19/02/2024

General Comment

The major announcement markets were expecting last week was inflation in the United States for January. The price of inflation on Tuesday was announced at 3.1%, well below last month’s 3.4% but above the 2.9% that markets expected. This resulted in a significant correction of the markets that day, but this did not last long after the next two days were bullish. Obviously, the markets believe that the persisting inflation above 3% will not significantly change the Fed’s plan to cut interest rates. According to the FedWatch tool, the most likely month to start reducing interest rates is now June, but this delay is not considered significant by the markets and for this reason, last week U.S. stock indexes hit new highs.

U.S. markets were not even rattled on Thursday when retail sales were reported well below than expected, but a correction was made on Friday after the announcement of the producer price index, which is also an indicator of inflation. This index was announced at 0.9% versus the 0.6% that markets expected giving more concerns about inflation’s persistence.  With Friday’s correction, U.S. markets closed negatively, correcting from new all-time highs.

In Europe, recent economic indicators have not been particularly strong. The European Union’s trade balance for December was 16.8 billion euros, a decrease from the previous 20.3 billion and below expectations. However, December saw a positive uptick in industrial production, which rose by 2.6%, surpassing the anticipated 0.2% decrease. European GDP remained unchanged in the final quarter of 2023. Christine Lagarde spoke to the European Parliament’s Committee on Economic and Monetary Affairs, emphasizing the need for more data to confirm inflation’s return to the 2% target. She also mentioned that strong wage growth could influence inflation trends.

To summarize the above, as we saw the U.S. stock indexes after Friday’s correction closed the week with some losses, while on the contrary European indices performed better. In the commodities markets, gold had been on a correction trend, while oil and copper making significant gains. The U.S. dollar has been on an upward trend for one more week. Bond yields climbed for the second week in a row, with the U.S. 10-year yield closing at 4.28%. Finally remarkable is the course of bitcoin and most cryptocurrencies as for another week had strong growth.

In this period, markets have been focusing on central banks and possible decisions of interest rate cuts. In that sense, the release of the Fed’s minutes on Wednesday (FOMC minutes) is the most important event of the current week. Several Fed officials will be giving speeches this week, and this is going to be another source of market information. The announcement of inflation in the Eurozone and German GDP will be the most important events for Europe. China is due to announce its interest rate decision on Tuesday and the announcement of PMI indicators for the world’s main economies is also important.

SP500

The US SP500 index was bearish last week as it closed at 5,005.57 points and loss of 0.42%. SP500 was holding the positive sign but in the last few hours of the trading week, there was a strong selling rally that caused these light losses. The inflation announcement on Tuesday, as it is expressed by the consumer price index, was a reason for a correction within that day but on Wednesday and Thursday, the bulls returned and recovered the losses. CPI was announced at 3.1% while markets were estimating a further de-escalation to 2.9%.  On Friday, another inflationary index (producer price index) was announced at 0.9% in January while markets were expecting 0.6% and some concerns regarding the course of the inflation returned. Furthermore, the Michigan consumer sentiment index was also below market expectations and things got even worse after San Franciso Fed President Mary Daly, speaking in Washington, said that three interest rate cuts are a reasonable baseline for 2024. Fed Bank of Atlanta President Raphael Bostic, in a CNBC interview on Friday, voiced his support for starting to lower interest rates sometime this summer. He also mentioned that improved inflation data might make a case for beginning the rate cuts earlier. On the same day, Richmond Fed President Thomas Barkin took a more cautious stance in his comments. He mentioned that the recent inflation numbers highlight the reason policymakers prefer to wait for additional data before deciding on reducing interest rates. The markets interpreted these statements as hawkish and were, more or less, the roots that caused the weekly bearish result. This week, besides the FOMC meeting minutes on Wednesday, there is also the critical earning report of Nvidia. Nvidia is scheduled to release its fourth-quarter earnings for the fiscal year 2024 after the market closes on Wednesday. Analysts are forecasting substantial increases in both profit and revenue, driven by the surge in artificial intelligence demand. Revenue for Nvidia in the final quarter of fiscal 2024 is expected to hit $20.38 billion, as per estimates by Visible Alpha. This figure represents more than a tripling of the company’s revenue compared to the same quarter in the previous year. If the earnings do not meet expectations, we may see a strong correction in the U.S. stock markets as many analysts consider the AI industry as a pillar of the global economy. It seems though that the uptrend that started by the end of October remains strong so we may try long positions this week.

DAX30

The German DAX40 index was bullish last week, closing at 17,117.44 points, with profits of 1.13%. The European stock markets had a bullish performance on Friday. In an interview with the Belgian newspaper L’Echo, Governing Council member Francois Villeroy de Galhau said there are numerous persuasive arguments for why the European Central Bank should not delay an initial interest rate cut this year for an extended period and he underlined that “It’s not a question of rushing into things; but acting gradually and pragmatically may be preferable to deciding too late and then having to over-adjust”. The probability that ECB may start interest rate cuts even before the Fed, boosted the European markets and DAX40 outperformed the U.S. ones. As per the German macro data that were released last week, the economic sentiment was improved and the yield of the 30-year bond auction remained unchanged at 2.53%. In the current week, more important announcements regarding the German economy will be released: PMI indicators and GDP. As DAX40 is very close to its all-time high price and since there are still many economic issues in the Eurozone & Germany, we prefer short positions this week.

FTSE100

The British FTSE100 index was strongly bullish last week, closing at 7,711.70 points, earning about 1.85%. Friday was one of the most profitable days during the last period. Wednesday and Thursday were also bullish and the cumulative performance of these 3 days, exceeded 3%. NatWest (a major retail and commercial bank in the United Kingdom, based in London) reported its largest annual profit since 2007, benefiting from high interest rates. Also, the UK had a series of important announcements last week that caused a positive sentiment in the markets. The unemployment rate dropped to 3.8% in December from 4.2% in November. All inflationary indices (CPI, PPI, Retail Price Index) were well below market expectations. Industrial production rose by 0.6% and manufacturing production rose by 2.3% while the GDP was marginally negative (-0.1%) in December. Finally, retail sales in January had an impressive increase of 3.4%. Technically speaking, the FTSE100 managed to surpass the resistance of 7,695 points which was its highest price in the last 3.5 months. We may try long positions for one more week.

Gold

The previous week was bearish for gold, with the April’s futures closing at $2,011.5 and losses of 0.58%. Critical reasons for the gold’s correction were the U.S. dollar strength and the rising bond yields which in turn diminished the attractiveness of gold. There was also an increase in the U.S. producer price index for January, bolstering the anticipation of persistently high interest rates. While gold is often regarded as a hedge against inflation, interest rates that remain longer, lessen gold’s appeal since gold does not generate interest. Gold has approached the critical support and milestone price of $2,000, been in a downtrend in the last 1.5 months. The main reason for that is the anticipation of the markets regarding interest rate cuts. March was the basic scenario 2-3 months ago, then we had a shift to May and currently, June has the highest probability according to the FedWatch tool. The FOMC meeting minutes on Wednesday are expected to be the most impactful factor for gold this week while speeches and statements by Fed officials will also be taken under serious consideration. We believe that gold can have a bullish reaction so we prefer long positions this week.

US Oil

Last week was bullish for oil with the next month’s futures closing at $79.19, with profits of more than 3%. The result was impacted by the interplay of global economic data, currency fluctuations, and geopolitical events. The possibility of increased conflict in the Middle East, particularly the tensions between Hezbollah and Israel, as well as the unrest in Gaza and the Red Sea region, have been significant factors in supporting crude oil prices. The U.S. data regarding inflation helped the U.S. dollar to strengthen and this is a factor that usually pushes the oil prices lower but it didn’t happen in the case of the last week. Sometimes, the weakening of the U.S. dollar renders oil more cost-effective for purchasers using other currencies, which sometimes leads to an increase in global demand. The demand seems strong, at least according to the International Energy Administration which revised the 2024 oil demand growth forecast to 1.22 million barrels per day. The Energy Information Administration, released last week the crude oil stocks change which was 12.08 million barrels, far from the 2.5 million barrels that markets were expecting. The perception regarding the demand is getting better because of China. China may have had certain issues lately but the deflation makes the markets believe that there may be a strong reaction of the Chinese government with easing measures that can help the consumption. We don’t think the time is mature for a solid movement of oil prices above $80 so we may try short positions this week.

EURUSD (Euro – US Dollar)
Last week was slightly bearish for EURUSD as it opened at 1.0778 and closed at 1.0775. The U.S. dollar had another week of gains, but the euro was able to resist, so the exchange rate did not take a strong downtrend. Inflation in the United States reported at 3.1% above market expectations, was the main reason behind the U.S. dollar. The Eurozone’s results were not negative after GDP remained unchanged in the fourth quarter of 2023 and industrial output rose by 1.2% in December. The trade balance was found to be lower than the market estimated but again it is strongly positive. In addition to the macroeconomic data, the more markets’ perception moves the Fed’s rate cut date to the future, the more it begins to match Markets’ estimates of a European Central Bank cut that is likely for next summer. So, the dollar stops having a substantial lead over the euro.

GBPUSD (Great Britain Pound – US Dollar)

Bearish was the last week for GBPUSD, as it opened at 1.2617 and closed around 1.2597. Sterling had significant reasons to weaken last week mainly due to inflation announced in the UK. Markets had expected a resurgence of inflation in January to 4.2% from 4% in December but the result was 4% and markets felt that the Bank of England had no main reasons to be particularly aggressive. Sterling, so, could not be imposed on the exchange rate because the opposite happened to the U.S. dollar and the inflation that was announced in the United States as we saw in the general commentary. As far as the rest of the UK’s macroeconomic results were concerned, they had a positive sign but were not able to give an upward trend in GBPUSD. The central event of the current week is the announcement of the Fed’s minutes on Wednesday but for several weeks the exchange rate seems to be subordinated to the strength of the U.S., dollar, and for this reason, we will choose sell positions.

USDJPY (US Dollar – Japanese Yen)

USDJPY was bullish last week, opening at 149.21 and closing at 150.20. For one more week, there were no substantive developments in relation to the Bank of Japan and the possible change in loose monetary policy and negative interest rate. “When sustained, stable achievement of the price target comes into sight, we will examine whether to maintain various easy measures, including the negative interest rate.”, said the head of the BoJ Ueda, something that merely prolongs the wait without giving substantial information. In this way, the strengthening of the U.S. dollar has again had a catalytic effect on the exchange rate, creating upward trends. This was helped by rising bond yields too. Also, a series of negative outcomes for Japan’s economy leaves little room for markets to think that a change in loose monetary policy may come soon. Japan’s GDP fell by 0.1%. the previous quarter as the markets were expecting an increase of 0.3%. Industrial production was also announced below expectations, while the producer price index had small growth trends. We don’t believe that the USDJPY can remain above 150 for a long time so we may try sell positions this week.

EURJPY (Euro – Japanese Yen)
Bullish was last week for EURJPY which opened at 160.76 and closed at 161.87. Although the markets expect a change in monetary policy and interest rates by the Bank of Japan in the following months, the Japanese currency is getting weaker. There are many hawkish statements by Japanese officials or at least statements that don’t show decisiveness so the markets consider the current gap between the current rates of Japan and other major economies. The price of the EURJPY is very close to a multi-month high so sell positions is our selection for the current week.

EURGBP (Euro – Great Britain Pound)

Last week was bullish for the EURGBP, as it opened at 0.8535 and closed at 0.8552. The sterling could not gain more compared to the euro during the last week due to the decreased inflation that was announced in the UK. It means that the Bank of England has now one important reason not to be too aggressive as the inflationary pressures are getting weaker. Both the UK and the Eurozone economies had decent-to-good macroeconomic results last week but there’s one technical reason that also contributed to the EURGBP’s uptrend. On Tuesday, the pair dropped to 0.8485 which is the lowest level since the August of 2022 and it makes sense that bullish reactions would occur. This fact creates an irregular balance on the pair so we prefer to stay out this week.

USDCAD (US Dollar – Canadian Dollar)

Bullish was the last week for USDCAD, as it opened at 1.3458 and closed at 1.3483. The U.S. dollar was in an uptrend again and it dominated on the pair. The Canadian dollar was not able to take advantage of the large increase in the oil prices which is something that usually favors it: The strength of the U.S. dollar was the master for one more week. The housing starts in Canada dropped last month, and so did the wholesale sales. The Foreign Portfolio Investment in Canadian Securities in December had increased by more than 10 billion which somehow surprised the markets positively. Canada is going to release the retail sales during the current week and beyond this announcement, we expect that the U.S. dollar and the oil prices will take over. We may try sell positions this week.

USDCHF (US Dollar – Swiss Franc)
The USDCHF had an upward course last week as the opening price was at 0.8742 and the closing price was at 0.8810. It was the third consecutive bullish week for the USDCHF which seems reasonable as all the major factors were along with the bulls. The U.S. dollar was strong for one more week and the global investing sentiment became more positive. Positive sentiment usually sends a big portion of investors and traders to assets of a higher risk compared to the so-called safe-haven Swiss franc. The franc became weaker after the inflation announcement of the Swiss economy on Tuesday. The inflation dropped in January to 1.3%, much lower than the 1.7% that the markets were expecting. Something similar happened with the producer & import price index which was released on the following day: -2.3% vs -1.1% in the previous month. It was a clear signal for the markets to consider a possible dovish stance from the Swiss National Bank. We may try buy positions for one more week.

AUDUSD (Australian Dollar – US Dollar)

Marginally bullish was the last week for AUDUSD, which opened at 0.6518 and closed at 0.6527. Even if the U.S. dollar was strong again, the Aussie was able to resist mainly because of the Australian and Chinese developments. On Tuesday, Reserve Bank of Australia (RBA) Governor Michele Bullock spoke in parliament and she stated that the RBA is well-placed to reduce inflation within a reasonable timeframe. It was a hawkish statement since it means that the interest rates may remain high for a longer period of time. There was a correction on AUDUSD early on Thursday after the negative result of the unemployment rate in Australia which reached 4.1% from 3.9% in the previous month.  AUDUSD was also affected positively to a large degree by the latest expectations in China. Markets expect that the deflation in China will lead to a fiscal expansion that will revitalize consumption and will favor all trading associates like Australia. Two bullish weeks for the AUDUSD against the strength of the U.S. dollar seems like a good indication for us to consider buy positions for one more week.

Bitcoin

Last week, Bitcoin was strongly bullish and closed at $52,130 with profits of 7.90%. A second in a row strongly bullish week has filled the crypto community with optimism and expectations for more profits. The weekly highest price was a bit below $53K which was the highest price since November of 2021 for the Bitcoin. On-chain intelligence tracker Santiment’s data indicates that whales have shown the highest level of activity in 20 months. These large wallet investors are distinct from the substantial inflows to Bitcoin’s ETF, highlighting a notable redistribution in Bitcoin supply among various whale groups. In 2024, Bitcoin whales with wallet sizes between 1,000 and 10,000 Bitcoins increased their holdings by $12.95 billion. There was also much positive news that concerned crypto companies that also boosted the sentiment. The Coinbase exchange reported a net profit of $273 million in the fourth quarter. Additionally, MicroStrategy, recognized as the largest corporate holder of Bitcoin, informed its shareholders that the company’s capitalization is expected to see significant growth. Last but not least: Christopher Waller, a member of the Fed, has expressed the view that the growing popularity of stablecoins, which are pegged to the U.S. dollar, will contribute to preserving the dollar’s position as the world’s reserve currency. Many crypto investors have already started dreaming already the all-time high price of around $69K. We may try long positions for one more 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.