The market uptrend continued for another week. The U.S. economy, which is the driver of the global economy, is proving to be particularly resilient, as although interest rates have remained at particularly high levels for some time, there are no signs of a recession or even a slowdown in growth. The services sector as expressed by the PMI indicator performed particularly well and was announced over 50 while the announcement that everyone had been waiting for, on the labor market for last month showed that new jobs increased by 199K, compared with an expected result of 180K. The positive picture of the labor market in the United States fills investors with optimism since it is an important macroeconomic figure. The week closed with the announcement of the Michigan consumer sentiment index which exceeded all expectations and was announced at 69.4. Another factor of optimism is that markets now consider as the more likely scenario that a Fed rate cut will start in March, well ahead of previous months ‘ estimates.
Europe has a rather different picture. Last week several economic data announced found themselves in negative territory. Retail sales fell, as did the GDP of the previous quarter and it seems that the Eurozone will hardly avoid a recession. What is now important is the duration and intensity of this recession.
As far as the rest of the world is concerned, a lot of investment eyes have recently fallen on China. China had a positive outlook for the services sector and trade balance, but inflation announced on Saturday, while markets were closed, is expected to raise new concerns. Markets were expecting inflation of -0.2% last month while the announcement was -0.5%. This constitutes intense deflation with what this entails in consumption and other sectors of the economy. There is, of course, a positive reading of this, since perhaps sharply negative inflation will trigger loose monetary policy and fiscal expansion, something that markets will welcome with particular fervor.
Nearly all major equity indices had a strong upward trend last week, with major commodities such as gold and oil losing significantly. The U.S. dollar, after three straight weeks of decline, rebounded last week against its main competitors. The bond market remained almost unchanged with the U.S. 10-year bond closing the week around 4.23%. Finally, the upward rally in the cryptocurrency market continued unabated.
The week we have just entered is very important and critical. Inflation is announced in the United States on Tuesday, followed by the Fed’s interest rate decision and press conference the next day. The European Central Bank, the Bank of England, and the Swiss National Bank will announce their decision on interest rates on Thursday. Market volatility is expected to remain at very high levels.
With mild bullish trends, the US SP500 index closed last week, at 4,604 points and profits of 0.20%. SP500 completed six consecutive weeks of profits which is something that indicates a clear uptrend. The robustness in the jobs market, as Non-Farm Payrolls increased by 199K, surpassing the anticipated 180K, coupled with a decline in the unemployment rate to 3.7%, has dampened expectations for a prompt reduction in Fed interest rates. Also, the other recent macro results, including GDP, manufacturing, and services show that the bad scenario of a recession is not the most likely case. According to the FedWatch tool, the interest rate cut will start taking place early next spring. Today may be a quiet day due to the lack of events but on Tuesday the inflation announcement and on Wednesday the FOMC, the interest rates decision, and the press conference may increase the volatility significantly. Markets expect that there will be no change in interest rates in this session but the press conference and the speculation on the future plans of the Fed will be in focus. We may try long positions this week, trusting that the trend is still on.
The German DAX40 index was bullish last week, closing at 16,759 points, with profits a bit more than 2.20%. The strong uptrend rally of DAX40 continues, breaking any possible resistance that appears. The inflation report for Germany validated the initial figures. In November, the inflation rate in Germany eased from 3.8% to 3.2%. If inflation figures also decline across the entire euro area, it could bolster a more accommodative ECB rate trajectory and contribute to increased consumer spending. Industrial production dropped last month in Germany by 0.4% and the factory orders decreased by 3.7%. In contrast, PMIs had a good performance, although still below 50, and the trade balance was announced to be 17.8 billion euros, exceeding marginally the estimations. This week, the focus is on the ECB interest rates decision. Most likely, there will be no change in rates but the following press conference may provide extra information regarding ECB’s plans. Markets are positive that the rate cut may start soon enough and if this perception prevails, a new rally may occur. However, inflation in the Eurozone is still high and the European economy still faces many issues so we prefer short positions this week.
The British FTSE100 index moved upward last week, closing at 7,554 points, earning about 0.33%. FTSE100 was more affected by the positive investing sentiment globally than its own strength. Inflation in the UK is still too high and the Bank of England is not comfortable in planning interest rate cuts like the Fed and the ECB already do. The Bank of England is going to announce the interest rate decision on Thursday. Most likely, rates will remain unchanged at 5.25% but we cannot rule out any possible surprises. The focus will be on the monetary policy report that will be released on the same day and markets will try to decode the next steps from the BoE. The UK has also other important data to announce this week: the unemployment rate on Tuesday and the manufacturing/industrial production & trade balance on Wednesday. It seems that the FTSE100 does not have the same uptrend strength as the other major indices do and in case of a market correction, it will be affected more so we may try short positions this week.
The previous week was strongly bearish for gold, with the futures closing at $1,998.3 and losses of more than 3.50%. It was unnatural for the gold prices to be at such high levels since there are no extraordinary situations taking place currently: there was not an intense risk-off mood, the inflation seems to be tamed and other competitive assets like the bond yields have decreased in the last period. The strength of the dollar, exerts downward pressure on gold prices, as it increases the cost for holders of other currencies. The strong U.S. jobs report released on Friday, signaling a resilient labor market, has reduced expectations of imminent interest rate cuts by the Fed. The presence of deflationary pressures in China, coupled with global economic uncertainties, adds complexity to the environment for gold. The upcoming focus on Wednesday’s FOMC meeting and U.S. inflation data becomes crucial. If the Fed signals a dovish stance, it could weaken the dollar and potentially lead to an increase in gold prices. On the other hand, if the Fed adopts a hawkish tone, it might strengthen the dollar, putting pressure on gold. We think that the correction in gold prices may continue so we prefer short positions this week.
Last week was bearish for oil with the next month’s futures closing at $71.23, with losses of 4.20%. For seven consecutive weeks, the oil prices drop and it is something that should cause thoughts and considerations, especially after the OPEC+ decision of new production cuts. On Friday oil prices performed a bullish reaction and this upward movement coincided with the release of data from the U.S. jobs market, which indicated robust job growth. It was a positive signal for fuel demand. Despite this positive development, lingering concerns persisted due to an unexpected rise in U.S. gasoline stocks, hinting at a potential oversupply in the market. The recent decline in prices prompted the United States to capitalize on the opportunity, as it sought to purchase up to 3 million barrels of crude oil for the Strategic Petroleum Reserve scheduled for March 2024. The decision to secure lower prices through this purchase aligns with the strategy employed in the previous year when a significant volume of crude oil was sold from the Strategic Petroleum Reserve. That move was aimed at alleviating the repercussions of geopolitical tensions. Although OPEC+, has committed to reducing production by 2.2 million barrels per day in the first quarter, investor skepticism persists regarding adherence to these cuts. Anticipated output growth in non-OPEC+ countries is poised to contribute to an oversupply situation next year. Of course, markets will also focus on the announcements & decisions of the following days, including interest rate decisions from many central banks and the U.S. inflation announcement. We believe that the downtrend is able to return so we may try short positions this week.
EURUSD (Euro – US Dollar)
Last week was bearish for EURUSD as it opened at 1.0877 and closed at 1.0757. The U.S. dollar, after three straight weeks of falls, recovered and pushed the exchange rate lower. Markets now assess that both the Fed and the European Central Bank will begin cutting interest rates next spring. So, the central banks and interest rates factor is slowly getting out of the way and giving way to the condition and resilience of economies. The U.S. economy is in much better shape than the European economy as reflected in the latest announcements. The robust labour market in the United States, as we saw in the general comment, is the most important factor. Europe, on the other hand, had most of its announcements in negative territory. The retail sales in the Eurozone fell by 1.2%, GDP for the previous quarter fell by 0.1% while the only source of optimism was PMI indicators announced above expected but still below 50. The current week has important announcements and decisions to contribute. Interest rate announcements for the Fed on Wednesday and for the European Central Bank on Thursday stand out, of course. The report on inflation in the United States on Tuesday is also very important. We may try buy positions this week.
GBPUSD (Great Britain Pound – US Dollar)
Bearish was the last week for GBPUSD, which opened at 1.2688 and closed at 1.2547. This downward move for the exchange rate is mainly due to the strengthening of the U.S. dollar. The dollar strengthened based on the healthy results that the U.S. economy continues to announce. The labor market, PMI indicators, and consumer sentiment index confirm this conclusion. The announcements for the UK last week were not particularly significant. Only PMI indicators were singled out, which had a relatively good result. But the big problem for the UK economy continues to be high inflation, even if it has significantly de-escalated. This fact currently prevents the Bank of England from thinking about rate cuts as the Fed is doing. Fed will probably make cuts next spring. The United States announces inflation on Tuesday and its decision on interest rates on Wednesday, while the Bank of England announces its decision on interest rates on Thursday. Buy positions is our selection for the current week.
USDJPY (US Dollar – Japanese Yen)
USDJPY was strongly bearish last week, opening at 146.67 and closing at 144.97 Although the U.S. dollar strengthened last week, the exchange rate fell sharply due to several important developments around the Japanese currency. Investors have swiftly factored in the likelihood of the Bank of Japan abandoning the negative interest rate policy earlier than anticipated. Heightening speculation about a departure from the extremely accommodative monetary approach, the BoJ has undertaken a special survey involving market participants to examine the effects and potential repercussions. Additionally, the visit of BoJ head Ueda to Prime Minister Fumio Kishida’s office has increased expectations for a significant change in policy by the Japanese central bank and has notably strengthened the Japanese yen. In addition to these developments, there were important announcements about Japan’s economy. Inflation, as reported by the Tokyo Consumer Price Index, fell to 2.6% while Japan’s GDP fell by 0.7% in the third quarter. Rumors of a change in monetary policy in Japan outweighed both the strength of the U.S. dollar and bond yields. This week the U.S. economy, both because of the inflation announcement and the decision on interest rates and the press conference to follow, will be back in focus. We think that markets overacted regarding the Bank of Japan’s next actions so we may try buy positions this week.
EURJPY (Euro – Japanese Yen)
Strongly bearish was last week for EURJPY which opened at 159.58 and closed at 155.99. The euro did not experience a period of strengthening, unlike the yen, which last week was perhaps the most strengthened currency. Α lot of data and indications last week made markets converge on the conclusion that the Bank of Japan will soon leave behind the very loose monetary policy and negative interest rates. Some statements by officials and a visit by the head of the Bank of Japan Ueda to the Japanese prime minister triggered these scenarios. It is still too early for the JPY to have such a strong trend change so we prefer buy positions this week.
EURGBP (Euro – Great Britain Pound)
Last week was slightly bullish for the EURGBP, as it opened at 0.8564 and closed at 0.8572. It’s obvious that last week the euro and sterling weakened and so there was that balance between them. The European economy has major problems as reflected in the latest announcements, but the UK is not in particularly good shape due to the problem of high inflation. At the moment the Bank of England cannot think of lowering interest rates and changing tight monetary policy. The European Central Bank and the Bank of England will announce their interest rate decisions this week so volatility will likely remain high. Given that inflation is higher in the UK than in the Eurozone, it might give sterling more points, and that’s why we’ll choose sell positions this week.
USDCAD (US Dollar – Canadian Dollar)
Bullish was the last week for USDCAD, as it opened at 1.3499 and closed at 1.3581. The recovery of the U.S. dollar was certainly the main reason for this upward exchange rate reaction. In addition, the new losses that oil prices have had were a major reason for the Canadian dollar to weaken. Also, last Thursday the Bank of Canada left the interest rates unchanged at 5% and tempered its aggressive language, toning down comments regarding the risks of inflation and shifting the pressure on prices. The Bank of Canada just retained certain hawkish statements, emphasizing that interest rates may increase if inflationary pressures resurface but the perception of the markets did not change. The announcements and decisions of the United States will be in focus this week and if these developments lead to the weakening of the U.S. dollar we may see the exchange rate turn downward again and that’s why we prefer sell positions this week.
USDCHF (US Dollar – Swiss Franc)
The USDCHF had an upward course last week as the opening price was at 0.8682 and the closing price was at 0.8799. After three consecutive declining weeks, the exchange rate was able to show an upward recovery based on the strength of the U.S. dollar. The results of the Swiss economy were rather in the direction of weakening the Swiss franc. Inflation in Switzerland fell to 1.4% from 1.7% the previous month, a result that was even below market expectations of 1.6%. Such a price in inflation does not give much chance for new interventions by the Swiss National Bank. The Swiss National Bank will announce its interest rate decision later this week, as will the Fed. The events of the current week will set the U.S. dollar in focus again and we prefer sell positions.
AUDUSD (Australian Dollar – US Dollar)
Bearish was the last week for AUDUSD, which opened at 0.6666 and closed at 0.6575. In addition to the US dollar rebounding last week, the weakening of the Australian dollar was also significant. The Reserve Bank of Australia left interest rates unchanged at 4.35% which is what the markets expected but the negative effect on the AUD was strong. Governor Michele Bullock of the RBA delivered the monetary policy statement, outlining some key points. She said that the decision on whether additional measures to tighten monetary policy are necessary to bring inflation back to the target within a reasonable timeframe will hinge on data trends and the ongoing evaluation of associated risks. The results from China, which usually affect the Australian dollar, were encouraging during the week. The Caixin PMI indicator for services exceeded market expectations, while the trade balance for the previous month was more than $ 68 billion, $10 billion above what markets had estimated. On Saturday, however, strong negative inflation in China may cause tremors. We may try sell positions this week.
Last week, Bitcoin was heavily bullish and closed at $43,786 with profits of 9.50%. Indeed, the performance of Bitcoin in the latest week is impressive. In the last three months, the cumulative profits are 50%. The 12-month profits are more than 156%. Several factors have contributed to this outlook. Expectations heightened for the approval of spot Bitcoin ETFs by the U.S. Securities and Exchange Commission (SEC). Additionally, the countdown for the Bitcoin halving event is steadily approaching its culmination. Of course, beyond the crypto-specific factors, Bitcoin is favored due to the developments of the traditional economy. Optimism that the global economies will avoid recession and that the interest rate reduction will start soon has boosted the risk-on mood and many investors prefer riskier asset classes such as the cryptos. Today, the Bitcoin price witnessed a correction of more than 3%, setting the stage for key macroeconomic events scheduled for the week. The release of November U.S. inflation data will affect the crypto markets. Market participants are also closely monitoring the FOMC interest rate decision & monetary policy announcement on Wednesday, recognizing their potential impact on Bitcoin’s market dynamics. Experts generally agree that the Fed is unlikely to raise interest rates. Higher interest rates typically hurt risk assets such as Bitcoin. A heightened probability of a rate hike could consequently intensify pressure on the price of Bitcoin, potentially leading to further corrections in the asset’s value. On the contrary, a perception that interest rates may start dropping soon will reasonably favor the crypto markets. This week the volatility makes sense to increase and in volatile assets classes like the cryptos may become even higher. It is wise for us to stay out 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.
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.