher probability for increased growth and increased demand for oil. However, the oil prices exceeded the milestone of $85 for the first time since last November, and profit-taking reasons may cause price retracements. At least, some factors still contain risk for the global economies. We may try short positions this week.

EURUSD (Euro – US Dollar)
Last week was bearish for EURUSD as it opened at 1.0795 and closed at 1.0773. The fall in the exchange rate took place towards the end of the week, especially in the last few hours. By Wednesday the EURUSD had managed to develop a strong upward trend that brought it into the price range of 1.0945. The belief that the Fed is not easy to continue raising interest rates after the negative U.S. labor market picture and less-than-expected growth in U.S. GDP has weakened the dollar. From Thursday and on, things changed, the dollar strengthened significantly, culminating on Friday due to the announcement of non-farm payrolls. Although on Thursday there were some hawkish statements from the European Central Bank officials, the euro has not been able to recover as the Eurozone’s results continue to raise concerns and the ECB’s stance does not appear to be entirely clear. The Eurozone will become more central to the markets this week as the GDP and retail sales announcements combined with Christine Lagarde’s speech will give the markets information about the Eurozone economy. The U.S. dollar has completed seven consecutive weeks of profits but we may try buy positions for the EURUSD this week.

GBPUSD (Great Britain Pound – US Dollar)

Slightly bullish was the last week for GBPUSD, which opened at 1.2575 and closed at 1.2586. The exchange rate almost followed the course of the US dollar since there were no significant developments or announcements from the British economy. Sterling looks stronger than other currencies paired with the U.S. dollar because the very high inflation that persists in the U.K. raises expectations that the Bank of England still has enough of a future in terms of interest rate hikes and other possible actions. Bank of England chief Economist Huw Pill said last week there was no room for complacency in the war against high inflation. This week the PMI Services Index is announced, but the announcement of the UK Monetary Policy Report by the Bank of England is even more important. We may try buy positions this week too.

USDJPY (US Dollar – Japanese Yen)

USDJPY moved mildly downward last week, opening at 146.39 and closing at 146.19. The fall for the exchange rate during the week was much stronger as the USDJPY dropped below 144.50 but Friday’s big recovery balanced things out and caused just a small drop. The picture presented by Japan’s economy based on the economic data announced was mixed: The Lead Economic Index strengthened, and retail sales rose by 6.8% last month. On the contrary, there was a negative picture of unemployment rising to 2.7%, industrial output falling last month by 2% and manufacturing continuing to shrink. Based on this mixed picture, the biggest factor for the USDJPY was again the US dollar, which determined the movements. Major is the announcement of the Japanese GDP for the second quarter of the year next Friday. We prefer buy positions for the current week.

EURJPY (Euro – Japanese Yen)
Bearish was last week for EURJPY which opened at 158.04 and closed at 157.51. During the week the exchange rate hit a new 15-year high price record, approaching even more the 160, but more about the weakness of the euro than the strength of the yen resulted in some corrective trends. The Bank of Japan continues the ultra-loose monetary policy but there are rumors and analyses that if the yen weakens too much there could be another intervention from the Bank of Japan or the government. On the other hand, the euro continues to face problems due to high inflation and the poor macroeconomic picture in the Eurozone. The correction could be extended and therefore we will choose sell positions this week.

EURGBP (Euro – Great Britain Pound)

Last week was bearish for the EURGBP, as it opened at 0.8574 and closed at 0.8556. Neither the euro nor sterling are experiencing a period of strengthening since the US dollar is currently dominant in the markets. But it appears that sterling has a lead over the euro because markets expect more intervention from the Bank of England to tackle inflation than from the European Central Bank. Inflation in the UK is significantly higher than in the Eurozone so there is a clear logic on this. On the other hand, the support of 0.85 seems to be very strong but in any case, we will prefer sell positions for one more week.

USDCAD (US Dollar – Canadian Dollar)

Slightly bearish was the last week for USDCAD, as it closed at 1.3590, about 15 pips lower than the close price of the week before. The very strong U.S. dollar was opposed by the strength of the Canadian dollar due to the explosive rise in oil prices and thus a relative balance was maintained between the two currencies. The large increase in oil prices should have led to an even greater strengthening of the Canadian dollar, but this was avoided due to some negative results announced by Canada. Canada’s GDP fell by 0.2% in the second quarter of this year, a figure that was a long way from the 1.2% growth forecast by markets. The Canadian dollar was under some pressure after that. The current week is full of news about Canada’s economy. The interest rate announcement on Wednesday, Bank of Canada chief Tiff Macklem’s speech on Thursday and the unemployment announcement on Friday stand out. We may try buy positions this week.

USDCHF (US Dollar – Swiss Franc)
The USDCHF had an upward course last week as the opening price was at 0.8837 and the closing price was at 0.8857. The rise in the exchange rate continued, although with less intensity, as the U.S. dollar continued to be in a state of strength. Conditions for the Swiss franc are not positive since inflation was announced very low at 1.6% and the country’s economy also seems to have some problems. More specifically, the KOF Leading Index fell for another month, retail sales fell by 2.2% while the PMI indicators dropped to 39.9. Momentum therefore continues to be bullish and for this reason, we will prefer buy positions for one more week.

AUDUSD (Australian Dollar – US Dollar)

Bullish was the last week for AUDUSD, which opened at 0.6404 and closed at 0.6445. The Australian dollar got a big boost from rising commodity prices. We should remind the reader that the currency of Australia is a prime example of a currency that is very dependent on commodity prices. Another reason was China’s improved manufacturing picture that somewhat dissipated the clouds that had gathered around the Chinese economy lately. These two factors managed to offset the strength of the U.S. dollar that we saw last week and thus the exchange rate closed with a rise. Australia’s economic data was also improved after retail sales rose 0.5% last month and the PMI index climbed to 49.6. AUDUSD seems to have found strong support below 0.64 and considering that the upward reaction may have a future we may try buy positions this week.

Bitcoin

Last week, Bitcoin was mildly bearish and closed at $25,970 with losses of 0.46%. There are several pending applications to the SEC regarding Bitcoin-based ETFs and the results should be expected during the next month. Bitcoin reached a weekly high price of $28142 last Tuesday on a court ruling that required the SEC to review asset manager Grayscale’s Bitcoin ETF application but these profits disappeared very soon after the SEC delayed all pending ETF applications on Thursday. ETF application approvals will be a factor that will help Bitcoin and the cryptocurrency ecosystem in general, but these delays have raised concerns and some voices say that the decision dates will extend beyond October. There are some other negative developments too as several crypto companies face certain issues with the SEC. Also, it is worth mentioning that Cambridge University announced a significant update to its Bitcoin Electricity Consumption Index after three years, leading to a substantial revision. The model for 2021 estimated Bitcoin’s electricity consumption at 104 TWh, but the revised estimate is 89.0 TWh. As Cambridge University mentions “An examination of the underlying assumptions behind the Cambridge Bitcoin Electricity Consumption Index (CBECI) has led to its first major revision since its launch in 2019 – a response to evidence indicating a periodic overestimation of electricity consumption “. In any case, Bitcoin has approached the support price zone of $24,756 and a bearish breakout may accelerate the bearish trend. 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.