12/02/2024

General Comment

The central topic that has been occupying markets lately is the decisions of central banks in relation to interest rates. After a wave of high inflation swept across the globe, many central banks were forced to raise interest rates to rates we haven’t seen in many years. From these movements, inflation showed to tame and the markets expected to escape from this vice of money at high cost. There was optimism that the rate cut could start early in the year, perhaps in the spring. This optimism is being cut short, mainly because of the statements of central bankers. The markets are therefore trying to assess and estimate the likely date of the reduction in interest rates.

Nevertheless, the United States economy, despite having high interest rates that we haven’t seen in several years, is on a trajectory of phenomenal growth. The macroeconomic results announced are increasingly encouraging. In the past week, we have not had much results but the echo of the strong labor market has remained. Also this week the PMI services index exceeded all expectations. The week ended positively due to the revision of inflation for the previous months. The U.S. Bureau of Labor Statistics adjusted the monthly consumer price index growth for December downwards to 0.2% from an initial 0.3%, and increased November’s CPI growth revision to 0.2% from the preliminary 0.1%. Markets welcomed this news with another bullish rally.

In Europe, the economic landscape appears more precarious. Recent macroeconomic data continues to indicate that the downturn has not yet reached its lowest point. The European Central Bank released its economic bulletin, highlighting the Governing Council’s commitment to bringing inflation back to its 2% medium-term objective promptly. Although some ECB officials appear more inclined towards reducing interest rates, such actions are not anticipated in the first half of the year.

The eyes of the investment community are also on China. Inflation in China has fallen short of expectations, heightening concerns among investors about the health of the world’s second-largest economy. The consumer price index for January showed a decline of 0.8% from the previous year, a more significant drop than the 0.3% decrease observed in December and below the anticipated 0.5% reduction. However, the mood improved with Friday’s announcement in relation to the new loans announced at particularly high levels. Also, the strong deflation encourages the thought of a new fiscal package by the Chinese government.

Equity markets in the United States continued to hit new all-time highs while markets in Europe were more subdued. The U.S. dollar remained dominant in the foreign exchange market, although it somewhat put a brake on its strength. Bond markets moved upward with the yield on the U.S. 10-year bond closing the week around 4.18%. On the commodity market, the sign was mixed, with oil making some gains while gold weakened. Finally, it is worth noting the impressive upward trend of bitcoin and most cryptocurrencies.

This week undoubtedly all eyes of the investment community will fall upon the announcement of inflation in the United States on Tuesday. This announcement may count significantly in the Fed’s decision on interest rates at its next meetings. U.S. retail sales and industrial production are also important on Thursday, while new building permits and the Michigan Consumer Confidence Index are announced on Friday. The week is also important for the Eurozone as GDP and industrial production are announced.

SP500

The US SP500 index was bullish last week as it closed at 5,026.6 points and profits of 1.37%. It was the fifth consecutive bullish week for SP500 and the fourth consecutive one of a new all-time high performance. Although the statements of many Fed officials who gave a speech during the whole week were not entirely clear regarding the interest rate cut plan, the SP500 keeps on rising as the investing sentiment remains very positive. The U.S. economy has an impressive performance in the major macroeconomic measures such as the unemployment rate and the GDP. Last week the ISM Services PMI was announced at 53.4 vs 52 which markets were expecting. The revised inflation figure for December, indicating a modest rise of just 0.2%, has enhanced market confidence. The earnings that were announced have exceeded expectations significantly surpassing analysts’ forecasts. A big part of the optimism comes from the technology sector as the perception of the markets is that the new technologies and especially AI could contribute to the global growth significantly. It is reflected in the rise that many tech companies of SP500 perform. It is very critical for the U.S. stock markets the Tuesday announcement on inflation. Markets estimate a significant drop to 3% from 3.4% in December. We may try long positions for one more week.

DAX30

The German DAX40 index was slightly bullish last week, closing at 16,926.5 points, with marginal profits of 0.05%. There are many concerns about the European and especially about the German economy but the DAX40 keeps being very close to its all-time high price. German imports and exports reduced significantly in December and the HCOB Services PMI indicator remained well below 50. Industrial production dropped by 1.6% and the German inflation as expressed by the harmonized index of consumer prices was unchanged at 3.1%. The only positive surprise has to do with factory orders which had a remarkable increase of 8.9% in December. Regarding the ECB and the possible interest rate cuts, it is not expected to happen in the first quarter of the current year. ECB Chief Economist Philip Lane’s comments did not significantly influence market risk sentiment. Lane mentioned that the ECB requires greater assurance that inflation is on track to meet its target.  A big factor that affects the German economy is China as a large portion of German exports move towards China. The latest deflation of the Chinese economy though is balanced by the view that there may be a fiscal expansion. We may try long positions this week.

FTSE100

The British FTSE100 index moved downward last week, closing at 7,572.6 points, losing about 0.56%. Since the inflation in the UK remains high, it is expected that the Bank of England will keep interest rates high for a longer period. The latest economic data from the UK economy is an extra reason that allows such an attitude. Services, composite, and construction PMI indicators were all announced above markets’ estimations. It seems that there are particular UK stocks though that weigh on the FTSE100. For example, AstraZeneca’s underperformance since the summer has been a major factor in the FTSE100’s struggle to match the performance of other major stock indices. The current week is very important for the UK economy as a series of economic announcements will be released. Inflation is maybe the most important announcement as it may affect directly the future decisions of the Bank of England. We are going to follow the recent downtrend of FTSE100 by selecting short positions for the current week.

Gold

The previous week was bearish for gold, with the next April’s futures closing at $2,023.3 and losses of 0.63%. Last week’s behavior in the gold market was significantly influenced by the stance of the Fed, as communicated by the head Jerome Powell and other Fed officials. Powell’s remarks along with subsequent comments from other officials (Neel Kashkari, Loretta Mester, etc.), underscored a cautious strategy regarding interest rate cuts amidst a robust economy and an unpredictable path for inflation. Their focus on making data-driven decisions before contemplating reductions in rates acted as a constraint on potential increases in gold prices. Adjustments to the U.S. inflation in December sustained a general pattern of decelerating inflation, an element crucial to the Fed’s decision-making framework. The U.S. inflation data, set for release on Tuesday, is projected to show a decrease from 3.4% to 3%. These statistics are key for the Fed’s decisions and they could affect the gold prices. We may stay out this week as there isn’t a clear outlook.

US Oil

Last week was bullish for oil with the next month’s futures closing at $76.84, with profits of more than 6.30%. The recent surge in oil prices can be mainly attributed to increasing tensions in the Middle East, particularly due to Israeli military activities in the Gaza Strip, including the bombing of Rafah. These actions have significantly raised market concerns, contributing to a rise in oil prices. The refusal to accept a ceasefire with Hamas suggests that the market may have underestimated the influence of regional instability on oil prices. In the United States, a resurgence to maximum production levels coupled with considerable refinery downtimes has led to a tightening of the oil market. The USA oil production has hit 13.3 million barrels per day. Additionally, there were reductions in oil stocks as according to the last week’s data, stocks increased by 0.67 million barrels vs 2.13 million barrels that markets expected. The U.S. oil rig count remained unchanged to 499 according to Baker Hughes. These developments have fostered a bullish outlook in the oil market. A crucial factor of the current period is the central banks’ decisions and the possible interest rate cuts. Tuesday’s U.S. inflation announcement is critical in this case. China is also a big question mark as the recent deflation may hurt the oil demand but many opinions support a QE and a fiscal expansion probability. We’d better stay out this week.

EURUSD (Euro – US Dollar)
Last week was neutral for EURUSD as it opened and closed around 1.0785. This neutral stance of the exchange rate is a two-move combination since EURUSD had a downward course on Monday but from Tuesday onwards it moved up to the levels it opened the week. There were a lot of statements from Fed officials last week that affected the U.S. dollar increasing the volatility. However, no major news has come out, nor have we learned anything new, so the prevailing scenario for a rate cut remains next May. In the Eurozone, last week’s economic announcements are typical once again of the economy’s weakness. Service PMI indicators were again below 50 while retail sales continued to shrink. Inflation in the United States will play a dominant role this week, while announcements of retail sales and industrial production in the Eurozone are also expected. If there is no surprise of very low inflation in the United States, the U.S. dollar will probably continue to strengthen so we prefer sell positions this week.

GBPUSD (Great Britain Pound – US Dollar)

Neutral was the last week for GBPUSD, as it opened and closed around 1.2630. The U.S. dollar had a mild uptick last week but was offset by a similar move by sterling. Positive was the assessment of the results of the UK economy last week after the PMI indicators were announced above market expectations. As well, Catherine Mann, a Bank of England policymaker, expressed her skepticism on Thursday about the sustainability of the recent decline in inflation. Mann highlighted her concern over the potential for a Red Sea price shock to be quickly reflected in pricing. It was a hawkish speech that gave sterling points. In addition to the very important announcement of inflation in the United States, the week contains very important announcements for the UK economy. Inflation, unemployment rate, retail sales, industrial production, manufacturing, and the trade balance are announced during the week. Although the exchange rate rebounded from week lows in the range of 1.25 it is not ruled out that the U.S. dollar will dominate again and so we prefer sell positions this week.

USDJPY (US Dollar – Japanese Yen)

USDJPY was bullish last week, opening at 148.36 and closing at 149.26. The U.S. dollar had a mild upward move that combined with rising bond yields helped the exchange rate move higher. Japan’s currency is currently unable to react after the very loose monetary policy and negative interest rates by the Bank of Japan. There are several signs that this is going to change soon but new statements are coming out in the opposite direction. Shinichi Uchida, Deputy Governor of the Bank of Japan, stated on Thursday that the bank is expected to conclude its purchases of risky assets but will refrain from rapidly increasing interest rates as it begins to reduce monetary support. Bank of Japan Governor Kazuo Ueda remarked on Friday that there is a high likelihood of maintaining supportive financial conditions even if negative interest rates are discontinued. Those statements were dovish enough not to leave much room for Japan’s currency to recover. The fact is that the closer we get to the critical price of 150, the more markets start thinking about changing policy. We may try sell positions this week.

EURJPY (Euro – Japanese Yen)
Bullish was last week for EURJPY which opened at 160.05 and closed at 160.99. This upward movement in the exchange rate should be attributed more to the weakening of the Japanese currency than to the strengthening of the euro. Μarkets have long expected a change in very loose monetary policy and negative interest rates from the Bank of Japan but this is something that prolongs and the interest rate gap between the Bank of Japan and European Central Bank remains large in favor of Europe’s currency. Most information, however, is consistent with the conclusion that the Bank of Japan will change its policy by April. If markets start digesting this information, the yen will strengthen. We may try sell positions this week.

EURGBP (Euro – Great Britain Pound)

Last week was neutral for the EURGBP, as it opened and closed around 0.8538. It was the second week in a row that we observed this phenomenon, which is a sign of the balance between the euro and sterling. Both economies face significant problems due to the high money costs that high interest rates have created. The high inflation that persists in both economies does not allow for hasty moves by their central banks, so markets believe the impact on their economies has not yet reached its lowest point. Technically speaking, there is very significant support for the pair near 0.85 but having more trust on sterling’s strength, we prefer sell positions for the current week.

USDCAD (US Dollar – Canadian Dollar)

Slightly bearish was the last week for USDCAD, as it opened at 1.3459 and closed at 1.3454. The slight rise in the U.S. dollar last week was offset by a similar rise in the Canadian dollar. The rise in oil prices has boosted the Canadian dollar and is the country’s main export commodity. The other reason was the satisfactory results of Canada’s economy announced last week. The Ivey PMI index was announced at particularly high levels while last month’s new jobs exceeded expectations, bringing the unemployment rate down to 5.7%. If the U.S. inflation announcement strengthens the U.S. dollar, the USDCAD is able to move higher so 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 0.8655 and the closing price was at 0.8748. A slight strengthening of the U.S. dollar was enough to push the exchange rate higher, reaching its highest price in the past two months. An important part of this development was the improvement in economic sentiment worldwide, which made investors choose higher-risk currencies rather than safe havens such as the Swiss franc. As far as the Swiss economy is concerned, the sign of last week was neutral, as the unemployment rate remained unchanged at 2.2% and foreign exchange reserves remained practically the same. We will follow this short-term uptrend with buy positions in the current week.

AUDUSD (Australian Dollar – US Dollar)

Marginally bullish was the last week for AUDUSD, which opened at 0.6510 and closed at 0.6522. The Australian dollar was probably the only major currency able to resist the strength of the U.S. dollar. The main cause was the press conference of Bank of Australia chief Michelle Bullock. Reserve Bank of Australia left interest rates unchanged at 4.35% but the press conference that followed was fairly hawkish. Not even the possibility of higher interest rates was ruled out. Michelle Bullock also emphasized the need for weighing risks carefully and underscored the bank’s continuous data collection to ensure inflation is moving back to the intended targets. Furthermore, she noted a projection of 2.8% inflation for 2025. Another big issue affecting Australia’s currency is also China. China’s deflation of course raises concerns but also raises the possibility of new quantitative easing. We may try sell positions this week.

Bitcoin

Last week, Bitcoin was heavily bullish and closed at $48,313 with profits of 13.50%. It was the most profitable week since the end of October. The rally occurred as ongoing inflows into U.S.-based spot Bitcoin ETFs likely eclipsed news of the bankrupt crypto lender, Genesis, seeking approval to liquidate its $1.6 billion bitcoin holdings. On Thursday, spot ETFs saw more than $400 million in inflows, marking the most significant single-day increase in nearly a month. The traditional markets also favor the crypto rally as well. The U.S. stock markets are in a strong bullish, performing consecutive new all-time highs. A great factor of this rise has to do with technology and AI and the bullish momentum generated by the stocks of the technology sector is a positive sign for the crypto market too. The U.S. inflation announcement on Tuesday is expected to influence the crypto markets. Technically speaking, the strong resistance of $49,050 can prove an obstacle to Bitcoin’s further rise. This price level is the highest since the March of 2022. Having said that and by keeping in mind that the markets may overreacted lately, 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.