04/03/2024

General Comment

For another week, markets focused on assessing central banks’ future plans in terms of interest rates and monetary policy. These estimates have to do mainly with when the major central banks will start cutting interest rates, following a long cycle of rising interest rates aimed at combating high inflation.

Those estimates have changed over the past few months. The Fed would be the first to lower interest rates relative to other central banks. Now the likelihood of interest rates falling at the March meeting is practically negligible and the most likely scenario is next June and even July. It is true that the strong effects of economic growth in the United States, and the resilience of the U.S. economy, favor the prolongation of high interest rates.

The United States has recently announced strong growth and a strong labor market. This picture changed slightly negatively last week but it appears to have not yet seriously affected the markets. More specifically, the latest estimate for GDP for the 4th quarter of 2023, was seen at 3.2% slightly below market estimates. Durable goods orders were also down while inflation appeared to stabilize after the announcement of personal consumption expenditures was announced about as much as markets had estimated.

Markets, of course, take note of statements from Fed executives, which apparently do not have a common line. On Friday, Richmond Fed head  Thomas Barkin expressed a more definitive stance, suggesting that the Fed might not lower its interest rates throughout the entire year.

In Europe, officials from the ECB have voiced their opinion that discussions on decreasing the bank’s policy rate are premature for now. They’ve also delayed their expectations for such an action to sometime in the summer, a sentiment ECB President Christine Lagarde echoed in her recent remarks.

Furthermore, an ECB official has expressed support for reducing rates by June, advocating for a systematic and gradual approach to policy easing afterward. Another official from the ECB noted that should forthcoming data corroborate the current assessment, the central bank’s Governing Council is prepared to adjust its monetary policy as needed.

There has been a lot of talk lately about China’s economy, which is showing some weaknesses, mainly due to deflation and the real estate market. China’s manufacturing results last week were encouraging though.

In the geostrategic field, things remain complicated. There are efforts to find a solution and a ceasefire in the Gaza Strip war, but the Houthis ‘ attacks in the Yemeni Sea remain, raising concerns about global trade.

Almost all major stock indices rose significantly last week, while most commodities such as gold and oil also had important profits. The U.S. dollar fell for the second week in a row, and last week’s gainers were the euro and the Japanese yen. We saw a slight decrease in bond yields with the U.S. 10-year yield closing the week at close to 4.18%. The rally in the cryptocurrency market continues and Bitcoin marked its most profitable week in recent months.

The current week is also critical for international financial markets. The most important announcement has to do with the U.S. labor market on Friday (NFPs) but markets are also focusing on the announcement on interest rates and monetary policy from the European Central Bank on Thursday. China’s economy will also gather the eyes of markets after it announces imports, exports, and trade balance as well as inflation for last month. The volatility of the markets is expected to be maintained at high levels as there is other news for each economy that we will see in detail below.

SP500

The US SP500 index was bearish last week as it closed at 5,137.08 points and profits of 0.95%. The market positivity was largely fueled by the congruence between the personal consumption expenditures report and what investors had anticipated. This report showed the least yearly inflation increase in the past three years, reinforcing the anticipation of possible reductions in interest rates by June or July. Stocks of the technology sector, especially those associated with artificial intelligence, are at the forefront of the market’s recent rally. Nvidia, a key figure in the AI industry, had remarkable performance after its impressive results. These advancements have driven SP500 to reach a new all-time high. The rest of the macro results of the U.S. economy were not positive though. New home sales disappointed last month and so did the durable goods orders (-6.1%). The GDP of the 2023 Q4 was announced below market expectations (3.2% vs 3.3%) and the ISM manufacturing PMI was announced at 47.8 much below the anticipated 49.5. Finally, the Michigan consumer sentiment index dropped from 79.6 to 76.9. No matter these negative results, the U.S. stock markets keep on rallying as the AI wave is strong. Also, even if the date of the interest rate cuts by the Fed keeps on shifting later, markets consider that the inflation battle has been won and sooner or later, rates will be cut. We may try long positions for one more week.

DAX30

The German DAX40 index was bearish last week, closing at 17,735.07 points, with profits of more than 1.80%. The German stock markets ignore the problems of the German & European economies and performing another all-time high week. German retail sales dropped by 1.4% in January and the unemployment rate climbed to 5.9% after the negative unemployment change of -11K job positions. The manufacturing PMI was marginally improved, from 42.3 in January to 42.5 in February but still, it’s well below 50. Finally, the inflation (harmonized index of consumer prices) dropped to 2.7% from 3.1% which pretty much helped the stock markets because the scenario of sooner interest rate cuts by the ECB is getting closer. This week, the German services PMI will be announced on Tuesday, and the next day the imports/exports/trade balance of the German economy in the last month. On Thursday the factory orders will be released and on Friday the industrial production. The most important announcements will come from the ECB though: decision on interest rates on Thursday and GDP on Friday.  We believe that there’s an overbought case for DAX40 so we’d prefer short positions this week.

FTSE100

The British FTSE100 index moved downward last week, closing at 7,682.5 points, losing about 0.30%. Most of this movement should be addressed to Wednesday’s strong correction. Some UK companies announced their disappointing earnings results. Reckitt experienced a significant drop of 13.3%, after the company failed to meet its quarterly net sales forecasts, following an investigation that revealed some of its employees had under-reported liabilities in the Middle East. Also, St. James’s Place saw a dramatic fall of 18.6%, dropping to its lowest level in 11 years, after reporting an annual loss. These results combined with some hawkish statements from Bank of England officials, led FTSE100 to an underperformance from the rest of the major stock indices in Europe & USA. This week, besides the services PMI, does not contain important economic data to be released by the UK economy so the focus will be again on the Bank of England’s anticipations and estimations regarding the course of the interest rates. As FTSE100 is not able to follow a global uptrend, what will happen to a global correction? Leaving this answer pending to everybody, we may try short positions this week.

Gold

The previous week was bullish for gold, with the next month’s futures closing at $2,086.9 and profits close to 2.37%. Gold gained bullish momentum, reaching its highest point since early December. This came after a period of consolidation in a narrow channel during the first half of the week. The fall in the U.S. 10-year bond yields and the U.S. dollar has enhanced the attractiveness of gold. While the personal consumption expenditures (inflation metric) met expectations, its annual figures continue to surpass the Federal Reserve’s 2% inflation target, signaling ongoing inflation concerns. Fed officials have urged caution against hasty interest rate reductions, advocating for a decision-making process that is guided by data. The outlook for gold remains optimistic, driven by anticipations of a looser monetary policy by the middle of the year. Should the economic data consistently fall short of expectations, it’s possible that gold prices could soar to unprecedented highs in the forthcoming period so long positions is our selection for the current week.

US Oil

Last week was bullish for oil with the next month’s futures closing at $79.97, with profits of 4.55%. The current trend is mainly propelled by the upcoming decision from OPEC concerning their supply agreements for the second quarter of 2024. Finally, this decision took place on Sunday while the markets were closed. According to Reuters, OPEC has decided to extend their voluntary oil output reductions of 2.2 million barrels per day into the second quarter. This move aims to stabilize the market amidst global economic uncertainties. The announcement from Russia, detailing an additional cut in its oil output and exports by 471K barrels per day for the second quarter, in collaboration with certain OPEC members, was a mini surprise that may give an extra boost to the oil prices. In the United States, the oil rig count has experienced an uptick, climbing to 506 rigs, marking the highest number since September, according to reports from the energy services company Baker Hughes. This rise indicates a potential increase in U.S. crude production, which may offset the limited supply resulting from OPEC’s output cuts. As per the demand of the oil market, there is a mix of factors indicating both weakening and stabilization. The manufacturing sector in China has contracted for the fifth consecutive month, which could suggest a decrease in demand from one of the world’s largest consumers of oil. On the other hand, factors such as the dip in inflation within the Eurozone and the USA might mitigate the impact on oil demand. If we follow the “buy the rumors, sell the news” strategy (taking into consideration OPEC’s announcement), we may try short positions this week.

EURUSD (Euro – US Dollar)
Last week was slightly bullish for EURUSD as it opened at 1.0829 and closed at 1.0839. Markets are starting to assess the possibility that the European Central Bank will start cutting interest rates earlier than the Federal Reserve. A few months ago this was not the central scenario and for this, the U.S. dollar was strengthening significantly. The strong macroeconomic results of the United States allow the prolongation of high interest rates since it does not appear to be significantly affected the country’s economy. This scenario is confirmed by statements from Fed officials and the first interest rate cuts are expected in June or July. In the summer, the reduction of rates is likely to begin, and by the European Central Bank, therefore, the advantage that the dollar had is no longer there. The Eurozone economy is still in trouble. Industrial and consumer confidence last month fell sharply. The unemployment rate was announced at 6.4% while inflation was announced at 3.1% against 2.9% expected by the markets. The announcement of the NFPs United States as well as the decision on interest rates and the monetary policy of the Eurozone will dominate this week. The labor market results could further weaken the dollar so we may try buy positions this week.

GBPUSD (Great Britain Pound – US Dollar)

Bearish was the last week for GBPUSD, as it opened at 1.2670 and closed around 1.2651. The exchange rate had strong bearish trends on Wednesday and Thursday, and Friday’s rebound was not able to change the downward sign. This decline is also coupled with a weakening of the U.S. dollar and is taking on particular significance. The British Retail Consortium Shop Price Index revealed a 2.5% increase in February on a year-over-year basis, marking a decrease from the 2.9% recorded in January. This reduction represents the ninth straight month of declines, bringing the index to its lowest level since March 2022. This development is in line with the January inflation figures, which remained at 4%, lower than the expected 4.1%. The falling prices, coupled with a slowdown in wage growth, provide a glimmer of hope for the Bank of England. Nevertheless, with current inflation rates still twice the Bank’s target of 2%, it is evident that the journey towards inflation control is still in progress and far from over. The current week contains no major economic announcements for the UK economy and so the focus will again be on the US economy. We prefer buy positions this week.

USDJPY (US Dollar – Japanese Yen)

USDJPY was bearish last week, opening at 150.47 and closing at 150.11. It was the first bearish week for the exchange rate after eight consecutive weeks of rising. Bank of Japan board member Hajime Takata said on Thursday that the central bank “needs to consider taking flexible response including exit from monetary stimulus“. There was therefore a clear reference to the Bank of Japan’s change in monetary policy and negative interest rates. Inflation in Japan was reported at 2.2% last month while excluding food and energy, inflation soared to 3.5%. Industrial output fell by 7.5% in January, but the unemployment rate fell slightly to 2.4%. Takata’s statements, however, were unable to keep the USDJPY below 150, which shows that the markets are still unconvinced. If there is a new downward breakout of the 150 it can gain downward momentum and so we will choose sell positions this week.

EURJPY (Euro – Japanese Yen)
Bearish was last week for EURJPY which opened at 162.99 and closed at 162.70. The euro was quite strong last week as there is a good chance that the rate cut will not start until the summer. A resurgence of inflation in the Eurozone announced last week has given new fodder to this scenario. However, the Japanese yen appeared to be even stronger after statements from the Bank of Japan suggested a change in very loose monetary policy and negative interest rates. This is a development that the markets have been expecting for a long time and according to many analysts, it is not excluded that it will happen in the coming months. From this perspective, we prefer sell positions this week.

EURGBP (Euro – Great Britain Pound)

Last week was bullish for the EURGBP, as it opened at 0.8541 and closed at 0.8565. Some results from the United Kingdom showing a decline in inflation did not favor sterling last week, which suffered losses. In contrast, the shared currency strengthened after announced inflation was above market expectations and fed into scenarios of high interest rates being extended by the European Central Bank. The European Central Bank’s announcement of the interest rate decision and monetary policy next Thursday will be a catalyst for the exchange rate. It is not excluded that these statements are additionally hawkish so we will choose buy positions for one more week.

USDCAD (US Dollar – Canadian Dollar)

Bullish was the last week for USDCAD, as it opened at 1.3488 and closed at 1.3559. The exchange rate rose even though the U.S. dollar was weak and oil prices strengthened significantly. The upward movement is therefore to be attributed mainly to the weakness of the Canadian dollar. This weakness is due to two main reasons. The first reason has to do with market expectations in relation to the Bank of Canada’s decision on interest rates and monetary policy on Wednesday. The analyses converge that interest rates will remain unchanged but it is not excluded that there will be hints to reduce them in the near future. The second reason for the Canadian dollar weakness has to do with the negative macroeconomic results announced last week. More specifically, last month Canadian GDP remained unchanged while .markets were expecting a rise of 0.2%. Also, the current account found itself in intense negative territory. Finally, the PMI indicator for manufacturing was announced below 50. This week in addition to the interest rate decision by the Bank of Canada and the announcement of the United States labor market, Canada will also announce last month’s unemployment rate. The last rise in the exchange rate in the last 2 months is not entirely justified and for this reason, we will choose sell positions this week.

USDCHF (US Dollar – Swiss Franc)
The USDCHF was bullish last week as the opening price was at 0.8793 and the closing price was at  0.8832. The United States dollar weakened last week that didn’t stop the exchange rate from rising. It seems that the economic and investment sentiment, which is improving, is pushing a large portion of the investment community towards higher-risk currencies against the safe haven of the Swiss franc. The results of the Swiss economy last week were mixed. The GDP strengthened in the 4th quarter of 2023 by 0.3%, above market expectations. In contrast, the KOF leading indicator dropped while retail sales and manufacturing declined. In addition to the important announcements about the U.S. economy that we saw above, equally important announcements have the Swiss economy. Inflation and unemployment rate stand out. We may try buy positions for one more week.

AUDUSD (Australian Dollar – US Dollar)

Bearish was the last week for AUDUSD, which opened at 0.6563 and closed at 0.6525. Inflation in Australia decelerated last month to 3.4%, which weakened the country’s currency, he said, since markets now believe that the Bank of Australia is slowly moving away from the scenario of intense and aggressive monetary policy. Also, the economic results announced by Australia were not encouraging. Retail sales rose below market expectations while the construction industry also lost the expectations. The manufacturing PMI index was announced at 47.8, well below the milestone of 50. Under these circumstances, the Australian dollar was not been able to benefit from the rise in commodity prices that usually have a positive effect on it. Neither, the improvement in China’s manufacturing image has had a positive effect on the Australian dollar. It is not excluded that the downward trend for AUDUSD will continue and so we prefer sell positions this week.

Bitcoin

Last week, Bitcoin was strongly bullish and closed at $63,142 with profits of more than 22%. Bitcoin price touched the $65,000 mark in the early hours of the current week, following a surge in demand from Spot Exchange-Traded Funds (ETFs). Despite this, important on-chain indicators hint that the rally for the leading cryptocurrency is likely to continue. The rally somehow eased in the middle of the last week. A report from Reuters has revealed that Grayscale Investments, a crypto asset management firm and the issuer of the GBTC spot Bitcoin ETF, is actively lobbying the US Securities & Exchange Commission for the approval of options trading on its spot Bitcoin ETF. Grayscale argues that allowing options trading on the GBTC ETF would broaden the investor base by attracting a new category of investors to the fund. Another critical factor that affects the price of Bitcoin is the upcoming halving in April. A Bitcoin halving is a significant event in the cryptocurrency world where the reward for mining new blocks is cut in half, resulting in miners receiving 50% fewer Bitcoins for transaction verifications. These events are crucial for traders because they diminish the rate at which new Bitcoins are introduced into circulation, effectively constraining the supply of new coins. If demand persists, this limited supply has the potential to drive up prices. Historically, the months leading up to and following past halvings have seen Bitcoin’s price surge dramatically. Under these circumstances and as the price of Bitcoin approached its all-time high ($69K), we’d better stay out 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.