15/01/2024

General Comment

Inflation resurgence in the United States was the dominant economic theme that occupied the financial markets last week. Inflation rose from 3.1% in November to 3.4% in December, a rise deemed to be of notable concern. December’s 3.4% even exceeded the 3.2% expected by markets, indicating that there were already some concerns. However, the dominant scenario for the Fed to initiate a rate cut in March does not appear to have changed. According to the FedWatch tool, the probability of an interest rate cut of 0.25% in March exceeds 77%. The bottom line is that markets have been alarmed by the rise in inflation, but not to the extent of disturbing the basic projections for the future.

The situation was further smoothed on Friday after the announcement of the producer price index in the United States which is also an indicator of inflation. The producer price index rose by 1%, below the 1.3% expected by markets, indicating that the trend in inflation remains downward.

In Europe, things remain more or less the same. Statements by officials from the European Central Bank were quite hawkish but it seems that the markets are not convinced. First, because statements by European officials have been contradicted many times, and second, because the Eurozone economy is not in good shape and is certainly in much worse shape than that of the United States.

Some good news came from China as December inflation was reported at -0.3% from -0.5% the previous month, indicating that deflationary pressures in China are beginning to ease. China’s imports, exports, and trade balance were also positive. China is a major player in the global economy, a key consumer of many commodities, and the destination of many exports from many of the world’s major economies. Its economic situation is therefore a barometer for the global economy.

Important was the news regarding the U.S. banks’ earnings. In the fourth quarter of 2023, JPMorgan Chase, Bank of America, and Wells Fargo reported profits that surpassed what financial analysts had predicted. These banks, collectively serving about a third of all Americans, indicated that their customers continued to spend actively. Conversely, Citigroup, currently undergoing a major global restructuring, declared a net loss of $1.8 billion for the same quarter. For the same period, JPMorgan reported earnings of $9.3 billion, or $3.04 per share, a decrease from $11 billion the year before.

In the field of geopolitics, concern continues to arise over the situation with the Houthis in the Red Sea. The Americans and the British bombed Houthi positions and perhaps this mean that there will be dangerous escalations in the area. Already global trade has been disrupted while oil prices have risen.

Summing up the above, the week was positive for all major equity indices in Europe and the United States while stabilizing trends prevailed in the commodity market with positive and negative signs. The US dollar did not change significantly and in most cases, the foreign exchange market had low volatility and fluctuations. The bond market was bearish with the price of the U.S. 10-year bond yield closing the week around 3.94%. For bitcoin and most cryptocurrencies, the week was on a downward trend after the SEC approved bitcoin ETFs.

This week, the eyes of the investment community will turn to the World Economic Forum, which will take place throughout the whole week in Switzerland. As for economic announcements, the most important day is Wednesday as China announces GDP, industrial production, and retail sales, while inflation is announced by the Eurozone and the United Kingdom. Finally, on the same day, the United States will announce industrial production, retail sales, and imports/exports.

SP500

The US SP500 index was bullish last week as it closed at 4,784 points and profits of 1.85%. The correction of the first week of the year did not carry on and the SP500 returned to its uptrend. This uptrend started at the end of October and since then, there has been just one bearish week. It is an indication that the stock markets in the USA are very strong and the investing community has a positive view for 2024. Last week there was a concern as the inflation had an uptick and announced at 3.4% vs 3.1% in November. The first thoughts of the markets were that the interest rate cut plan could be in doubt since the inflationary pressures insist. Things smoothed out very soon because the producer price index and the bank earnings in the USA created positive expectations. There are important economic data to be announced in the economic calendar this week, including retail sales, industrial production, imports/exports, initial jobless claims, and the Michigan consumer sentiment index. We prefer long positions for one more week as the uptrend momentum remains strong.

DAX30

The German DAX40 index was bullish last week, closing at 16,705 points, with profits of 0.67%. Some hawkish statement by ECB officials creates some concerns regarding the plan to cut interest rates although this landscape remains blurred. The German economy is facing certain issues. Following a significant rise in bankruptcies the previous year, it is anticipated that closures will continue to escalate this year. This is attributed to persistently elevated energy prices and the cessation of pandemic-related financial assistance. Market specialists caution that numerous firms, that survived the COVID-19 pandemic through substantial government support, are now facing collapse. In a statement released today, the German Ministry of Economic Affairs says that “current early indicators do not signal a quick economic recovery“. However, the DAX40 remains close to its all-time high, implying that the markers remain optimistic or at least, not negative. Sooner or later, the problems in the economy will reflect on the equity markets so we may try short positions this week.

FTSE100

The British FTSE100 index moved downward last week, closing at 7,625 points, losing about 0.85%. Positively, the U.K. economy showed strength in November, registering a 0.3% growth in GDP, which exceeded expectations. This expansion, largely fueled by the services sector, suggests a strong rebound in the economy. The manufacturing production rose by 0.4% and the industrial production rose by 0.3%. The trade balance was negative but less negative than the markets expected. All these economic announcements released on Friday caused a bullish reaction for FTSE100 but it was not enough to revert the negative weekly sign. The UK economy has certain issues. The head of the Bank of England Andrew Bailey testifying before the UK Treasury Select Committee said that it’s important to return the UK to the inflation target. It was a hawkish stance and markets consider that the Bank of England will maintain the high interest rates for a longer period of time. We prefer short positions for one more week.

Gold

The previous week was slightly bullish for gold, with the next month’s futures closing at $2,046.7 and of 0.20%. The inflation figures had a modest increase, moderating anticipations of immediate rate cuts by the Federal Reserve. This development initially caused an uptick in gold prices, as investors viewed gold as an effective safeguard against inflation. Nevertheless, the producer price index that was released on Friday was lower than expected, hinting at a possible easing of inflation and bolstering the likelihood of forthcoming rate decreases. These economic data notably influenced the fluctuations in gold prices over the week. As per the geopolitical area, the intensified military involvement of the U.S. and UK against Houthis has increased market volatility, reinforcing gold’s position as a favored safe-haven asset. The two other main factors that affect the gold prices (bond yields and the U.S. dollar) also contributed to the asset’s movements. There was a decrease in US 10-year bond yields which enhanced the attractiveness of non-yielding gold. Concurrently, the U.S. dollar saw a modest increase. We may try short positions this week.

US Oil

Last week was bearish for oil with the next month’s futures closing at $72.68, with profits of more than 1.50%. The week started with a downward trend after Saudi Arabia declared a reduction in the February official selling price of Arab Light crude to Asia. This announcement led to a significant drop in prices on Monday, despite the ongoing geopolitical turmoil in the Middle East. Although there was this initial decrease, oil prices experienced a gradual rebound over the week, influenced by the escalating crisis in the Middle East. The U.S. and the UK forces struck certain Houthis’ targets and Houthis replied that they were going to escalate their attacks. Markets are concerned about a general escalation involving other countries (e.g. Iran) that may cause an increase in oil prices. As per the demand, U.S. crude oil reserves, as per the Energy Information Administration’s report, experienced a surprising surge, increasing by 1.3 million barrels, which was contrary to the anticipated decline of 700,000 barrels. This rise lends a bearish aspect to the fundamental market outlook. Short positions is our selection for the current week.

EURUSD (Euro – US Dollar)
Last week was slightly bearish for EURUSD as it opened at 1.0938 and closed at 1.0950. The U.S. dollar had stabilized last week, mainly driven by the effects of inflation, which rose from 3.1% to 3.4% in December. This resulted in a fall in the dollar, but on Friday the announcement of the producer price index eased the concerns and thus the week was practically neutral for the dollar. Relatively good U.S. bank earnings results on Friday also helped the greenback. The euro, on the other hand, has not been able to benefit to a great degree. The economic situation in the Eurozone is not good, and this was confirmed by last week’s announcements. Retail sales fell last month by 1.1% while the unemployment rate remained almost unchanged at 6.4%. Markets expect the Fed to start cutting interest rates earlier than the European Central Bank. If this perception continues, the dollar will weaken so we may try buy positions this week.

GBPUSD (Great Britain Pound – US Dollar)

Bullish was the last week for GBPUSD, as it opened at 1.2707 and closed at 1.2751. The U.S. dollar did not have much change in the previous week, as negative and positive inflation news balanced out on Wednesday and Friday respectively as we saw above. Sterling, on the other hand, had some reasons to strengthen, because of the monetary policy the Bank of England might be pursuing and due to the positive economic announcements in the United Kingdom. UK inflation may have de-escalated significantly but remains at particularly high levels. This means that the markets consider that the Bank of England will be slow to lower its rates relative to the Fed, and this strengthens sterling against the dollar. Economic announcements in the UK have been encouraging too. Both GDP and industrial production/manufacturing strengthened in November. If the aforementioned things remain the same, the upward trend for the GBPUSD may continue. We may try buy positions this week too.

USDJPY (US Dollar – Japanese Yen)

USDJPY was bullish last week, opening at 144.48 and closing at 144.89. It was the second bullish week in a row for the pair. The exchange rate has largely followed the U.S. dollar’s path these two weeks. Inflation announced in Japan last Tuesday at 2.4% down from the previous month’s 2.7% shows that very loose monetary policy and negative interest rates from the Bank of Japan have not brought significant inflationary pressures for the time being. This may be a signal for the Bank of Japan to continue the same policy. There are, of course, many analysts who believe that the policy will change in 2024. Statements by bank officials support this position, but as long as the interest rate gap between the US and Japan persists, it is in favor of raising the exchange rate. We prefer buy positions for the current week.

EURJPY (Euro – Japanese Yen)
Bullish was last week for EURJPY which opened at 158.11 and closed at 158.66. The euro had no particular reasons to strengthen last week. There may have been some hawkish statements from European officials, but the markets don’t seem to be convinced. The economic situation in the Eurozone is also not particularly encouraging. However, the euro continued to strengthen against the Japanese currency due to the continued very loose monetary policy and negative interest rates from the Bank of Japan. The interest rate gap between the European Central Bank and the Bank of Japan remains high, pushing the exchange rate higher. Buy positions is our selection for one more week.

EURGBP (Euro – Great Britain Pound)

Last week was bearish for the EURGBP, as it opened at 0.8599 and closed around 0.8583. Both the euro and the British pound were relatively neutral. However, the high inflation that persists in the UK (although it has recently de-escalated) is consolidating confidence in the markets that the Bank of England will be long in starting to cut interest rates. It is not clear from the European Central Bank either but the difference in inflation between the two economies is enough to create perceptions. This week UK and the Eurozone will announce inflation results for last month so there will be newer information on the issue. If the results show an increase in inflation, most likely the euro will suffer less so we may try buy positions this week.

USDCAD (US Dollar – Canadian Dollar)

Bullish was the last week for USDCAD, as it opened at 1.3345 and closed at 1.3407. Canada’s economy didn’t have much to contribute to the economic calendar last week, so the exchange rate moved mainly because of the U.S. dollar but also oil prices usually affect the Canadian dollar. The slight rise in the U.S. dollar and the fall in oil prices resulted in the rise we saw last week. This week, in addition to the important announcements for the United States that we saw in the general commentary, also contains important announcements for the Canadian economy, since on Tuesday inflation is announced and on Friday retail sales. Considering the potential relative strength of the greenback, 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 0.8478 and the closing price was at 0.8525. The U.S. dollar changed slightly last week, as the inflation news was conflicting. The consumer price index strengthened but the producer price index declined. So the sign was roughly neutral to slightly bullish for the dollar. The Swiss economy had significant announcement results but the US dollar dominated on the pair. Inflation in Switzerland hit a peak last month and was reported at 1.7% against 1.4% in November and 1.5% expected by markets. We also saw a small increase in the unemployment rate, which rose to 2.2% from 2.1% last month. It looks like the US dollar will continue to dominate the exchange rate, and if it strengthens, we may see the USDCHF in the range of 0.87. We may try buy positions for one more week.

AUDUSD (Australian Dollar – US Dollar)

Bearish was the last week for AUDUSD, which opened at 0.6715 and closed at 0.6685. Australia had positive macroeconomic results last week. Retail sales increased by 2% last month while there was a particularly strong trade balance that was well above market expectations. We have also had significant results from China whose economy largely affects the Australian dollar. Deflation shrank to -0.3% from -0.5%. China’s exports rose 2.3% while its trade balance exceeded $ 75 billion. All these factors, however, were not capable of pushing the Australian dollar higher. The U.S. dollar prevailed and created downward trends for the exchange rate. It makes sense for us to prefer sell positions for one more week.

Bitcoin

Last week, Bitcoin was bearish and closed at $41,715 with losses of more than 5%. Most of the drop in Bitcoin prices took place on Friday and Sunday. Even with the approval of the Bitcoin spot ETF, the overall situation for the cryptocurrency markets appears to be less than favorable. On Friday, the price of Bitcoin fell by 8%. Many analysts believe that this was a “sell the news” phenomenon that happens very often under these circumstances. When good news is expected, an asset performs a bullish rally but when this good news is confirmed, we often see a sell-off. But most likely it was not the only reason for this drop. There was an introduction of redemption options after the approval of spot Bitcoin ETFs. This event coincided with the Grayscale Bitcoin Trust (GBTC) having more than $25 billion in Bitcoin assets, which had been locked for years due to the absence of a selling option. The recent approvals of Bitcoin ETFs, allow investors to exit, implying the selling of Bitcoin on the open market. Although early this week we see a reaction up to the $42,500, we cannot rule out that the correction may carry on so 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.