The rise in the markets continued for the fifth week in a row, with the result that all the correction that occurred from the end of July to the end of October has already been covered and optimistic analysts are talking about a continuation of the upward rally. But is this the case? Let’s take things from the beginning. Markets have now firmly established the view that it will be very difficult for central banks to raise interest rates again and that the reduction of existing interest rates may begin sooner than expected. In a report on Friday, Goldman Sachs adjusted its estimate by a quarter for the ECB, saying it may start cutting interest rates in the second quarter of 2024. Something similar is happening with the Fed with markets having as their main scenario the start of a rate cut in May or June. These developments have sparked optimism in the markets because serious economic effects of high interest rates have not yet appeared and since the moment they will start to fall is approaching, perhaps the soft-landing scenario will be confirmed. To some extent, Christine Lagarde and Jerome Powell in speeches this week confirmed the optimistic scenarios.
Macroeconomic results in the United States announced last week also confirm those estimates. U.S. GDP grew in the third quarter at an impressive rate of 5.2% versus 5% expected by markets. Also based on the announcement of personal consumption expenditures, the inflation dropped last month. The news from China was also positive as the Caixin PMI indicator for manufacturing climbed to 50.7 from 49.5 the previous month. Eurozone inflation fell even further last month to 2.4% and PMI indicators were also announced above expected. Also, the recent cease-fire between Israel and Hamas and the non-expansion of the war to neighboring countries calmed the markets even more. Last week’s OPEC+ meeting did not deliver any news that could have a strong upward impact on oil prices so that headache was removed from power.
Things look ideal but no one can rule out the scenario that the effects of high interest rates may appear with a time lag since in the previous period liquidity was very large. If this happens, we may see a decline and a growth slowdown in the next period.
Recapping last week’s picture, most equity indices in Europe and the United States performed new gains. Oil prices fell, while the strong upward rally we saw for gold was very impressive. The U.S. dollar continued to lose for the third week in a row while the decline in bond yields was impressive with the U.S. 10-year yield closing at 4.21% on Friday. As for cryptocurrencies, they followed the rise of traditional markets, hitting new multi-month highs.
The week that has just begun for the markets is also important. Of course, the announcement of the labor market (Non-Farm Payrolls) in the United States on Friday dominates, while investors will also pay particular attention to the announcement of inflation in China on Saturday. The announcements on the services & composite PMI indicators for the world’s largest economies will also be important while their decision on interest rates will be announced by Canada and Australia this week. The Eurozone announces retail sales on Wednesday and GDP on Thursday.
With bullish trends, the US SP500 index closed last week, at 4,595 points and profits of 0.79%. It was another profitable week for SP500 (the 5th in a row) which confirms that the market is in an uptrend momentum. Most of the weekly profits came on Friday, especially after the dovish speech of Fed’s head Jerome Powell. Powell said that rates are “well into restrictive territory.” and that “The full effects of our tightening have likely not yet been felt”. He also said that inflation remains significantly higher than the target but is trending in the correct direction. These statements were enough to create a positive environment as the sense that is established and somehow confirmed by Powell’s speech is that no more hikes will take place and that during the first half of the next year, the rate reduction may start. This perception comes along with the solid picture of the U.S. economy lately. As per the previous week, results were also positive: 5.2% growth in 2023 Q3 GDP and personal consumption expenditures dropped from 3.4% to 3% which indicates a drop in inflation too. Only the manufacturing PMI was announced at 46.7, lower than the market expectations of 47.6. SP500 has approached the important resistance of 4,607 points which is the highest price of about 1.5 years. A technical bearish reaction is likely and if the macros of the week also contribute, we may see corrections so we may try short positions this week.
The German DAX40 index was bullish last week, closing at 16,398 points, with profits a bit more than 2.30%. The rally of the 5 last weeks is really strong with total profits close to 12%. The positive news comes from both central banks, the Fed, and ECB as all the latest information converges to the conclusion that the interest rates hike cycle is over. Moreover, some latest reports mention that the ECB may start the rates reduction, earlier than expected, even earlier than the Fed. The German economy had also other reasons to feel more comfortable as the Chinese manufacturing Caixin PMI was announced well above expectations, indicating a possible recovery of China’s economy. The Chinese economy is very important for Germany as Germany is China’s biggest trading partner and technology exporter in Europe. German economic data was also encouraging: retail sales increased by 1.1% last month while the manufacturing PMI was announced at 42.6 vs 42.3 expected. Inflation dropped to 2.3% and the recent auction of 10-year German bonds had a significant yield reduction from 2.64% to 2.45%. Such a strong rally though, may cause corrections due to profit-taking or other technical reasons. At least, the European economy is not that far out as the indices show. We may try short positions this week.
The British FTSE100 index moved upward last week, closing at 7,529 points, earning about 0.55%. Obviously, FTSE100 underperformed the other major stock indices. The general sentiment is positive due to the perception that the interest rate cuts in most of the big central banks will start during the next spring and so far, the heavy recession scenario has not been confirmed. The UK has still very high inflation compared to other economies like the U.S. and the Eurozone. It means that we may see new interest rate hikes by the Bank of England or at least, the existing ones may remain much longer. Andrew Bailey (head of the BoE) last week was hawkish enough. Andrew Bailey, speaking in the Henry Plumb Memorial Lecture, remarked that although inflation has exceeded the BoE’s primary objectives, indications suggest that soaring prices, particularly in the food sector, are starting to show signs of moderation but he also said that there is still a considerable distance to cover before achieving the 2% target again. There’s a lack of important economic announcements for the UK economy this week and we’d prefer short positions.
The previous week was strongly bullish for gold, with futures closing at $2,071 and profits of more than 3.40%. Gold prices attained a record peak last week, driven by comments from Fed chair Jerome Powell that instilled confidence among traders, suggesting that the U.S. central bank’s tightening of monetary policy could be approaching its conclusion. Markets interpreted Powell’s speech as dovish, with indications of potential interest rate cuts as early as next spring. The market responses to Powell’s remarks were varied. Bond yields declined, with the U.S. 10-year yield decreasing to 4.21%, even though Powell warned against expecting substantial rate cuts. The U.S. dollar experienced a decline in strength following Powell’s prudent approach to interest rate adjustments. The depreciation of the dollar generally enhances the appeal of gold. The U.S. dollar index decreased, ending the week lower for the third consecutive time. The current week opened with a strong bullish gap, up to $2,152 but as time goes by the gap is filling. The trend is without any doubt strongly bullish but the record highs and gold’s history in periods of interest rates pitches may indicate important corrections so we’d prefer short positions this week.
Last week was bearish for oil with the next month’s futures closing at $74.36, with losses of 1.10%. The decrease was a response to a variety of factors, encompassing investor doubt regarding the extent of OPEC+ supply reductions and apprehensions about a worldwide deceleration in manufacturing that could affect demand. On Thursday, the OPEC+ members reached an agreement to implement voluntary production cuts amounting to approximately 2.2 million barrels per day (bpd) for the beginning of the next year. This initiative is spearheaded by Saudi Arabia, which has decided to maintain its existing voluntary cut. The current output of OPEC+, standing at around 43M bpd, already incorporates reductions of approximately 5M bpd, intended to bolster prices and bring stability to the market. The production cuts figure encompasses the continuation of voluntary cuts by Saudi Arabia and Russia, contributing 1.3M bpd to the overall reduction. After the announcement, oil prices dropped more than 2%. This reaction highlights the market’s uncertainty regarding the efficacy of the cuts and the global economic outlook. This response from the market also suggests a degree of disappointment, as certain investors were expecting more assertive measures from OPEC+. As per the U.S. Energy Information Administration (EIA), the crude oil reserves in the United States continued to rise in the week ending November 24th, increasing by 1.6M barrels. While this figure marks a significant decrease from the previous week’s addition of 8.7M barrels, it still exceeded the market’s optimistic projection of a 933K barrels reduction. With the market’s eyes on the current week’s news and especially on NFPs, we think that the downtrend may carry on so we prefer short positions this week.
EURUSD (Euro – US Dollar)
Last week was bearish for EURUSD as it opened at 1.0943 and closed at 1.0878. Although the U.S. dollar continued to weaken, the euro was unable to take advantage of it and the exchange rate had losses after two consecutive upward weeks. On Wednesday, the EURUSD managed to exceed 1.10 for the first time since last August, but the positive announcements about the US economy that we saw at the general comment, combined with some developments in relation to the Eurozone economy and the ECB’s decisions, brought strong corrective trends. On Thursday, in the Eurozone, a big drop in inflation was announced for last month (2.4% versus 2.9% in October), and on Friday, Goldman Sachs said it estimated that the Eurozone’s interest rate cuts would begin in the second quarter of the next year instead of the third quarter that was initially estimated. These developments were enough to bring down the euro and to give the week a negative sign. If Goldman Sachs estimates are correct and the Eurozone will start cutting interest rates earlier or at least alongside the Fed then the US dollar is favored against the euro, given that the US economy is in much better shape than the European one. The announcements for the two economies are important as we saw in the general comment and we’re keen to try sell positions this week.
GBPUSD (Great Britain Pound – US Dollar)
Bullish was the last week for GBPUSD, which opened at 1.2595 and closed at 1.2709. For the third week in a row, the exchange rate managed to rise mainly due to the weakening of the US dollar. As long as the prevailing view among markets is that the Fed is not going to raise interest rates and that it is going to lower them next May or June, the US dollar is losing points. The UK economy had no major economic announcements to contribute last week but Bank of England chief Andrew Bailey’s speech on Wednesday was of a strongly hawkish nature. Andrew Bailey said the 2% inflation target is still a long way off and that it takes a lot of hard work to achieve that. Most of the gains for the pair appeared in the final hours of the week after Jerome Powell’s speech which had a strongly dovish tone. The UK has no major announcements in this week either with the exception of perhaps the PMI indicators. By contrast, the United States has plenty of economic data to announce, most importantly of course the labour market (NFPs) on Friday. We may try sell positions this week.
USDJPY (US Dollar – Japanese Yen)
USDJPY was strongly bearish last week, opening at 149.41 and closing at 146.79. The weakening of the U.S. dollar and the large de-escalation in bond yields brought this strong decline to the USDJPY. Markets also appreciated the results of the Japanese economy announced last week. Industrial production, retail trade, and new housing starts were in positive territory. Unemployment fell even marginally to 2.5%, while PMI indicators also had a positive result. Also, markets on the edge of their minds have that the very loose monetary policy and negative interest rates in Japan will not continue forever, and this expectation is strengthening Japan’s currency. In addition to major announcements expected for the United States economy, Japan announces inflation next Tuesday. However, if the dollar starts to strengthen the USDJPY may recover so we may try buy positions this week.
EURJPY (Euro – Japanese Yen)
Strongly bearish was last week for EURJPY which opened at 163.44 and closed at 159.75. The drop was so sharp that he managed to bring the pair below 160 in a single week, considering that it was below 160 at the end of October. The positive economic results of the Japanese economy and the reports estimating that the European Central Bank will cut interest rates sooner than expected had this strong effect that we saw. Perhaps the markets are valuing the fact that the Bank of Japan is soon to change its monetary policy. Buy positions is our selection for the current week, thinking that it is too early for the JPY to form such a strong uptrend.
EURGBP (Euro – Great Britain Pound)
Last week was bearish for the EURGBP, as it opened at 0.8681 and closed at 0.8558. Andrew Bailey, with the hawkish nature of his statements throughout the week in relation to monetary policy and interest rates, helped sterling perform gains. On the other hand, a sharp decline in inflation in the euro area and some expectations that a rate cut will happen sooner than expected weakened the euro considerably. The UK has no severe economic announcements this week but the Eurozone announces retail sales and GDP. If the estimates about the central banks do not change then the picture for the exchange rate will not change and for this reason, we will prefer sell positions this week.
USDCAD (US Dollar – Canadian Dollar)
Bearish was the last week for USDCAD, as it opened at 1.3626 and closed at 1.3495. The continued weakening of the U.S. dollar was instrumental in this new decline in the exchange rate. For three consecutive weeks, the USDCAD has fallen to lower levels, even though Canada’s main export commodity oil which is the country’s dollar barometer has also fallen. Markets, obviously value Canada’s economy positively, which is confirmed by the latest economic announcements. The labor market looks quite solid since last month the balance was positive by 25,000 job positions. GDP also increased marginally by 0.1% last month. The Bank of Canada has not been as dovish as the Fed lately, which is another reason why the exchange rate is falling. The perception Fed’s rate reduction in spring and the solid outlook of the U.S. economy may give some breath to the U.S. dollar so 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 0.8815 and the closing price was at 0.8690. Markets have formed the view that the Fed will not raise interest rates further and that the impending cut will occur within the first half of next year. This view significantly weakens the U.S. dollar. On the other hand, Switzerland’s economy had some positive results last week that favored the Swiss franc. More specifically, the KOF Leading Indicator strengthened to 96.7 while Switzerland’s GDP in the third quarter of this year increased by 0.3%. There are important announcements for the U.S. economy this week, including NFPs and we’re keen to try buy positions.
AUDUSD (Australian Dollar – US Dollar)
Bullish was the last week for AUDUSD, which opened at 0.6577 and closed at 0.6674. The US dollar was weak last week in contrast to the Australian dollar which was quite strong. Australian bank head Michelle Bullock gave a boost to the Australian dollar after she did not rule out further tight monetary policy in order to combat high inflation. A catalyst was also the positive news that came from China and related to manufacturing which was strengthened last month. Remember that Australia’s economy is closely tied to China’s and when China is doing well most of the time the Australian dollar strengthens. The announcements for the United States economy are important but important announcements also exist for the Australian economy: decisions on interest rates, GDP, and trade balance are announced. We expect a reaction from the greenback so sell positions is our selection for the current week.
Last week, Bitcoin was heavily bullish and closed at $39,989 with gains of 6.75%. We have not seen such high prices for Bitcoin since the April of 2022 which means that extraordinary events take place. Investors are becoming more convinced that the Federal Reserve has concluded its series of interest rate hikes as inflation moderates. It makes the global sentiment positive and the risk-on asset classes such as the cryptocurrencies are favored. The cryptocurrency community is also anticipating the decision on applications by the SEC, including those from entities like BlackRock, to launch the first-ever U.S. spot Bitcoin ETFs. Bloomberg Intelligence anticipates that a group of such products could have approval from the SEC by January. Some high-risk issues regarding big exchanges seem to be removed after the latest developments. Changpeng Zhao is said to be officially stepping down from his position as Binance’s CEO following a $4.3 billion fine imposed on the cryptocurrency exchange but markets welcomed this news as they consider that the Binance-SEC war is over. Early in the current week, the uptrend rally carries on and Bitcoin is already above $41K so by following this strong trend we’d prefer long positions this week.
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.
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