01/01/2024

General Comment

The last week of the year was positive for financial markets, although volatility due to the days was visibly reduced. The lack of important news and announcements did not allow investors to have new views and information. Under these conditions, the perception of the markets regarding the central banks and the policy they are going to exercise mainly in the first months of the new year prevailed again. In most of the world’s major economies, inflation has decelerated significantly, and markets have the impression that in the first quarter of the new year, central banks will begin to reduce interest rates. Especially in the United States, this impression has been accompanied by corresponding statements from central bank officials. A similar feeling exists for the European Central Bank although the information is limited.

As far as the Bank of England is concerned, the high inflation that remains does not allow for such actions, even though we have seen a sharp decline in inflation over the last month. The big question remains the Bank of Japan which continues to have negative interest rates very loose monetary policy. The markets have repeatedly thought that soon it will take place, but so far, they have been disproved. In China, the deflation of the last months will allow the People’s Bank of China to have a loose monetary policy with significant fiscal expansion. Markets most likely will welcome such a development. 

Due to low volatility, equity markets performed some mild gains last week. As far as the commodity market is concerned, the sign was mixed with gold gaining but with a significant decline in oil prices. Bond yields continued their downward trend and the yield on the 10-year U.S. bond closed the week near 3.87%. The U.S. dollar continued to weaken while other currencies such as the euro and sterling made some gains. Bitcoin and most cryptocurrencies had losses.

The interest in the markets returns in the first week of the new year with important news and announcements. They stand out, of course, the announcement of the Fed’s minutes on Wednesday and the announcement of the United States labor market on Friday (NFPs). Other important announcements are PMI indicators for most of the world’s main economies, inflation in the Eurozone, and retail sales in Germany.

SP500

The US SP500 index was bullish last week as it closed at 4,770 points and profits of 0.31%. The index had another profitable month after the very profitable November and so it hit new year highs that are close to all-time highs, about a year ago. The technology sector, particularly in artificial intelligence, has experienced a significant increase and has helped the stock markets drastically. The possibility of the Fed transitioning from steep interest rate hikes to potential reductions early next year has also markedly influenced the market. This policy change indicates a potential softening of the U.S. economic path and drives positive investor anticipations for 2024. New economic data will be added this week: the Fed’s minutes on Wednesday and the announcement on the U.S. labor market (NFPs) on Friday. The climate seems positive, so we prefer long positions this week.

DAX30

The German DAX40 index was slightly bullish last week, closing at 16,752 points, with profits of 0.28%. It was the second week in a row with reduced volatility due to the festive days and the lack of economic news and announcements. The sentiment, however, has remained positive as the index has risen significantly since the end of October. European markets have been affected by the positive international economic climate, especially from the USA, since there is a widespread impression that the cycle of high interest rates will end soon without any serious impact on the economy. In the first week of the new year, retail sales and the unemployment rate are announced in Germany, which will give new fuel of information to the markets. However, it is obvious that the European economy is behind the American economy, and this may be reflected in the choices of investors. We may try short positions this week.

FTSE100

The British FTSE100 index moved upward last week, closing at 7,733 points, earning about 0.46%. Since the end of October, the index has had an impressive recovery, which has intensified in recent weeks. The large de-escalation of inflation in the UK that we have seen recently has given the impression to a large portion of investors that the Bank of England will not make any more interest rate rises but will instead start cutting in the first half of the new year. If this happens, it would be an alignment of the Bank of England with other central banks such as the Fed and the European Central Bank. The first week of the new year has no major announcements for the British economy and we may see the positive climate continue therefore we will choose long positions.

Gold

The previous week was bullish for gold, with the next month’s futures closing at $2,072 and profits of more than 2.15%. Gold continues to follow an uptrend, buoyed by anticipations of the Fed implementing early rate reductions in 2024. The markets expect several rate reductions in 2024, with the initial cut projected to occur during the Fed’s meeting in March. The rate cuts, driven by a downward trend in inflation, lessen the expense associated with holding gold. Lower interest rates decrease the opportunity cost of holding non-yielding assets, making gold more appealing to investors. The gold comes from 3 consecutive weeks of a bullish trend, and it is not excluded that we will see corrective trends dominate the first days of the new year. We prefer short positions this week.

US Oil

Last week was bearish for oil with the next month’s futures closing at $71.33, with losses of more than 3%. The tensions in the Red Sea are beginning to subside. Earlier in the month, key shipping companies had stopped using the Red Sea and the Suez Canal following attacks on vessels by Yemen’s Houthi militant group. It was a big relief for the industry which caused a significant decrease in oil prices. The latest data from the American Petroleum Institute (API) weekly report, released on Wednesday, showed that U.S. crude oil inventories rose by 1.837 million barrels last week versus 0.939 million barrels in the prior week. Also, according to Baker Hughes, the rigs increased in the U.S. from 498 to 500 during the last week. This data indicates a situation of over-supply which pushes the oil prices lower. Below $70 the bearish trend may accelerate, and we’re keen to try short positions this week.

EURUSD (Euro – US Dollar)
Last week was bullish for EURUSD as it opened at 1.1002 and closed at 1.1037. During the week the price of the exchange rate exceeded 1.11 but from Thursday onwards correction trends dominated. The U.S. dollar continues to weaken after markets have speculated that the Fed will start cutting interest rates very soon, most likely in March. Based on expectations the European Central Bank will also soon start cutting interest rates, but it is not clear when this can be done. This imbalance between the two central banks has created the upward trend that we have been seeing for some weeks. The current week contains important announcements and economic news that will clearly affect the exchange rate. The announcement of the Fed’s minutes, the United States labor market and inflation in the Eurozone stand out. The fact is that the U.S. economy is in much better shape than the European one; this will soon be seen in both economies ‘ currencies. We will choose sell positions this week.

GBPUSD (Great Britain Pound – US Dollar)

Bullish was the last week for GBPUSD, which opened at 1.2687 and closed at 1.2730. The exchange rate continued its upward trend that started in early October as the U.S. dollar continued to weaken. Sterling has had strong signs of recovery since high inflation in the UK prevented thoughts of cutting interest rates. But the big drop in inflation that we have seen lately is beginning to show in the sterling’s behavior, and so in the last two weeks, the rise has been with less intensity. The UK doesn’t have much to contribute to the economic calendar this week so the market will be focused on announcements from the United States. It is not excluded that announcements will strengthen the US dollar again and for this reason, we may try sell positions this week.

USDJPY (US Dollar – Japanese Yen)

USDJPY was bearish last week, opening at 142.24 and closing at 140.96. The U.S. dollar has continued to weaken as markets estimate that soon enough the Fed will start cutting interest rates. A strengthening factor in the downward trend of the exchange rate in recent times is clearly the large de-escalation of bond yields. However, important was the role of the yen as well. Markets are trying to figure out exactly when the negative interest rate policy from the Bank of Japan will change. Estimations say that it will not take long to happen. The bank’s head Ueda said the possibility of ending negative interest rates in 2024 is not zero. The rate has been close enough to the milestone price of 140 and will very likely meet support there. The trend is bearish though and therefore we prefer sell positions for one more week.

EURJPY (Euro – Japanese Yen)
Bearish was last week for EURJPY which opened at 156.67 and closed at 155.68. As long as markets believe that the moment is approaching when the Bank of Japan will review its very loose monetary policy and negative interest rates, Japan’s currency is strengthening. In this direction were also the recent statements of the head of the Bank of Japan who said that this could happen in 2024. On the other hand, the euro has been strengthening lately mainly due to the positive economic sentiment affecting the markets and prompting them to choose higher-risk solutions. However, it seems that the power of the yen is greater so we may try sell positions this week too.

EURGBP (Euro – Great Britain Pound)

Last week was neutral for the EURGBP, as it opened and closed around 0.8670. The euro and sterling have recently been buoyed by the positive economic sentiment that dominates markets and allows a sizable portion of investors to opt for higher-risk currencies. Until recently, the impression of the markets was that sterling is more likely to remain high, mainly due to high inflation in the UK. This impression has partially changed since, on the basis of the latest announcement, inflation in the UK has fallen significantly. We may try buy positions this week.

USDCAD (US Dollar – Canadian Dollar)

Slightly bearish was the last week for USDCAD, as it opened at 1.3254 and closed at 1.3246. The weakness of the U.S. dollar had pushed the exchange rate earlier in the week to well below 1.32. The U.S. dollar has been losing ground lately, as the markets have anticipated that the Fed will start lowering interest rates in the first quarter of the new year. So, since the end of October, a sharp decline has begun for USCAD, but it has decreased lately, especially since the middle of the week. The root cause was falling oil prices that pressured the Canadian dollar. If we see the U.S. dollar rebound then that reaction may have a continuation 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 0.8540 and the closing price was at 0.8414. There was no major economic news or announcements for the Swiss economy last week except for the KOF indicator, which was announced above market expectations with an extra tone of optimism for the Swiss economy. The main reason for the downward movement is certainly the weakness of the U.S. dollar. The dollar has been weakening for several weeks, mainly due to markets ‘ perception that the Fed will cut interest rates in the near future. However, the price range in which the exchange rate moves is a low price for several years and thus upward reactions are not excluded. We would prefer buy positions this week.

AUDUSD (Australian Dollar – US Dollar)

Slightly bullish was the last week for AUDUSD, which opened at 0.6801 and closed at 0.6806. The fact is that the exchange rate could not take advantage of the continued weakness of the U.S. dollar, so it had just a slight rise. This may be attributed to the strong rise we have seen lately which shows signs of exhaustion. Australia’s economy had no major economic announcements last week while China’s economy, which often affects the Australian dollar, had no announcements too. While markets were closed, the PMI Manufacturing Indicator in China was announced below market expectations. The uptrend is still active, and we’re keen to try buy positions this week.

Bitcoin

Last week, Bitcoin was bearish and closed at $42,258 with losses of 1.80%. According to a recent report by Reuters, the decision regarding the Bitcoin Spot ETF by the U.S. financial regulator (SEC) could be announced as early as this Tuesday. However, it seems that the impact of this news on the cryptocurrency markets has faded. Many investors overestimated the impact of Spot Bitcoin ETFs. In addition to waiting for the SEC’s decision, recent developments in the Fed’s expectations for interest rate cuts soon favor higher-risk options such as cryptocurrencies so the price of bitcoin remains high. Microstrategy (software company) purchased 14,620 Bitcoins between November 30 and December 26. It seems that the markets are beginning to regain their trust in cryptocurrencies. It is not excluded, however, that any approval of ETFs by the SEC may cause corrective trends since markets usually overreact to rumors and underreact to news. Of course, in case of disapproval, the correction could be sharp. This case has a low probability though. In any case, we prefer 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.