29/01/2024

General Comment

Entering the last week of the first month of 2024, the dominant theme for financial markets remains assessing central bank behaviors on interest rates. The macroeconomic results announced and the statements by central bank executives are weighted by markets and analysts in order to conclude and interpret future actions. The economic results of the previous week were enough and so there was a lot of speculation. Especially in the United States, the results converged for another week on the fact that the U.S. economy is strong and resilient. U.S. GDP grew in the fourth quarter of 2023 by 3.3%, well above the 2% markets had estimated. Also, for December personal consumption expenditures were announced to be up 2.9%, with markets expecting 3%. So, on two considerable macroeconomic measures (GDP and inflation), the announcements exceeded expectations, highlighting and underlining the resilience of the U.S. economy.

These developments had a double reading since a strong economy could withstand high interest rates for longer. James Bullard, the past president of the St. Louis Fed, mentioned on Tuesday that the central bank might start reducing interest rates before inflation reaches 2%, possibly as early as March. According to the FedWatch tool, the probability of a rate cut in March is close to 52%. A few days ago, this probability was greater but the positive economic data of the United States have diminished it.

A high degree of optimism about the U.S. economy stems from the tech industry and, more generally, from the belief that new advances in artificial intelligence could make a decisive contribution to the recovery of the economy. This to a certain extent does not lack logic but needs attention since it could develop into a bubble, as it has done in other times in the past in corresponding technological revolutions.

In Europe, things are quite different. The European Central Bank maintained its interest rates as expected. The difficult economic situation in the Eurozone and many economies in Europe may prompt the European Central Bank to start cutting interest rates soon enough. The bank’s head Christine Lagarde tried to look hawkish enough in order to prop up the European currency and to maintain the optimism. According to Mrs Lagarde, the economy is expected to have experienced a standstill in the fourth quarter and recent data indicate potential weakness in the short term. However, certain surveys suggest the possibility of growth in the future. Meanwhile, geopolitical conflicts in the Middle East present a risk of increasing inflation. She also said inflation may decrease faster if energy prices follow the recent downtrend.

As per the Asian economic giant, which is China, Chinese officials are considering a major stimulus package to counteract recent downturns in economic performance and the stock market. It seems, however, that this is a temporary measure. In the long run, a more robust belief in a Chinese resurgence is probably required to fuel a lasting recovery of the Chinese economy.

Geopolitical turmoil continues to be pronounced, in the wake of a drone attack on an American base situated near the Jordan-Syria border. This incident resulted in the death of three troops and left over 20 troops wounded.

To sum up the above, equity markets in Europe, the United States, and Asia performed notable gains. In the commodity market, things were mixed as gold fell while oil and copper had significant gains. The bond market remained practically unchanged as the yield on the U.S. 10-year closed the week near 4.14%. The dollar continued to lead the currency market, posting gains for the 4th consecutive week. Finally, high volatility in cryptocurrency markets was accompanied by a mini recovery after two declining weeks.

The week that has just begun is also important for the markets. On Wednesday there is the decision on interest rates and monetary policy in the United States to be followed by a corresponding press conference. Markets do not expect a change in interest rates, but the press conference may provide more information about the future. On Friday, the United States will also announce new job positions for January (NFPs), which may be decisive for the Fed’s future moves. Two other major central banks are announcing their interest rate decision this week. These are the European Central Bank and the Bank of England, as we will see in more detail below. This is an important week for China too as it is announced through PMI indicators the manufacturing activity which is the main pillar of the Chinese economy. There are other announcements of lesser but not negligible importance for many economies of the world as we will see in detail below and so the week is expected to maintain the high volatility for the markets.

SP500

The US SP500 index was bullish last week as it closed at 4,891 points and profits of 1.05%. The last week saw a generally steady performance in the U.S. stock market, with SP500 registering gains amidst a diverse set of quarterly financial reports as market dynamics were notably influenced by various major corporations. There were many ups and downs but the sign is considered positive. Notably, Intel’s stock experienced a significant drop of 10%. However, the market was buoyed by the release of encouraging economic results. The core personal consumption expenditures for December were better than expectations, providing a positive signal regarding the inflation course. Additionally, GDP growth in the last quarter that surpassed predictions has enhanced investor confidence, alleviating concerns about a severe economic downturn. Looking ahead, market experts are trying to assess the possibility of interest rate reductions in 2024 with the most critical parameter being the date that the Fed will begin the cuts. The current week is also very important due to the FOMC on Wednesday and the NFPs on Friday. Both of these releases may affect the Fed’s decisions seriously. The breakout of the 4,900 points that we saw last week is important because it opens the road to the psychological level of 5,000 points. We may try long positions this week.

DAX30

The German DAX40 index was strongly bullish last week, closing at 16,961 points, with profits of 2.45%. The European Central Bank has kept its interest rates at historically high levels, holding the Eurozone’s deposit rate constant at 4%. This move aligned with market anticipations and was paired with a pledge from the European Central Bank to sustain these heightened rates as a strategy to manage inflation effectively. As the inflation has dropped significantly during the last months, according to Lagarde’s statements the rate cuts could start from the next summer. This issue is critical for the markets and their major concern in the current period. As per the German economic data, the bond auctions had a marginal increase of the yield and the business climate & expectations had lower than expected performance. Lower than expected were also the results of the services and composite PMIs and only the manufacturing PMI managed to exceed the estimations but it’s still well below 50. Most likely the impressive performance of the DAX40 was affected by the announcement of the stimulus package in China which could revitalize the German exports. The performance of DAX40 last week was impressive but markets are still skeptical about China we prefer short positions this week.

FTSE100

The British FTSE100 index moved strongly upward last week, closing at 7,635 points, earning about 2.30%. The UK stock market, especially the FTSE100, exhibited a positive performance with significant weekly gains. This upward trend was fueled by the encouraging economic announcements and especially from an uplift in consumer sentiment. According to the GfK Group, consumer confidence was announced at -19 vs -21 expected by the markets, and reached its highest level since January 2022. This surge in optimism among consumers is anticipated to lead to a rise in consumption expenditures. Also, the PMI indicators were all above the estimated prices: in manufacturing 46.3 vs 46.7, in services 53.8 vs 53.2 and the composite 52.5 vs 52.2. Of course, a very critical issue for the UK stock markets, remains the interest rate cuts during 2024, both the starting date and the reduction figures. Interest rates decision and the following press conference from Andrew Bailey will provide extra information. The sentiment seems positive so we may try long positions for one more week.

Gold

The previous week was bearish for gold, with the next month’s futures closing at $2,016.8 and losses close to 0.50%. Recent key economic reports have highlighted the robustness of the U.S. economy. The personal consumption expenditures data for December indicated a managed inflation scenario. Moreover, the U.S. GDP for the last quarter of the year exceeded forecasts, achieving an annualized growth rate of 3.3%. These economic indicators point to a diminished probability of the Fed implementing immediate rate cuts although March remains the most probable scenario for starting. This development has had a bearish impact on gold, which is commonly viewed as a safeguard against inflation and economic instability. The bond yields were practically unchanged as the 10-year U.S. bond yield closed the week around 4.14%. Bond yields significantly influence the gold markets since higher yields render non-interest-bearing assets such as gold less appealing to investors. Over the week, the U.S. dollar which is the third critical factor for gold prices in this period, saw a strengthening. This surge in the dollar’s value results in gold becoming more costly for investors who deal in other currencies, which in turn suppresses the gold global demand. This downward trend may carry on this week too, so we prefer short positions.

US Oil

Last week was heavily bullish for oil with the next month’s futures closing at $78.01, with profits of more than 6.25%. It was the most bullish week in the last 5 months. This heavy movement in oil prices is primarily attributed to the U.S. solid economic performance, expressed by a 3.3% growth in GDP for Q3 2023. Additionally, the mild increase in personal consumption expenditures, signaling a tempering of inflation, bolsters the prospects for oil demand. The possibility that the Fed may delay interest rate cuts is a significant factor influencing oil prices, and it remains a central point of focus for traders. On the other hand, the escalation of geopolitical tensions, especially in the Middle East, is exerting upward pressure on oil prices. Notably, the Houthi military’s assault on an oil tanker in the Gulf of Aden has amplified concerns about potential disruptions to the oil supply. Such events highlight the geopolitical vulnerabilities that significantly impact the stability of the global oil supply chain. Finally, there was another factor that pushed the oil prices higher and had to do with the oil inventories. According to the Energy Information Administration, there was a significant reduction of inventories in the USA last week of 9.233 million barrels. It was a clear indication of a high-level demand which dragged the oil prices higher. China’s measures to stimulate its economy are also affecting oil demand. The People’s Bank of China’s recent action to infuse liquidity into the banking system is a clear indication of the country’s dedication to fostering economic growth. However, we consider last week’s price jump as an overreaction as the global economy is not in such an excellent shape to boost the oil demand so much so we may try short positions this week.

EURUSD (Euro – US Dollar)
Last week was bearish for EURUSD as it opened at 1.0890 and closed at 1.0853. The dominance of the US Dollar continues, based on two concrete pillars. The first pillar has to do with the resilience and strength of the U.S. economy in an environment where interest rates are high and money costs are high. However, as we have seen in the general comment, GDP continues to grow in impressive figures while inflation continues to be at levels that make it controllable. The second pillar has to do with the markets ‘ belief about when the Fed will start cutting interest rates in the United States. There has been an over-optimism that this could happen soon, starting next March, but as time goes on, the strong U.S. economy gives more points to this scenario to start later and the U.S. dollar keeps on strengthening. In Europe, the dominant rate-cut scenario continues to be detected in the coming summer but the European economy is not in good shape. These two factors have weakened the euro in recent weeks. The European Central Bank left interest rates unchanged as markets expected, and Christine Lagarde at the press conference did not particularly convince markets. This week, due to the FOMC and NFPs in the United States, and due to the interest rate decision in the Eurozone may maintain the high volatility in the exchange rate. The downward trend is likely to continue, so we may try sell positions this week.

GBPUSD (Great Britain Pound – US Dollar)

Neutral was the last week for GBPUSD, as it opened and closed around 1.27. The dollar continued its upward trend, driven by the strength of the U.S. economy and market expectations about the course of interest rates in the coming months. Sterling, however, held on well and was able to resist the great strength of the dollar. This happened for two reasons mainly. The first reason has to do with the high inflation that persists in the UK and that forces markets to assume that the Bank of England will start cutting interest rates much later than the Fed. The second reason has to do with some positive results announced by the British economy last week. More specifically, all the PMI indicators (manufacturing, services, and composite) were well above market expectations. Also, better than expected was the release of consumer confidence. On the basis of these two data, sterling was supported, and thus the exchange rate had no observable changes. This week, however, volatility is expected to skyrocket because, in addition to the important announcements of the United States, there is the decision on interest rates by the Bank of England. The baseline scenario is that interest rates will not change from the current rate of 5.25%, but both the outcome of the vote and the press conference that will follow will be important in terms of the perception that markets will form. We may try sell positions this week.

USDJPY (US Dollar – Japanese Yen)

USDJPY was slightly bearish last week, opening at 148.21 and closing at 148.13. The big stake in Japan’s economy has to do with negative interest rates and the very loose monetary policy that has been for a long time. For some period, the markets have been trying to estimate when this policy will change by assessing macroeconomic results and statements coming out of Japan. The Bank of Japan at the beginning of the week left interest rates unchanged at -0.1% while at the press conference that followed, the signals were also dovish. The head of the bank Ueda said that they would not hesitate to pursue an even looser monetary policy if necessary. In addition to these statements, inflation announced Friday in Japan at 1.6%, well down from the previous month’s 2.4%, was also in a dovish direction. However, markets are confident that the Bank of Japan’s policy will change in the coming months, so the strength of the U.S. dollar has not been able to affect the exchange rate. Bond yields, which remained almost unchanged, were a factor that did not particularly affect USDJPY. We prefer sell positions this week.

EURJPY (Euro – Japanese Yen)
Bearish was last week for EURJPY which opened at 161.46 and closed at 160.79. The euro has been unable to recover strength after the European Central Bank decided to leave interest rates unchanged in the Eurozone and after Christine Lagarde’s press conference failed to convince markets of the bank’s resolve. Also, the situation of the European economy was presented rather negatively even if Christine Lagarde left some window of optimism for the future. In Japan, things are quite different since very loose monetary policy and negative interest rates continue, but markets have believed that this is going to change soon and based on this belief the yen is strengthening. We may try sell positions this week.

EURGBP (Euro – Great Britain Pound)

Last week was bearish for the EURGBP, as it opened at 0.8571 and closed around 0.8543. The pair approached the critical support zone of 0.85, completing four consecutive weeks of decline. Markets are confident that the high inflation that persists in the UK will force the Bank of England to keep interest rates high longer. The UK continues to have economic problems but last week’s economic data was encouraging. The Eurozone economy also has problems, but the hesitations that markets believe the European Central Bank will have, combined with lower inflation in the Eurozone, give sterling more points than the euro. Although the support of 0.85 seems quite strong, we will choose sell positions for one more week.

USDCAD (US Dollar – Canadian Dollar)

Bullish was the last week for USDCAD, as it opened at 1.3432 and closed at 1.3449. In addition to the strength of the U.S. dollar, which seems to have prevailed at the exchange rate for another week, we also had significant developments for Canada’s economy and the country’s currency. The Bank of Canada opted to maintain the interest rates at the current level, a move that aligned with general expectations. Simultaneously, the bank conveyed a somewhat dovish stance. During the press conference, the head of BoC Tiff Macklem highlighted the premature nature of discussing the precise timing for initial rate reductions. Nonetheless, the mere indication that rate cuts might gain significance in the upcoming months was perceived as notably dovish, exerting downward pressure on the Canadian dollar. However, in the last two days of the week, the Canadian dollar recovered strongly mainly due to the strong rally we saw in oil prices. Sell positions is our selection for the current week.

USDCHF (US Dollar – Swiss Franc)
The USDCHF had a downward course last week as the opening price was at 0.8678 and the closing price was at 0.8638. The exchange rate went against the strength of the U.S. dollar and had a correction after three consecutive weeks of uptrend. Last week, Thomas Jordan, head of the Swiss National Bank, noted the significant role of the strong Swiss franc in keeping inflation in check. Furthermore, he expressed optimism about the economy, citing economists’ confidence in avoiding a recession. However, Jordan also stressed that despite the absence of an expected recession, the economic forecast suggests subdued growth. Sooner or later, however, the US dollar will dominate the exchange rate and again this combined with its strengthening may see the exchange rate higher. We may try buy positions this week.

AUDUSD (Australian Dollar – US Dollar)

Bearish was the last week for AUDUSD, which opened at 0.6591 and closed at 0.6575. Downward pressure was exerted on the exchange rate due to the strengthening of the U.S. dollar, but the fall was not significant because the Australian dollar resisted. The PMI indicators announced for Australia had a significant rebound across the board. The Australian dollar was also propped up due to news emerging from China. At the beginning of the week, the People’s Bank of China left interest rates unchanged at 3.45% but the most important news came from elsewhere. Chinese authorities are contemplating a plan worth 2 trillion yuan (approximately $278 billion) aimed at revitalizing the struggling stock market. This plan has already influenced the markets in Hong Kong and has provided support to the market views. This week we will learn more about the Chinese economy due to the announcement of manufacturing. Inflation will also be announced for Australia. Australian dollar seems strong enough based on the above data so we may try buy positions this week.

Bitcoin

Last week, Bitcoin was bullish and closed at $42,026 with profits of 1.12%. The recent decline in Bitcoin’s price has been closely linked to the redemptions of the Grayscale Bitcoin Trust. Before its conversion into an ETF on January 11, Grayscale served as one of the primary vehicles for U.S.-based investors to gain exposure to Bitcoins without directly owning the cryptocurrency. Following the significant SEC ETF approval, investors rapidly capitalized on this development by redeeming their Grayscale holdings, effectively having profited from their trades. This led to an outflow of funds from the cryptocurrency market, exerting downward pressure on the price of Bitcoin until the price of $38,500. However, it seems that the sentiment is improved and the Bitcoin, not only managed to recover above $40K very quickly but it also exceeded $42K during the weekend. Eric Balchunas, a renowned ETF analyst at Bloomberg, estimates that Charles Schwab, a global asset management behemoth, is poised to join the Bitcoin ETF universe with a product that is expected to be competitively priced. Balchunas opines that the entry of such a significant player into the market could escalate the competition within the Bitcoin ETF space. This estimation had a big contribution to Bitcoin’s recovery. The crypto community has also turned the focus to the upcoming Bitcoin halving in April 2024. After this event, the reward for mining a Bitcoin block will be cut in half, decreasing from 6.25 to 3.125 bitcoins. Historically, the halving event has been a major catalyst for Bitcoin’s value. In previous instances following a halving, the price of Bitcoin has reached new all-time highs, highlighting the event’s potential impact on the cryptocurrency’s market dynamics. The correction on Sunday though creates some concerns about the sustainability of the new uptrend. 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.