25/12/2023

General Comment

The previous week ended with relative calm for financial markets after both the lack of major economic announcements and the entry of the Western world into the Christmas holiday season reduced volatility. Some important news and announcements came from the United States and maintained the positive climate that has formed for some months. The announcements of U.S. GDP for the third quarter of the year and personal consumption expenditures had a positive impact on markets, without large divergences from expected prices.

In Europe, things were somewhat different. Of course, it was singled out for an announcement on inflation in the Eurozone that seems to have significantly de-escalated and is now approaching the 2% target that has been set. However, markets reacted with caution as the Eurozone continues to face significant economic problems.

On the part of China, the other great player of the international economy, there was relative calm. The People’s Bank of China left interest rates unchanged at 3.65%, as markets had expected.

In addition to economic announcements, markets, and international trade have been disrupted by ongoing attacks by Houthi rebels on merchant ships. Approximately 19,000 ships sail through the Suez Canal annually, and the extended time it takes the ship to complete a longer mileage and time journey is expected to absorb 20% of the global fleet capacity, leading to delays in the availability of shipping resources. Continued attacks by Houthi rebels on ships have prompted many companies shipping containers and tankers for now to announce they will stop crossing the Suez Canal and circle Africa for routes to Asia. It is a major problem for the international trading system.

To sum up, the U.S. stock index continued to move upward; several European indexes stabilized or even had a small correction. Commodity markets moved up, with gold, oil, and copper performing significant gains. The U.S. dollar continued to weaken against its main competitors. Markets have now speculated that the U.S. rate cut will begin in the first quarter of 2024 and are trying to gauge the chances of when it will happen to other central banks. We saw stabilizing trends in bond yields with the U.S. bond yield closing the week around 3.90%. Finally, bitcoin and most cryptocurrencies returned to an upward trend after a correction week.

The current week is extremely poor in relation to economic announcements. A few announcements stand out in the United States that have to do mainly with housing markets. Therefore, the week may have low volatility, which may spike many assets.

SP500

With bullish trends, the US SP500 index closed last week, at 4,755 points and profits of 0.76%. The index has completed 8 consecutive weeks of rise, as the climate remains positive. Markets have now discounted that the Fed will cut interest rates in the first quarter of 2024, and so far, signs and evidence of a recession have not been confirmed. The new financial results announced are also aligned in this direction. US GDP for the third quarter of 2023, which may have been announced below market expectations, remains strong at 4.9%. Personal consumption expenditures fell from 2.8% to 2.6%, which confirms that inflation is falling. Durable goods orders rose by an impressive 5.4%, while the Michigan Consumer Sentiment Index was announced at an impressive 69.7. There is little concern about the disruption of international trade in the Red Sea and whether it might affect and bring back inflation, but the climate has not been disturbed by now. Last Wednesday we saw a sharp correction which must be attributed rather to technical reasons than to actual reasons. It is not excluded that the positive climate will continue for another week even with reduced volatility and therefore we may try long positions.

DAX30

The German DAX40 index was slightly bearish last week, closing at 16,706 points, with losses a bit more than 0.25%. Volatility has been reduced mainly due to the days and Christmas holidays. The confidence in the markets may be that a rate cut by the European Central Bank will begin soon enough, but the effects of expensive money and high rates on the economy are already evident. In Germany, last week’s announcements were not many but they were not in positive territory. The business sentiment index was down to 86.4 while consumer confidence is also negative. Inflation, however, continues to decline in Germany and the Eurozone, as at least the large decrease in the producer price index that we saw last week showed. The DAX40 was recently found at new historical highs, but this is with the state of the economy and therefore it is not excluded that we will see new corrections. We may try short positions this week.

FTSE100

The British FTSE100 index moved upward last week, closing at 7,697 points, earning about 1.60%. The week had started positively but strengthened significantly due to the large de-escalation of inflation, as we saw in last Wednesday’s announcement. Inflation fell sharply to 3.9% from 4.6% in the previous month, while producer price and retail sales indices also fell significantly. This made the markets reconsider their opinion on the Bank of England’s next actions which as expected will be softer. Such a development clearly favors the share market and thus the FTSE100 was outperforming the other main indices of Europe and America. The positive sentiment continued on Friday even though GDP was announced in slightly negative territory at -0.1%. The 1.3% increase in retail sales showed that at least consumption remains high. It remains to be seen whether this positive climate will continue but for this week we will choose long positions.

Gold

The previous week was bullish for gold, with the next month’s futures closing at $2,064.5 and profits of more than 2.15%. There is increased confidence among investors that the Fed will reduce interest rates more significantly than indicated in its “dot plot.” This sentiment also boosts the expectation that the Fed will initiate its rate-cutting phase earlier than initially anticipated, potentially starting in March of the following year. Investors are now considering the likelihood of a 1.5% interest rate cut by the Federal Reserve in 2024. Beyond Fed and interest rates, the weak dollar is a factor that limits the uptrend for gold prices. This uptrend is helped by the great de-escalation of the bond yields that we have seen recently. The geopolitical climate in 2024 is anticipated to be turbulent and unpredictable. Investors seek more secure assets, which reinforces gold’s role as a safe-haven during periods of geopolitical instability. However, it seems that for the moment gold prices cannot develop a strong bullish trend and corrections may occur, so we prefer short positions this week.

US Oil

Last week was bearish for oil with the next month’s futures closing at $73.49, with profits close to 2.90%. Volatility for oil prices was particularly high, influenced by escalating tensions in the Middle East that are impacting oil supply routes, along with a declining U.S. Dollar, which makes the commodity more affordable for international buyers. The potential for interruptions in oil transport caused by the activities of Houthi militants in the Red Sea has been a key element driving up oil prices. The situation is further complicated by a recent report from the Energy Information Administration showing an unexpected increase in U.S. inventories. This rise suggests a potential oversupply, which could suppress oil prices. Additionally, Angola’s departure from OPEC is sparking discussions about the organization’s continued influence on global oil pricing. We believe that the oversupply may override the Red Sea temporary issues so we may try short positions this week.

EURUSD (Euro – US Dollar)
Last week was bullish for EURUSD as it opened at 1.0894 and closed at 1.1013. The U.S. dollar has continued to weaken, with confidence that the Fed’s rate cuts will begin in the first quarter of 2024. The inflation of the United States and the estimates for its course allow this. In the Eurozone inflation is also decelerating and was announced last month at 2.4%, which is close enough to the 2% target set repeatedly by Christine Lagarde. However, it is not so clear when the European Central Bank will start cutting interest rates in the Eurozone, and this uncertainty is something that strengthens the euro.  With the exception of some minor announcements in the United States the economic calendar of the current week is poor and therefore volatility is expected to decrease as well. Giving a greater chance of continuing the current trend we will choose buy positions this week too.

GBPUSD (Great Britain Pound – US Dollar)

Bullish was the last week for GBPUSD, which opened at 1.2680 and closed at 1.2697. The exchange rate was unable to take advantage of continued weakness in the U.S. dollar after sterling also weakened. A key issue was last month’s inflation announcement in the UK. Inflation had been at 4.6%, markets were expecting a de-escalation to 4.4% while the announcement was finally 3.9%. As is perfectly reasonable, the markets feel that the Bank of England has no reason to be particularly aggressive and that perhaps soon in 20124 the reductions in interest rates would begin. These developments have had a negative impact on sterling. On Friday there were major announcements about the economy in the UK. These announcements mainly related to GDP and retail sales had a mixed sign and thus did not largely determine the trend of the pair. For GBPUSD there could still be a downward shift as the U.S. economy is in much better shape and therefore, we may try sell positions this week.

USDJPY (US Dollar – Japanese Yen)

USDJPY was bullish last week, opening at 142.06 and closing at 142.39. It was a bullish reaction for the pair after 5 straight weeks of declines. The most important development occurred on Tuesday with the announcement of interest rates by the Bank of Japan and the announcement of monetary policy. The Bank of Japan left interest rates unchanged at -0.1% but both the monetary policy announcement and the speech by Bank head Ueda were dovish. Not only has there been no change in monetary policy, but Ueda said there would be further easing if necessary. Although markets have estimated a change in monetary policy will happen soon, they cannot ignore these statements. Inflation in Japan was announced at 2.8%, which is not a particular risk. However, the downward trend has not changed yet and perhaps this upward reaction was transient and for this reason, we prefer sell positions this week.

EURJPY (Euro – Japanese Yen)
Bullish was last week for EURJPY which opened at 154.73 and closed at 156.85. The announcement of interest rates and monetary policy by the Bank of Japan was a strong blow to the yen. There was no change in interest rates as expected but the bank’s stance was quite dovish. On the other hand, it is not clear when the European Central Bank will start cutting interest rates, but the difference in interest rates between the two banks is a given and is likely to push the rate higher. However, the markets assess that the Bank of Japan, that sooner or later the Bank of Japan will change monetary policy and therefore we could try sell positions this week.

EURGBP (Euro – Great Britain Pound)

Last week was strongly bullish for the EURGBP, as it opened at 0.8581 and closed at 0.8671. This strong move was mainly due to the weakness shown by sterling. Inflation in the United Kingdom de-escalated sharply last month to 3.9%, which may force the Bank of England to revise its very aggressive monetary policy. Inflation in the Eurozone was announced at fairly low levels at 2.4% and most likely in 2024, the European Central Bank will start to reduce the interest rates. The recent development of inflation in the United Kingdom may bring about a certain equilibrium in the exchange rate, and for this reason, we may stay out this week.

USDCAD (US Dollar – Canadian Dollar)

Bearish was the last week for USDCAD, as it opened at 1.3366 and closed at 1.3259. The U.S. dollar continued to weaken for another week, pushing the exchange rate lower as the Canadian dollar had some reasons to strengthen. First of all, inflation in Canada was reported last month above the 2.9% expected by markets, at 3.1%. This may put the Bank of Canada on second thoughts in relation to the start of a reduction in interest rates. Another factor that boosted the dollar of Canada was the recovery in oil prices. Regarding the other economic announcements, the country’s GDP in the last quarter remained unchanged, and retail sales increased by 0.7%. However, if markets start to assess the strength of the US economy, we may see the US dollar strengthen and for that reason, 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 0.8672 and the closing price was at 0.8557. The weakening of the U.S. dollar was the main reason for this downward move. Thus, the exchange rate continued the downward trend that started about 3 months ago. Switzerland’s economy had little to contribute last week. An important event was the announcement of the trade balance, which was increased in relation to market expectations and was announced at 3.7 billion francs. Given the strength and robustness of the US economy and the fact that the exchange rate has reached significant levels of support, we will choose buy positions this week.

AUDUSD (Australian Dollar – US Dollar)

Bullish was the last week for AUDUSD, which opened at 0.6693 and closed at 0.6795. In addition to the continued weakness of the U.S. dollar, the Australian Dollar continues to have particular reasons for strengthening. The minutes from the recent meeting show that the Reserve Bank of Australia has decided to maintain the current interest rate. This decision reflects the Australian authorities’ commitment to fighting inflation, while still leaving the door open for potential future increases in interest rates. Also, the recent rise in commodity prices is something that has been boosting the Australian dollar traditionally. As for the news from China, which most of the time affects the Australian dollar, there was no important news as interest rates remained unchanged at 3.65%. One negative news, of course, is that foreign direct investment in China fell by 10% last month. Although the exchange rate has been on a strong upward trend for about two months, it is not ruled out a recovery of the U.S. dollar and therefore we prefer buy positions this week.

Bitcoin

Last week, Bitcoin was bullish and closed at $43,033 with profits of more than 4%. On Thursday, officials from the U.S. Securities and Exchange Commission met with representatives from at least seven companies planning to launch exchange-traded funds (ETFs) linked to spot bitcoin in early 2024. According to public memos and information from two individuals familiar with the talks, the SEC instructed at least two companies to submit their final changes by the end of the current week. Participants in these discussions with the SEC included representatives from BlackRock. Grayscale Investments, ARK Investments, and other companies. The approval window set by the SEC from January 5 to January 10, 2024, is drawing near and there’s obvious optimism in the crypto markets. Many voices claim that we may see all-time highs for Bitcoin soon. As the SEC approval approaches, we may see price corrections though based on the logic ‘buy the rumor – sell the news’ 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.