18/03/2024

General Comment

As markets focus on upcoming decisions by central banks, especially the Fed, inflation announcements take on particular importance. Last week the central event on which markets focused was the announcement of the producer price index in the United States. That measures the average changes in prices in primary markets of the US by producers of commodities in all states of processing. In February, the producer price index increased by 0.6%, exceeding the 0.3% rise observed in January. The year-over-year rate reached 1.6%, surpassing the prior 1.0%. This announcement resulted in a correction in the U.S. markets since nothing is certain about the Fed’s rate cut. Earlier in the week we also had the release of the consumer price index which is the main inflationary metric. And there we had an outperformance of what the markets expected: 3.2% versus 3.1%. Now, the May rate cut scenario has a very small probability, while there is a remarkable probability that there will be no reduction even in June. It is this idea of extending high interest rates that are creating nervousness and correction in U.S. markets.

Also, lower than expectations were retail sales in the United States and the Michigan consumer sentiment index, which further reinforced the concerns. The labor market continues to be positive though. On Thursday, the United States announced that initial jobless claims dropped to a seasonally adjusted 209K for the previous week, surpassing expectations of 219K. This indicates that the labor market continues to be robust.

As far as the Eurozone economy is concerned, the problems continue, as the latest figures show. In January, Industrial Production in the Eurozone experienced a significant drop of 6.7% year-over-year. ECB officials have hinted that the central bank might begin to ease monetary policy by June. This strategy reflects the policymakers’ intention to mitigate the potential impact of such a decision on the financial markets by signaling their plans well in advance.

The announcements of inflation in the US, as we said above, resulted in a correction in US stock indices. In Europe, things are different as European equity indices continued their upward trend. The U.S. dollar was the big winner last week when it comes to currency markets. On the contrary other currencies such as the euro, the pound sterling, and the Japanese yen fell.

In the commodity markets the sign was mixed with gold suffering losses and oil making gains. Worthy point that was the big rise in copper prices last week. On Wednesday, leading Chinese copper smelters reached an uncommon consensus to initiate production reductions at some plants that are operating at a loss. This decision is in response to a shortage of raw materials. According to sources familiar with the plans, this agreement was reached during a meeting in Beijing. The move comes at a time when the fees for processing copper concentrate in the spot market have fallen to their lowest level in over ten years.

The upward reaction of bond yields was also strong, with the yield on the US 10-year bond closing the week above 4.30%. Finally, in the cryptocurrency market, we saw a sharp correction after a strong upward rally that had preceded it.

The current week is a very important and critical week for the markets. Of course, the meeting and the Fed’s decision on interest rates and monetary policy stand out. It is unlikely that interest rates will change at this meeting, but the following press conference and the monetary report statement will provide more information to markets about the Fed’s intentions. The decision on interest rates and monetary policy by the Bank of Japan on Tuesday is also important. The Bank of Japan is the only one of the main banks to maintain a very loose monetary policy and negative interest rates. Information and statements from officials from Japan have repeatedly talked about changing this policy with the most basic scenario to talk about in the coming months. Under these circumstances, the Bank of Japan’s meeting on Tuesday is of particular importance. A decision on interest rates and monetary policy will be taken by the Bank of England on Thursday as well as from the Swiss National Bank on the same day. Finally, the Reserve Bank of Australia will decide on interest rates on Tuesday. All of these central bank decisions combined with the markets ‘ view of interest rates and monetary policy in the near future will determine the trend and volatility in markets in the week that has just begun.

SP500

The US SP500 index was slightly bearish last week as it closed at 5,117.09 points and losses of 0.13%. The SP500 had an uptrend through midweek but the announcement of United States inflation, especially for an announcement of the producer price index on Thursday, prompted corrective trends. The notable increase in wholesaler inflation has driven the benchmark 10-year bond yield considerably higher. This situation has led to uncertainties regarding the possibility of the Fed softening its monetary policy stance. On top of that, there have been some other negative signals about the United States economy. Last month’s retail sales rose by 0.6% against expectations of 0.8%. Below market expectations, the Michigan consumer sentiment index was also announced. Markets are worried about a long extension of the Fed’s interest rate cut, and that’s what’s been reflected in equity markets. Against this background, the Fed’s interest rate meeting on monetary policy on Wednesday takes on particular significance even if no change in interest rates is expected. If there are new worries, we may see the correction widened so we will choose short positions this week.

DAX30

The German DAX40 index was bullish last week, closing at 17,936.65 points, with profits of 0.70%. During the week, the index managed to exceed 18,000 points for the first time in its history but then we saw a mild correction, mainly due to the U.S. factor and the high inflation announced in the United States which affected all markets. European markets are currently performing better than U.S. markets, with confidence that the European Central Bank will start cutting interest rates in June. Inflation has de-escalated in the Eurozone and negative economic results reinforce this belief. Inflation in Germany was announced last month at 2.7% while the wholesale price index fell by 3%. This week, there are no major announcements for the Eurozone and German economies, so markets will again focus on the ECB’s rate cut scenarios.

FTSE100

The British FTSE100 index moved upward last week, closing at 7,727.40 points, earning about 0.90%. The British stock markets appear to be affected by situations outside the UK. In addition to the United States traditionally influencing the markets, the resurgence in Chinese markets is garnering interest. Following significant withdrawals from Chinese markets over the past year, it appears that investor confidence in the economic outlook is being restored, accompanied by anticipations of revived demand for raw materials. Also, the UK’s financial results last week had a mixed-to-positive sign. The unemployment rate increased marginally to 3.9%, but the 10-year bond auction had a significantly reduced rate. Industrial production and manufacturing were relatively weak last month, but the economy appears to be on the mend because GDP increased by 0.2%.

Gold

The previous week was bearish for gold, with the next month’s futures closing at $2,159.4 and losses close to 0.90%. Gold started the week strongly, driven largely by increasing investor optimism about a potential interest rate cut by the Fed in June. Nevertheless, as the week moved on, gold prices started to pull back due to renewed concerns over inflation.  The inflation readings, which were higher than anticipated, led to an adjustment in market expectations concerning the likelihood of U.S. interest rate cuts. Data throughout the week highlighted ongoing inflationary pressures, diminishing the chances of immediate reductions in rates. Consequently, gold, which does not offer yields, becomes less appealing in an environment of rising interest rates. Moreover, the U.S. dollar experienced a notable weekly increase – its largest since mid-January. This strengthening of the dollar made gold more costly for buyers using other currencies, contributing to the decline in the metal’s price. Additionally, U.S. bond yields saw an uptick last week as the market recalibrated its interest rate expectations following the release of the inflation data. The current week is packed with significant events that may impact gold prices further. The meeting of the Fed stands out as a crucial event. While no changes in rates are anticipated, the markets are highly attentive to any indications of possible future rate cuts. The Bank of Japan also garners interest, as it may consider moving away from negative interest rates. We may try short positions for one more week.

US Oil

Last week was bullish for oil with the next month’s futures closing at $81, with profits of more than 3.80%. Geopolitical tensions between Russia and Ukraine are raising concerns about potential disruptions in oil supply, particularly due to Ukrainian attacks on Russian oil refineries which have notably diminished Russia’s oil production capacity. Concurrently, the adherence of OPEC+ countries to their production cuts is exacerbating the supply constraints. In response to these dynamics, the International Energy Agency (IEA) has revised its outlook, now forecasting a global crude oil deficit, contingent upon OPEC+ maintaining its voluntary production curbs. Simultaneously, the U.S. oil sector is experiencing a surge in activity, evidenced by the significant increase in the number of oil and natural gas rigs (510) added in a week. Furthermore, oil traders are closely monitoring the Fed’s monetary policy, given the uncertainty over potential interest rate cuts amid persistent high inflation. Any reduction in rates could stimulate the U.S. economy and, consequently, boost oil demand. The date of the reduction is very critical and although no change is expected in this week’s session, we may have hints about the future at the upcoming Fed’s press conference. However, the rising U.S. dollar complicates the scenario, as its strength makes oil more expensive for foreign currency holders. Technically speaking, the oil prices exceeded $81 last week for the first time since last November so any corrections for profit-taking reasons would make sense. We may try short positions this week.

EURUSD (Euro – US Dollar)
Last week was bearish for EURUSD as it opened at 1.0940 and closed at 1.0887. The effects of inflation in the United States that were worse than expected caused the U.S. dollar to rise soundly as a result of this downward trend in the exchange rate last week. A few months ago, markets were poised for a rate cut by the Fed in March or May. Now even the June scenario is an optimistic scenario since there is a strong likelihood of a rate cut starting in July. In addition to inflation and interest rates, some key long-term data in the United States deteriorated, such as retail sales. The Eurozone continues to have issues. The industrial production of the previous month showed a big downturn. However, the prevailing view is that the European Central Bank could start cutting interest rates in June. The eyes of the investing community will fall on the FOMC and the decision on interest rates in the United States on Wednesday. Most likely there will be no change in interest rates, but the information that will be learned mainly through the press conference could be decisive for the short-term course of the dollar. We may try sell positions this week.

GBPUSD (Great Britain Pound – US Dollar)

Bearish was the last week for GBPUSD, as it opened at 1.2849 and closed around 1.2732. The biggest momentum in the move was the strengthening of the U.S. dollar following the inflation results announced in the United States. Both the consumer price index and the producer price index had increased rates last month. The conclusions of the markets following these announcements are that the Fed’s rate cut may be delayed. Sterling was unable to react in particular because the results announced for the UK economy were not positive. It also did not change anything about the attitude of the markets and the behavior of the Bank of England and when interest rates will start to fall in the UK. Both the Fed and the Bank of England will announce their decision on interest rates and monetary policy within the week, and that fact alone is capable of driving up volatility for the exchange rate. Most likely, rates will not change in both cases so the focus will be on the press conferences that will follow. We prefer sell positions for one more week,

USDJPY (US Dollar – Japanese Yen)

USDJPY was bullish last week, opening at 146.99 and closing at 149.03. It is clear that the exchange rate has been strongly affected by the recovery of the U.S. dollar. So, we saw an upward reaction for the USDJPY after two declining weeks. An important role was also played by the rise in bond yields following the rise of the US dollar. During a parliamentary address on Tuesday, Bank of Japan head Ueda stated that upon nearing the stable and sustainable target of 2% inflation, they will pursue a withdrawal from negative interest rates, Yield Curve Control, and other extensive monetary easing measures. These remarks made by Ueda did not support the Japanese Yen. As for Japan’s economic results last week, we saw a decline in GDP (0.1% in the last quarter of 2023 versus 0.3% expected for purchases) while the producer price index strengthened increasing inflationary pressures in the country. Sell positions is our selection for the current week.

EURJPY (Euro – Japanese Yen)
Bullish was last week for EURJPY which opened at 160.81 and closed at 162.26. The euro has not had a good week as market confidence begins to build that the European Central Bank’s interest rate cut could begin in June. Also, after the high inflation announced in the United States, the international investment sentiment fell and higher-risk currencies like the euro, were less attractive. However, the exchange rate had a strong rise, mainly due to the weakness of the Japanese currency. Bank of Japan chief Ueda’s statements failed to support the yen, ahead of a Bank of Japan decision on interest rates and monetary policy next Tuesday. According to most analysts monetary policy in Japan will change soon but it is doubtful if it will happen this week. However, there may be evidence of this and for this reason, we may try sell positions this week.

EURGBP (Euro – Great Britain Pound)

Last week was bullish for the EURGBP, as it opened at 0.8503 and closed at 0.8547. Both the euro and sterling were quite weak last week, but the sterling has weakened more, due to some negative economic announcements for the UK economy. On the other hand, the euro is not at its best either, because analysts predict that a rate cut at the European Central Bank will happen soon enough. The macroeconomic data of the Eurozone economy remains problematic too. Technically speaking, the exchange rate for some time has not been able to break below 0.85 and around this price range, it has been experiencing upward reactions. We may have seen such a reaction last week, which cannot be ruled out that it may continue this week too, so we may try buy positions.

USDCAD (US Dollar – Canadian Dollar)

Bullish was the last week for USDCAD, as it opened at 1.3477 and closed at 1.3538. The great strength of the U.S. dollar was enough to push the exchange rate higher. The Canadian dollar although it enjoyed some positive economic results, has not been able to react. More specifically, the wholesale sales and the housing starts in Canada were up last month. The Canadian dollar has not even been able to take advantage of the high rise in oil prices. Traditionally, such a rise favors CAD. This week, in addition to the FOMC that markets will turn their sights on, there are also important announcements for Canada’s economy with the announcement of inflation on Tuesday standing out, and the announcement of retail sales on Friday. The U.S. currency is likely to rise further so we may try buy positions this week too.

USDCHF (US Dollar – Swiss Franc)
The USDCHF was bullish last week as the opening price was at 0.8748 and the closing price was at 0.8835. This result was quite reasonable since the U.S. dollar strengthened and the USDCHF, has been very strong relative to the U.S. dollar. The main cause was the resurgence of inflation in the United States which brings back scenarios of a delay in rate cuts by the Fed. In Switzerland, the producer price and import index fell to 0.1% and this made Switzerland’s currency more vulnerable. This week, the focus will be on the Fed meeting on interest rates and monetary policy in the United States. Although no change at this meeting is expected, there may be statements at the press conference about the Fed’s future plans. A decision on interest rates and monetary policy will also take place by the Bank of Switzerland on Thursday but is expected to affect the exchange rate less unless there is a surprise. We prefer buy positions for one more week.

AUDUSD (Australian Dollar – US Dollar)

Bearish was the last week for AUDUSD, which opened at 0.6648 and closed at 0.6559. Australia’s economy did not have particularly significant economic announcements in the past week, so the focus was on the U.S. dollar which strengthened significantly and pushed the exchange rate lower. Rising inflation in the United States was the main cause of the strengthening of the U.S. dollar. Some negative results from China’s economy also negatively impacted the Australian dollar. New loans and money supply had results below expected in China. The current week is very important for the exchange rate since there is a decision on interest rates and monetary policy by both the Fed on Wednesday and the Bank of Australia on Tuesday. Of course, China news and developments will also have a crucial role in AUD. We may try buy positions this week.

Bitcoin

Last week, Bitcoin was bearish and closed at $68,352 with losses close to 1%. During the week Bitcoin even dropped below $65k, having a strong correction from all-time highs near $74k. On Saturday, Bitcoin’s price fell significantly, as over the previous day, long positions amounting to $125 million were liquidated. By early Sunday morning, Bitcoin’s price rebounded, crossing back over $68K. The decrease in the asset’s price triggered substantial liquidations in the derivatives market. Following Bitcoin’s decline, a range of other cryptocurrencies, including altcoins and meme coins, experienced significant losses. There are other reasons in traditional markets that cryptocurrencies and Bitcoin have been under pressure in the last few days. Inflation that appears to persist in the United States increases the likelihood that high interest rates will persist for longer, turning a significant portion of investors away from high-risk options such as cryptocurrencies. The markets are also looking to the upcoming halving of Bitcoin which is expected to take place in April 2024. A Bitcoin halving reduces the reward for mining new blocks by half. This means miners will receive 50% less Bitcoin for transaction verification. Scheduled to happen once every 210,000 blocks, approximately every four years, Bitcoin halvings continue until the network has produced the maximum supply of 21 million bitcoins. To summarize all the above, it is not excluded that the correction for bitcoin and cryptocurrencies will continue and therefore 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.