26/02/2024

General Comment

The past week has been another impressive week for the financial markets. The United States economy continues to perform impressive results. PMI indicators for manufacturing and services were again well above 50 while the labor market continues to have a solid picture since initial jobless claims were well below market expectations.

Moreover, the markets have been very supportive of the growth that artificial intelligence and new technologies expect to bring, and that is why the announcement of Nvidia’s earnings last Wednesday was of particular importance. Nvidia announced its fiscal fourth-quarter earnings, surpassing markets’ predictions for both earnings and sales. Nvidia announced a net income of $12.29 billion for the quarter, marking a 769% increase compared to last year’s $1.41 billion. The company’s total revenue surged by 265% from the previous year, driven by robust sales of AI chips for servers. Furthermore, the company indicated that its revenue for the upcoming quarter would exceed expectations, despite the high bar set for significant growth.

The other big issue that concerns markets in recent times is none other than central banks and expected decisions to reduce interest rates. According to the Fed minutes released on Wednesday, nothing new has been learned, but many speeches by officials have indicated that they are holding back in a wait-and-see mode. Now the most likely scenario for starting a rate cut is shifted to June. After all, impressive results of the U.S. economy should not cause a rush at the Fed.

The economic situation is a completely different landscape in Europe. The Eurozone’s economic downturn persisted into February, as evidenced by the PMI indicators. The PMIs for February indicated a slight slowdown in the pace of contraction, with a relatively stable services sector helping to mitigate the significant decline in manufacturing activity. The composite PMI experienced a modest increase, moving from 47.9 in January to 48.9 in February. This was due to the manufacturing index decreasing to 46.1 from 46.6, while the services PMI improved significantly, reaching 50 after being at 48.4 in January. These results show that the economy in the Eurozone has not yet been able to get back on its feet.

The eyes of the investment community are also on China as the country’s economy is facing major problems. There is a big issue of deflation and a big problem in real estate. The Chinese government has put together a rescue package aimed at purchasing stocks, showcasing a proactive approach to addressing market volatility. In addition, the People’s Bank of China has lowered its one-year lending rates, a move that may boost domestic investment in the real estate market. While these initiatives are seen as positive steps, they are anticipated to lead to calls for more substantial fiscal and monetary stimulus.

Taking all of the above into account and as we mentioned at the beginning of the comment, the main equity markets in Europe and the United States had a significant uptick last week. The U.S. dollar fell against its main competitors while the euro had a bullish reaction. Mixed was the sign in the commodity market with gold gaining while oil had some losses. We had a little adjustment for bond yields with the yield on the U.S. 10-year bond closing the week at close to 4.25%. Regarding the cryptocurrency market, after a period of strong rise, we have seen stabilizing and correcting trends.

The week that has just begun contains important announcements about the United States economy in particular. Personal consumption expenditures and GDP for the 4th quarter are announced. Personal consumption expenditures are an indicator of inflation and are expected to be taken seriously by the Fed for its future plans. Other announcements for the U.S. economy are durable goods orders and consumer confidence. As per the Eurozone, announcements that will pique the interest of the markets are inflation and unemployment rate in the Eurozone, inflation, retail sales, and the unemployment rate in Germany.

SP500

The US SP500 index was bearish last week as it closed at 5,088.80 points and profits of 1.66%. The SP500 reached a new record high after the previous corrective week. The U.S. stock market is currently on an upward trajectory, largely driven by robust corporate profit reports. Nvidia’s exceptional quarterly earnings ignited a surge, propelling the SP500 index to its most impressive days since the start of 2023. According to officials’ recent remarks from the Fed, there is a deliberate strategy towards adjusting interest rates. The market has moderated its anticipations for significant rate reductions, now more in harmony with the Fed’s advisement, indicating an adjustment to the central bank’s tactics. Given the latest inflation data, the latest statements, and the FedWatch tool, the most likely moment for interest rate cuts is in June. Of course, this is a shift from recent anticipations of March or May but markets seem patient without worries. The surge in bond yields reflects the markets’ response to comments from the Fed and the latest inflation figures. Investors are displaying a guarded optimism, keeping a close eye on interest rates and inflation metrics. The resilience of the U.S. economy and the positive view that the recent AI trend may boost the economy confirm this optimism. In the current week, markets will put their eyes on the U.S. economy announcements: GDP, PCE, durable goods orders, and Michigan consumer sentiment index are the most important. Corrective trends cannot be ruled out after new all-time highs since there may be profit-taking behaviors and the too positive environment is fragile in macro news. We may try short positions this week.

DAX30

The German DAX40 index was strongly bullish last week, closing at 17,419 points, with profits of 1.76%. Obviously, the European stock markets including the DAX40 were positively affected by the impressive results of Nvidia. There are certain hopes and an increased optimism that the new AI technologies are able to boost the global economies. Markets were afraid of a strong recession in the German economy but last week’s released economic data somehow eased the concerns. The German economy contracted by 0.3% in the last quarter of 2023 but this has been already consumed by the markets. PMI indicators remain below 50 but the services PMI exceeded the estimations. Above market estimations were the announcements of expectations and the current assessment of the German economy in February. A critical aspect that markets focused on lately is the possible date that the ECB will start cutting interest rates. Many analysts believe that it could happen during the summer and this is another source of optimism that the bad scenario is behind. The German economy has economic data to announce this week (PMIs, CPI, unemployment rate, retail sales), and the markets will have a better idea of the situation. Things are not that good to justify such a strong bullish rally so we prefer short positions this week.

FTSE100

The British FTSE100 index moved slightly downward last week, closing at 7,706.28 points, having marginal losses. On Tuesday and Wednesday, FTSE100 had a strong bearish pressure. The monetary policy report hearing and the statements by Bank of England officials had a hawkish stance. The common belief as it is extracted from the above is that the inflationary pressures are still an issue and that any possible rate cuts by the Bank of England still have a long way to go. During the last two days of the week, FTSE100 performed an upward recovery but it could change the negative weekly sign. Nvidia’s impressive results boosted global sentiment as the markets consider the latest AI technologies a serious reason for an economic boost. The PMI indicators for the UK economy announced on Thursday, also helped the recovery of the FTSE100 since they were all above 50. FTSE100 underperformed most of the major equity indices in Europe & USA so a possible correction in markets may affect it even more. We may try short positions this week too.

Gold

The previous week was bullish for gold, with April’s futures closing at $2,049.4 and profits close to 1.25%. The gold market’s dynamics over the previous week were heavily influenced by the Fed’s prudent stance on interest rate reductions. Speakers from the Fed highlighted the necessity for further signs of diminishing inflation before contemplating any cuts in rates. January’s consumer price index and producer price index results showed the fight against high inflation will be long-lasting and difficult. The resilience of the U.S. economy as it is expressed by the latest results in the jobs market and growth allows the delays of interest rate cuts. The two critical factors that usually affect gold prices also contributed to the uptrend. There was a decline in U.S. bond yields, mirroring investor unease regarding the direction of future interest rates. Also, after rallying for seven consecutive weeks, the U.S. dollar recorded a weekly decrease. In the current week, the gold market is expected to be swayed by several important economic releases, with the Personal Consumption Expenditures data standing out. This report is anticipated to offer vital information on inflation patterns and consumer expenditure, possibly impacting the Fed’s policy choices. We may try short positions this week.

US Oil

Last week was bullish for oil with the April’s futures closing at $76.49, with losses of 3.40%. The crude oil market experienced a notable downturn, reversing the previous week’s gains. This shift was largely attributed to speculation regarding the U.S. Fed’s interest rate strategies, particularly following comments from Fed officials. Most of the officials suggested that interest rate reductions might be postponed and it caused fears of a possible economic slowdown, which could negatively impact oil demand. Geopolitical events remain a significant driver in the oil market’s dynamics. The continuous war in the Gaza Strip and the situation in the Red Sea, especially the actions of Houthi militants near Yemen, continue to be a source of worry. Such tensions typically push oil prices higher because of the perceived risk to supply but during the last week, the concerns regarding the demand dominated. The weekly crude oil stocks in the USA increased by 7.17 million barrels last week and the rig count had increased to 503 from 497 in the previous week. This could indicate a strategic pivot towards boosting domestic oil production. Markets also have put their eyes on the Chinese economy since a fiscal expansion may boost the demand in China. The last week’s downtrend may carry on so we prefer short positions.

EURUSD (Euro – US Dollar)
Last week was bullish for EURUSD as it opened at 1.0771 and closed at 1.0820. The minutes from the latest meeting of the Federal Open Market Committee (FOMC) revealed that policymakers are not considering rate cuts until there is greater confidence that inflation is on a downtrend. Fed officials remained generally positive about overcoming inflationary pressures, noting that, despite high inflation, it was progressing towards the central bank’s 2% target. This stance was seen as dovish by markets and the US dollar weakened. The results in the Eurozone last week were not particularly encouraging, and that may lead some investors to believe that the European Central Bank will start cutting interest rates earlier than expected. The contrasting picture of the United States economy that continues to impress creates the impression that there should be no rush to cut interest rates from the Fed. The current week’s economic announcements are important as we have seen in the general commentary but believing that the U.S., dollar may be able to recover again, we will choose sell positions.

GBPUSD (Great Britain Pound – US Dollar)

Bullish was the last week for GBPUSD, as it opened at 1.2595 and closed around 1.2671. The U.S. dollar found itself weak last week on announcements of Fed minutes and statements by some officials all moved in a dovish direction. Of course, the economic path of the United States remains impressive but the results from the United Kingdom were not negative last week. PMI indicators had a satisfactory result with the sole exception of manufacturing which was announced slightly below expected. The Bank of England monetary policy report, which was released last week in conjunction with statements by several Bank of England officials, took a cautious stance as they all consider the inflation issue still hot. All this boosted sterling even further. This week markets will focus on the United States and the major announcements expected. If the U.S. dollar reverts to its familiar strength, the exchange rate will move downward so we may try sell positions this week.

USDJPY (US Dollar – Japanese Yen)

USDJPY was bullish last week, opening at 150.07 and closing at 150.53. The exchange rate has been bullish for eight consecutive weeks, even though last week the U.S. dollar was not strong. The cause of course is the weakness of the Japanese currency caused by continued very loose monetary policy and negative interest rates from the Bank of Japan. There are statements and expectations that this policy is going to change soon, but as this is prolonged, the interest rate gap between the two central banks favors a rise in the exchange rate. This rise was not shaken at all by even the slight correction we saw in bond yields last week. The announcements of Japan’s economy have been relatively satisfactory, but this has not helped the Japanese yen. Things are blurred regarding the Bank of Japan so we’d better stay out this week.

EURJPY (Euro – Japanese Yen)
Bullish was last week for EURJPY which opened at 161.62 and closed at 162.89. For three consecutive weeks, the exchange rate has been trending upwards approaching the critical resistance of 164.30 which is also the highest price we have seen since August 2018. The root cause is certainly the continued very loose monetary policy and the negative interest rates of the Bank of Japan. The rise was also matched by a strengthening of the euro last week, even though there are no particular reasons to support the European currency and the European economy. We will stay out this week as the Bank of Japan’s plans are not clearly visible yet.

EURGBP (Euro – Great Britain Pound)

Last week was slightly bearish for the EURGBP, as it closed at 0.8539, about 13 pips lower than the previous week’s closing price. Both Europe’s currency and the British pound strengthened last week, as the improving economic sentiment allowed a large share of investors to position themselves in higher-risk currencies. But since the problem of inflation in the UK is even more acute than in the Eurozone, the sterling gains a few points relative to the euro and so the exchange rate moves slightly above 0.85 which is a crucial support. There has not been a clear downward breakout in this support in the last year and a half and that is why we will choose buy positions this week.

USDCAD (US Dollar – Canadian Dollar)

Bullish was the last week for USDCAD, as it opened at 1.3475 and closed at 1.3508. We should note that this bullish movement took place in a week when the U.S. dollar was weak. The declining oil prices were an important reason that caused the weakening of the Canadian dollar since the CAD and the oil are positively correlated assets. Important was also the announcement of the Canadian inflation. Canadian inflation fell to 2.9% in January, significantly below the anticipated slight decrease to 3.3% from the earlier period’s 3.4%. The annual Core CPI, excluding food and energy, rose 2.4% in the same period, a decline from the 2.6% noted in December. This sharp decrease in inflation created anticipation in the markets that the Bank of Canada could be less aggressive and less hawkish in the next period. The U.S. announcements and the oil prices will dominate on the USDCAD in the current week and we may try buy positions.

USDCHF (US Dollar – Swiss Franc)
The USDCHF was neutral last week as the opening price and the closing price was around 0.8810. The pair had an upward course and completed four consecutive bullish weeks even though the U.S. dollar was weak. The minutes from the January FOMC policy meeting, disclosed on Wednesday, showed that policymakers were apprehensive about reducing interest rates too swiftly in the face of persistent inflation and a resilient US economy. Additionally, Fed officials emphasized once again that the central bank was not rushing to change its monetary policy stance. The above concluded with a weak dollar. The improved economic sentiment though, makes many investors favor more risky assets and currencies than the so-called safe-haven of the Swiss franc. The Swiss economy had a good performance in January regarding the imports, the exports, and the trade balance but these results could not help the franc. We may try buy positions for one more week.

AUDUSD (Australian Dollar – US Dollar)

Bullish was the last week for AUDUSD, which opened at 0.6522 and closed at 0.6563. The Reserve Bank of Australia meeting minutes that were released on Tuesday had a strong hawkish tone. The members concluded that the argument for maintaining steady interest rates was more compelling at this meeting. Further insights from the minutes indicated that the board concurred it was prudent not to dismiss the possibility of another increase in rates. Another increase in rates statement, compared to the environment of rate cuts in the USA in the near future, creates a strong advantage for the Australian currency. As per the macro results, Australian PMIs had a good performance in February, all announced above 50. Also, the markets expect a reaction from the Chinese government against the deflation and in case of a strong stimulus package in China, the AUD will be favored. This week though, the focus will be placed on the U.S. announcements, mostly regarding PCE and GDP. If the U.S. dollar manages to recover, we will see downward trends for the AUDUSD so we may try sell positions this week.

Bitcoin

Last week, Bitcoin was bearish and closed at $51,722 with mild losses of 0.78%. The crypto market has had a bullish trend in the last weeks after the approval of the Bitcoin ETFs by the SEC. As this development is consumed and digested by the markets, the cryptos are more affected by the latest news from the central banks and especially by the Fed. Last week saw a decrease in the likelihood of the Fed reducing interest rates in March and May. It was a result of the FOMC minutes release and of many statements by Fed officials. High interest rates for a longer period do not favor high-risk assets such as cryptos. Contrary to Bitcoin’s retreat, Ethereum maintained its upward momentum on expectations that the SEC will greenlight the initial series of ETH-spot ETFs in May. This could be a potential reason for another bullish rally for the cryptos but it’s still too early. Crypto markets also concern lately after Satoshi Nakamoto’s earliest collaborator Martii ‘Sirius’ Malmi has released his entire email correspondence with Bitcoin’s creator. Markets analyze the 120 pages of writings by Bitcoin creator Satoshi Nakamoto, seeking clues about his identity. There may be many AI algorithms that would try to find out how Satoshi Nakamoto is, according to the style of writing and other information contained in his emails.

Another source of concern for Bitcoin was the ECB blog post (https://www.ecb.europa.eu/press/blog/date/2024/html/ecb.blog20240222~0929f86e23.en.html) with the headline “Bitcoin has failed on the promise to be a global decentralised digital currency and is still hardly used for legitimate transfers. The latest approval of an ETF doesn’t change the fact that Bitcoin is not suitable as means of payment or as an investment”. Many times, the ECB has expressed demurrals regarding cryptocurrencies but this time was more intense. Keeping all the above in mind, 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.