08/04/2024

General Comment

The past week has been a bearish one for the United States equity markets after several weeks of rise. On Friday there was a rebound due to the announcement of the labor market in the United States. In March, the U.S. Nonfarm Payrolls saw a significant rise of 303,000 jobs, surpassing the anticipated 200,000 job increase. Wage inflation is still on the rise, the annual rate has slightly decreased to 4.1% from 4.3% the previous month. The result of this very strong labor market was that the unemployment rate fell marginally to 3.8%. However, this rise of the markets on Friday was not able to reverse the negative sign of the week since the previous days the correction trends dominated.

Federal Reserve officials have shown differing levels of caution regarding the possibility and timing of interest rate reductions, especially considering recent increases in oil prices that might affect inflation figures and could modify the Fed’s approach to easing monetary policy. Minneapolis Fed President Neel Kashkari pointed out worries about inflation data from January and February, indicating that rate cuts might be unnecessary if inflation persists. In a similar vein, Fed Chair Jerome Powell stressed the importance of further proof of inflation steadily heading towards the 2% goal before contemplating any cuts in rates. These viewpoints underline a wider uncertainty within the Federal Reserve about adjusting monetary policy as economic circumstances continue to change.

The crucial question for markets remains when central banks will start cutting interest rates and statements that tend to delay this development are creating negative sentiment in markets.

The climate is deteriorating further due to the geopolitical turbulence that prevails. Israel and the USA are on high alert for fear of Tehran’s retaliation following the Israeli missile attack on the Iranian embassy in Syria. The attack attributed to Israel flattened the building complex of the Iranian embassy in Damascus, resulting in the death of seven members of the Islamic Revolutionary Guard Corps (IRGC), including two generals.

In Europe, things seem clearer even if that sounds strange. Inflation in the Eurozone fell even further last month to 2.4%, giving even more points to the rate cut scenario from June. Economic problems in the Eurozone remain though.

In the other major global economic giant, which is none other than China, the situation appears to be improving, as at least the recent results for manufacturing showed, which surged last month.

Most major equity indices in Europe and the United States had losses in the past week, as we have seen above. On the contrary in the commodity market, we saw a remarkable rally, especially in gold, oil, and copper. Gold in particular continued to hit all-time historical records. The U.S. dollar lost after three consecutive weeks of growth, and it’s worth noting that this was matched by a drop in equity markets. It seems that in recent times correlations that were considered very strong have been broken. Bond yields also rose last week, with the yield on the US 10-year bond closing at 4.40% on Friday, a price that we had not seen since last November. As for Bitcoin and most cryptocurrencies, last week was corrective.

The week that has just begun is very critical for financial markets. In the United States, the March inflation is announced on Wednesday and the same day the Fed meeting minutes will be announced. both of these events certainly have a crucial role in the Fed’s decisions to lower interest rates. The June scenario remains the prevailing one, but it has weakened considerably as July is gathering great chances. On Thursday, the European Central Bank will announce its decision on interest rates and monetary policy in the Eurozone. The likelihood of a change in interest rates is very small, but the press conference that will follow may give us important information for the future. Several Fed officials will speak this week, and the announcement of inflation in China is expected to be critical as well. Market volatility makes sense to move at high levels.

SP500

The US SP500 index was bearish last week as it closed at 5,204.35 points and loss of 0.95%. This decline came after a sharp increase in the prices of crude oil and remarks from Neel Kashkari, the President of the Minneapolis Federal Reserve, who expressed worries about reducing interest rates amidst ongoing inflation. On the same page was Jerome Powell who appeared cautious enough, and did not anticipate a relaxation of monetary policy until there is greater certainty about the inflation trend, yet he maintained that it would be suitable to lower interest rates at some point within the year. Powell further mentioned that it is premature to determine if the recent uptick in inflation is merely a temporary fluctuation. There’s a continuous time shifting of interest rate cuts from March to May, then to June, and now July is very close to June as a quantified probability according to the CME FedWatch tool. On Friday, SP500 exhibited signs of rebounding from a clearly bearish week. This improvement came in the wake of the March jobs report, which displayed enduring strength despite economic adversities. The source of concerns remained though: the escalating geopolitical tensions in the Middle East, specifically with Israel shutting down embassies in response to threats from Iran, crude oil prices have seen a surge. This rise in oil prices signals potential challenges for controlling inflation. The weekly performance of the stock markets will depend very much on the results of the Consumer Price Index & Producer Price Index (inflation metrics) as well as the FOMC minutes. Good news from the inflation figures may bring back the positive sentiment in the markets and we’re keen to try long positions this week.

DAX30

The German DAX40 index was bearish last week, closing at 18,175.04 points, with losses of 1.72%. Obviously, the DAX40 was affected by the globally negative economic sentiment, especially from the United States. There are recent concerns that inflation may insist so the expected interest rate cuts from the central banks may be rescheduled later in this year. Neel Kashkari from the Fed said that interest rate cuts may be unnecessary this year. Inflation in the Eurozone has dropped significantly (it was announced at 2.4% in the previous month) but nobody knows what will happen in case commodities (especially oil) prices rise. Germany had decent to good economic results last week: manufacturing PMI recovered from 41.6 to 41.9 although it is still very low, inflation dropped to 2.3% in March, composite and services PMIs rose significantly and only the factory orders had a bad performance as we saw a -10.6% decrease. There are many problems in the German economy that do not align with the recent bullish rally of DAX40 so we may try short positions this week.

FTSE100

The British FTSE100 index moved downward last week, closing at 7,919.50 points, losing about 0.57%. The whole week was strongly bearish but on Friday there was an attempt at recovery as the positive jobs data from the USA caused an improvement in the markets ‘ sentiment. Some economic announcements that took place during the last week were not important enough to affect the FTSE100 significantly. So, the speculation regarding the central banks and interest rate cuts, the geopolitical tensions, and the recent rise in commodity prices occupied the markets. Investors are expecting the Bank of England to cut interest rates in June, as inflation in the UK has been consistently slowing down. The Governor of the Bank of England, Andrew Bailey, has mentioned recently that the UK economy is nearing a juncture where, thanks to more promising indicators of diminishing inflation, the central bank might start to lower interest rates. Normally, this could be a bullish sign for the stock markets but there are fears that commodity prices may rise and high inflation may be still alive. The recovery on Friday most likely was temporary and the corrective trends may prevail again so we prefer short positions for one more week.

Gold

The previous week was heavily bullish for gold, with the next month’s futures closing at $2,345.4 and profits close to 4.80%. During the last two months, gold prices have been in a strong upward rally that has caused total profits of more than 15%. This performance in such a short period is extraordinary for gold. Most of these gains happened on Friday though which means that the gold prices were affected by the negative sentiment until Friday and by the strong U.S. jobs data results on Friday.

Upcoming interest rate cuts typically lead to an increase in gold prices due to the inverse relationship between interest rates and the value of gold. When central banks lower interest rates, the yield on fixed-income investments such as bonds tends to decrease, making gold—a non-yielding asset—more attractive by comparison. Lower interest rates in the USA also often lead to a weaker currency, making gold cheaper for investors holding other currencies, which can increase demand for gold. Interest rate cuts expectation is the main cause that has resulted in the recent rally in gold prices. The main question though is whether the inflation figures in the following months will allow interest rate cuts. If these cuts are shifted in the future we may see a gold price correction. Concern is also mounting over the possibility that speculative trading has artificially boosted the current prices of gold. The abrupt fluctuations witnessed on Friday highlight the risks of excessive optimism in the gold market. We may try short positions this week.

US Oil

Last week was strongly bullish for oil with the next month’s futures closing at $86.91, with profits of 4.50%. The potential for a conflict between Israel and Iran raised alarm bells in the oil markets, as Iran promised revenge for an assault on its military forces. The assault believed to have been carried out by Israel, demolished the complex housing the Iranian embassy in Damascus, leading to the deaths of seven members of the Islamic Revolutionary Guard Corps. This increased geopolitical tension, which historically affects oil supply and pricing, is exacerbated by continuous strikes on Russian refineries by Ukrainian drones. These attacks further compromise Russia’s ability to produce oil, affecting the global supply. As per the demand side, the strong performance of the U.S. economy, marked by a significant surge in job creation and wages, is also a key factor influencing oil demand. The job data in March points to a solid potential for oil consumption, even in the face of potential delays in interest rate reductions by the Fed. Back to the supply issues, in its most recent meeting, OPEC decided to keep its existing oil supply policy unchanged. This decision does not seem to change a lot the perception of the markets but the upcoming OPEC monthly report next Thursday remains important. Early this week, oil prices fell by over 1%, amid a de-escalation of tensions in the Middle East. This decline followed Israel’s withdrawal of additional soldiers from southern Gaza and its agreement to engage in new discussions about a possible ceasefire in the conflict that has lasted six months. We may try short positions this week.

EURUSD (Euro – US Dollar)
Last week was bullish for EURUSD as it opened at 1.0786 and closed at 1.0836. After three consecutive weeks of rise, the U.S. dollar suffered some losses, mainly due to the view that markets are starting to gain on the Fed’s rate cuts. Following statements by Fed officials last week, those cuts were called into question, as some suggested that even no cuts at all could be made this year. Until some days ago, June was the most likely scenario but now July has a good chance too. On the other hand, things look clearer in the Eurozone with the June scenario remaining the prevailing one for a rate cut. The fall in inflation (2.4% in March) in the Eurozone further favors this scenario. Of course, the Eurozone economy remains anemic, as the latest figures show. Last month’s retail sales fell by 0.7% while the PMI for manufacturing remained below 50. The current week is quite interesting because interest rates and monetary policy are announced in the Eurozone as well as inflation and meeting minutes by the Fed. There is a good chance that the US dollar will start strengthening again and for this reason, we prefer sell positions this week.

GBPUSD (Great Britain Pound – US Dollar)

Bullish was the last week for GBPUSD, as it opened at 1.2620 and closed at 1.2637. The U.S. dollar weakened last week because markets are beginning to gain confidence that interest rate cuts may be later than expected. This fact was confirmed by statements from Fed officials last week. The dollar rebounded somehow into Friday after the labour market announcement was judged by markets as very positive. Conversely, the sterling is likely to be affected by expectations around Bank of England interest rate cuts. Market participants foresee a rate reduction by the UK central bank come June, as inflation within the UK shows a consistent slowdown. Bank of England head Andrew Bailey has noted recently that with inflation signs becoming increasingly promising, the UK’s economy is nearing a crossroads where it might be appropriate for the central bank to start reducing interest rates. These developments have not allowed sterling to benefit much from the weakening of the U.S. dollar. In addition to announcing inflation in the United States, the UK also has major announcements this week: GDP, industry/ manufacturing, and the trade balance. We may try sell positions this week, trusting that the dollar may return to its strength.

USDJPY (US Dollar – Japanese Yen)

USDJPY was bullish last week, opening at 151.42 and closing at 151.62. Although the U.S. dollar weakened last week, the exchange rate rose, confirming once again the major weakness of the Japanese currency. The recent interest rate rise by the Bank of Japan has not convinced markets as there is no evidence of determination for the bank that it can continue aggressively with big new increases. So USDJPY continues to flirt with multi-decade high prices. Of course, this creates two problems. The first one has to do with excessive levels and some investors who will secure profits and the second with a suspected intervention on the part of Japan. Finance Minister Shunichi Suzuki has announced the Japanese government’s commitment to aggressively address fluctuations in exchange rates, hinting at a strong stance towards market interventions to curb erratic movements. In line with this, Bank of Japan Governor Kazuo Ueda has vowed to closely watch currency trends, indicating a coordinated effort to ensure the yen’s stability. These considerations lead us, regardless of what the US dollar will do, to choose sell positions this week.

EURJPY (Euro – Japanese Yen)
Bullish was last week for EURJPY which opened at 163.21 and closed at 164.30. Europe’s currency is experiencing a period of weakness, and this is mainly due to information coming from the European Central Bank but also from market views that the European Central Bank will start cutting interest rates in June. This makes sense to weaken the euro, which is also affected by the negative economic results announced in the Eurozone. However, the exchange rate continues to rise because of the weakness of the Japanese currency. The recent rate cut by the Bank of Japan, instead of strengthening the yen, has weakened it even further since the increase was small and Japan is not showing much determination to continue more aggressively. But the chances of intervention on the part of Japan to support its currency and the excessive levels of the exchange rate could lead to a fall 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 0.8534 and closed at 0.8574. There is an opinion in the markets that both the European Central Bank and the Bank of England could start cutting their high interest rates from next June. This fact weakens both the euro and the British pound. As a consequence of the above, we see a balance in the pair, continuing and moving in a narrow range between 0.85 and 0.86. But last week the euro strengthened against sterling after there were thoughts that the Bank of England could start cutting interest rates later rather than in June. Considering that the balance in the EURGBP is maintained and there will be a mean reversion to the range center of this period, we will choose sell positions this week.

USDCAD (US Dollar – Canadian Dollar)

Bullish was the last week for USDCAD, as it opened at 1.3529 and closed at 1.3589. Almost the entire week the exchange rate had been on a downward path after the U.S. dollar had strong signs of weakening. This weakening came from statements by Fed officials who spoke of fewer rate cuts this year or no reductions at all. But the U.S. dollar rebounded significantly on Friday, following strong labor market results in the United States. This fact combined with the disappointing picture of the labor market in Canada. Markets expected the net change in employment to reach 25,000 positions last month, but the result was disappointing as the figure was negative by 2,000 positions. This resulted in the unemployment rate rising from 5.8% to 6.1%. The rise in oil prices through the week has not been able to help the Canadian dollar. Early this week, oil prices experienced a significant drop following Israel’s pullout of troops from regions in Gaza and its pledge to enter into renewed negotiations regarding a possible ceasefire with Hamas. Buy positions is our selection for the current week.

USDCHF (US Dollar – Swiss Franc)
The USDCHF was bullish last week as the opening price was at 0.9004 and the closing price was at 0.9020. It is important to note that this rise has been matched by a week of weakening of the U.S. dollar. This means that the Swiss franc was even weaker which is perfectly reasonable based on the announcements we have seen in the previous days. A few weeks ago, the Bank of Switzerland was the first of the main central banks to cut interest rates. It is not excluded that there may be other reductions quite short; the large decline in inflation is helping to achieve this result. Last month inflation in Switzerland fell from 1.2% to 1% on an annual basis, while after too long, on a monthly basis, prices remained unchanged. If this is combined with the technical picture of the USDCHF and with the important event of the breakout of 0.90, it is not excluded that we will see a new rise and for this reason, we may continue with buy positions for one more week.

AUDUSD (Australian Dollar – US Dollar)

Bullish was the last week for AUDUSD, which opened at 0.6512 and closed at 0.6577. The exchange rate appears to have followed the weakening of the U.S. dollar and reacted upward. The Reserve Bank of Australia released the minutes of its March monetary policy meeting, which revealed that the board members did not entertain the possibility of raising interest rates at that time. This is a factor that has weakened the Australian dollar somewhat since the possibility of a rate increase in the previous period was real. However, there was no clear indication of a reduction in interest rates as well, and this somehow balanced things out. Another reason for the strengthening of the Australian dollar was the recovery that China’s economy continues to show. All PMI indicators for manufacturing and services in China were announced well above 50, something to confirm this possibility. However, the market spotlights this week will fall on the United States and the inflation announcement. We may try buy positions this week.

Bitcoin

Last week, Bitcoin was bearish and closed at $69,358 with losses of 2.70%. With Bitcoin nearing its block reward halving in less than two weeks, many analysts suggest that a corrective situation is probable. It means that in the previous period, the halving created waves of optimism among the crypto traders but since we have approached the event many will sell taking advantage of price movements driven by rumors rather than by the event’s outcome itself. The halving event is seen as a positive trigger for Bitcoin’s price, with expectations that it will lead to decreased selling pressure from miners immediately afterward, potentially leading to an increase in the asset’s value. Bitcoin-spot ETF market flow data for the previous week kept driving interest in buying Bitcoins. The market for Bitcoin-spot ETFs experienced significant net inflows, although these inflows were less than those recorded in the prior week. As per the factors that come from the traditional markets, Fed monetary policy continues to influence, as indicators of the U.S. economy play a role in shaping trends in the Bitcoin-spot ETF market. Anticipated reductions in Fed interest rates could boost demand for Bitcoin. Upcoming inflation data from the U.S. this week might alter anticipations for a rate adjustment by the Fed in June but July has now also a very good chance. The latest U.S. jobs report has bolstered the market’s belief that the U.S. will steer clear of an economic downturn. Cuts in Fed rates, positive macroeconomic environments, sustained interest from the Bitcoin-spot ETF market, and the forthcoming halving event are all seen as encouraging signs for the market. This fact is confirmed by the strong uptrend that Bitcoin is performing early this week. However, possible bad results in inflation data this week may turn the sentiment negative, and high-risk assets, including the cryptos, may face corrective issues. 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.