15/04/2024

General Comment

According to the BLS report, the annual Consumer Price Index in the United States for March was 3.5%, marking a significant increase from February’s 3.2% and exceeding the forecast of 3.4%. Prices on a monthly basis climbed by 0.4%, consistent with the increase seen in February and above the anticipated rise of 0.3%.

That announcement was a shock to markets because the inflation persisting probably won’t let the Fed cut interest rates as soon as expected. During the autumn and at the beginning of the year there was an impression in the markets that up to 6 rate cuts could be made in 2024. As long as inflation does not decrease, the estimates for a rate cut have now dropped and according to the FedWatch tool, the rate cut may start from July without excluding September. The situation gets complicated by the time the September session is the last session before the US election.

Equity markets have performed a fantastic rally in recent months that is grounded in optimism about new technologies and artificial intelligence and market expectations that high interest rates will fall sharply through the year. At the moment, those expectations have not been fully dashed, but the high inflation of March has raised many concerns.

The situation is further complicated by the deterioration in the geopolitical field. The US expects Iran to launch strikes on multiple targets within Israel in the near future and is prepared to help its ally. This development has put the Biden administration on high alert, anticipating the start of a potentially unstable and unpredictable period in the Middle East. In addition to the general disruption, such a development could push up oil prices, further exacerbating the inflation issue.

A bit of a breather for the markets took place on Thursday after the announcement of the producer price index, which is also an indicator that measures inflation. That index rose 2.1% in March, slightly below the 2.2% that markets predicted. However, it seems that this development was not enough to hold the decline, which returned more sharply on Friday.

In Europe, things look completely different. The European Central Bank on Thursday left interest rates unchanged, but Christine Lagarde’s press conference and other ECB officials hinted that they may start to cut rates from June. Some analysts have said interest rates will be cut continuously since June at every ECB meeting.

As for the other big pole of the global economy, which is China, things seem to have gotten worse. Inflation returned to sharply negative territory after being announced at -1% last month. There was also a huge drop in exports in March. China’s March exports fell 7.5%, resulting in a trade balance of just $ 58 billion, a big divergence from the $ 70 billion markets had expected.

To sum up, most of the major equity markets in Europe and the United States had significant losses in the past week. Bond yields were up significantly, with the yield on the 10-year U.S. bond closing the week near 4.52%. There was a mixed picture of the commodity market as oil suffered losses while other commodities such as gold and copper continued their upward rally. Significant was the strengthening of the US dollar against its main competitors. The dollar had its most profitable week in several months. Expectations of a rate cut by the European Central Bank, on the other hand, brought heavy losses to the euro. Finally, Last week was a corrective one for Bitcoin and most cryptocurrencies.

During the weekend, Iran launched an attack with drones and ballistic missiles, with Israel intercepting 99% of them. Iran stated that the bombing by Israel was in response to the April 1st air raid on a building of the Iranian consulate in the Syrian capital of Damascus, during which senior Iranian commanders were killed. Israel is weighing its response, noting on Sunday night that it will not act immediately alone, but insisting that its forces remain on alert and that the leadership has approved measures that are both offensive and defensive. Futures on major stock indices opened early on Monday with positive signs which means that for the moment, markets are not seriously concerned.

The week that has just begun is clearly calmer as per the economic announcements, but this does not mean that the volatility of the markets will decrease. Possible developments in the Israel-Iran conflict could upset the markets. Also, several Fed executives such as Loga, Bostic, and Haskel will have speeches this week with markets expecting more information about the U.S. central bank’s intentions. Retail sales are being announced on Monday in, the United States as well as the industrial production on Tuesday. Markets are also expected to pay attention to China’s Tuesday announcements on GDP, industrial production, and retail sales.

SP500

The US SP500 index was bearish last week as it closed at 5,123.40 points and losses of 1.56%. Last week, SP500 had a downturn due to deteriorating investor sentiment, spurred by an inflation report that came in hotter than anticipated and disappointing quarterly results from major banks. The consumer price index that was announced on Wednesday at 3.5% was indeed a serious fact that changed the sentiment in the US stock markets. This development will put to the test the expected interest rate cuts by the Fed. Many analysts have lowered the expectations to two rate cuts while some others mention even no cuts in 2024. The producer price index for March increased by only 0.2%, which was below the anticipated 0.3%, injecting some optimism after the market downturn on Wednesday but on Friday the corrective pressures returned. The financial sector faced significant challenged, spearheaded by JPMorgan, which experienced a downturn in its share price after projecting interest income that fell below expectations. This forecast contributed to broader concerns within the sector, impacting overall market performance. Other major banks also reported difficulties, reflecting the challenging economic environment impacting financial institutions. Wells Fargo also reported a significant drop in first-quarter profits, primarily due to reduced interest earnings from customers, contributing to a slight dip in its stock price. Citigroup’s shares declined but to a smaller degree following a decrease in quarterly profits, further underscoring the struggles within the sector. This week more companies will announce earnings: Goldman Sachs, Bank of America, Morgan Stanley, Netflix, American Express are the most considerable ones.  The Iranian attack on Israel during the weekend has not created serious concerns so far. President Biden sent a clear message to Prime Minister Benjamin Netanyahu that the attack from Iran was thwarted, Israel has secured a victory, and therefore, he is requesting that the Israeli leadership not escalate further by responding with military strikes on Iran. This development has brought some earnings in the SP500 futures early this week as a relief reaction of the markets but if the spotlight returns to the high inflation and high interest rates the sentiment may turn to negative again that is why we prefer short positions this week.

DAX30

The German DAX40 index was bearish last week, closing at 17,930.32 points, with losses of 1.35%. DAX40 and many other European stock indices had a better performance compared to the US stock indices. The inflation in the Eurozone area has dropped significantly and most analysts believe that from June, the ECB will start reducing the interest rates.  The harmonized index of consumer prices in Germany was announced in March at 2.3% which is very close to the target of 2%, set by the ECB. Of course, the major problems in the German economy remain as it is also shown by the last results. Exports dropped by 2% in February, which resulted in a trade balance of 21.4 billion euros, much lower than the expected 25.5 billion euros. Industrial production dropped by 4.9% and the current account was announced at 29.9 billion euros. Germany has great expectations from a possible recovery of the Chinese economy as China is a big export destination for the German industrial and manufacturing production but the latest disappointing results from China, have created second thoughts on that. Although the current week has opened positively for DAX40, we may try short positions for one more week.

FTSE100

The British FTSE100 index moved upward last week, closing at 7,931.30 points, earning about 0.15%. In a Thursday interview with the Financial Times, Megan Greene, who is part of the Bank of England’s Monetary Policy Committee, indicated that interest rate cuts in the UK are likely to be delayed due to ongoing inflation pressures, which remain more significant than those in the United States. She also suggested that delaying the start of policy easing would be more beneficial. These comments underscore the differential inflationary pressures facing the UK compared to the United States, particularly in the services sector, which can have implications for monetary policy decisions and economic forecasts. It seems though that the UK markets had a more positive sentiment before Thursday and these statements. While on Wednesday, the US stock markets faced a serious correction, UK stocks ended Wednesday’s trading session higher as investors reassessed the global interest rate landscape. It seems that given the uncertain outlook in the USA, where market valuations are considerably higher, investors are increasingly viewing the undervalued UK market as an attractive investment destination. The positive macroeconomic results (GDP, industrial & manufacturing production) announced on Friday further improved the sentiment. Despite the particularities of the UK economy, if the global sentiment drops, it will be difficult for FTSE100 to resist so we may try short positions this week.

Gold

The previous week was bullish for gold, with the next month’s futures closing at $2,374.1 and profits of 1.22%. On Friday, we saw even higher prices, close to $2,450 but during the last hours of the week, there was a sharp correction. Gold prices declined as traders’ liquated gains from the recent strong rally. Concurrently, the U.S. dollar reached multi-month highs last week and generally speaking, a robust dollar negatively impacts gold prices. Gold’s pricing has been supported by considerable demand from central banks in the last period as the escalating geopolitical tensions and the high inflation support such a decision. Worries over China’s economic stability have deepened, adding to wider apprehensions about global economic growth. China’s economy is an indicator closely monitored by gold investors and traders. Another factor is the bond yields, a competitive asset in the family of safe-haven options. Bond yields rose last week after the strong dollar and the high inflation announcements and the gold as a non-yielding asset lost some of its strength. Gold prices remain close to record levels early this week. The persistent conflict in the Middle East has continued to help safe-haven investments. Some market analysts believe that likely gold prices will gain from ongoing geopolitical risks as well as potential rate cuts by the Fed later in the year. Some corrections may occur though as the recent rally was strong enough and the situation in the Middle East looks better so we prefer short positions this week.

US Oil

Last week was bearish for oil with the next month’s futures closing at $85.66, with losses of 1.44%. Last week, the oil finished at a lower price, as investor sentiment was dampened by revised demand forecasts and continuous geopolitical instability. The International Energy Agency has lowered its projection for global oil demand growth in 2024, casting a shadow of caution among traders. According to https://www.iea.org/reports/oil-market-report-april-2024 “World oil demand growth continues to lose momentum with 1Q24 growth of 1.6 mb/d, 120 kb/d below our previous forecast due to exceptionally weak OECD deliveries. With the post-Covid rebound now largely complete, and vehicle efficiencies and an expanding EV fleet acting as a further drag on oil demand, growth in 2024 and 2025 slows to 1.2 mb/d and 1.1 mb/d, respectively“. This updated forecast arrives as traders are already contending with the ongoing high inflation rates in the USA, which are tempering expectations for a Fed rate cut in the near future. Many traders now believe that such monetary easing will happen in July in September which is a delay compared to the previous estimations. Higher interest rates usually slow down economic activity and, consequently, decrease oil consumption. The crisis de-escalation in the Middle East and the lower demand expectations may create pressures on oil prices so we prefer short positions this week.

EURUSD (Euro – US Dollar)
Last week was heavily bearish for EURUSD as it opened at 1.0836 and closed at 1.0640. Both the US dollar and the euro contributed to this decline. The sharp rise in inflation in the United States leaves little room for optimism about an immediate rate cut by the Fed. The most likely scenario for a rate cut is July, not excluding September. This fact gave the U.S. dollar a big rise. The situation in the Eurozone and the euro is completely different. The European Central Bank left interest rates unchanged on Thursday, but as its officials say and many analysts agree, a rate cut could start in June. Given the gap in rates that already exists between the two central banks, this development significantly weakens the euro. Many analysts predict the exchange rate at significantly lower levels if this situation is maintained and therefore, we will choose sell positions this week.

GBPUSD (Great Britain Pound – US Dollar)

Bearish was the last week for GBPUSD, as it opened at 1.2623 and closed at 1.2448. The strength and momentum of the U.S. dollar dragged down the exchange rate, which fell below 1.25 for the first time since last December. High inflation in the United States has made the investment community believe that the Fed’s rate cut will be delayed further. This development particularly strengthens the U.S. dollar, which is also favored due to the strong economic results announced by the United States in recent times. On the other hand, in the United Kingdom, the statements made are quite cautious since there too the problem of inflation remains active. However, the dollar dominates and imposes its power on the exchange rate. Perhaps the fall would have been greater had there not been positive economic announcements for the UK last week. The country’s GDP strengthened in February marginally by 0.1%. There were also positive results in industrial production and manufacturing that were well above market expectations. If the climate in the US does not change and the dollar continues to strengthen, we will see new pressures toward the exchange rate and for this reason, we prefer sell positions for one more week.

USDJPY (US Dollar – Japanese Yen)

USDJPY was bullish last week, opening at 151.55 and closing at 153.22. The exchange rate has risen to levels we haven’t seen in several decades since the huge interest rate gap between the central banks (the Fed and the Bank of Japan) remains. The recent increase in Japan’s interest rates has rather disappointed the investment community since Japan’s bank does not show determination for continued and strong actions. In the United States, resurgent inflation is preventing the Fed from cutting interest rates, so the U.S. dollar continues to strengthen. The rise in the exchange rate is also favored by the recent rise in bond yields. Many voices talk of possible intervention on Japan’s part against high volatility and the weakness of its currency. However, this possibility does not seem to prevent investors who remain sellers of the yen. Buy positions is our selection for one more week.

EURJPY (Euro – Japanese Yen)
Bearish was last week for EURJPY which opened at 164.22 and closed at 163.07. Both the euro and the yen were weak last week, each for its own reasons. Japan’s currency has been in a major phase of weakness for some time after the Bank of Japan had negative interest rates and a very loose monetary policy. There has been a slight rise in interest rates a few weeks ago but that has not been able to reverse the sentiment and the yen continues to weaken. In particular though, last week the euro was even weaker as most statements and information converge on the fact that the European Central Bank will start cutting interest rates from June onwards, and perhaps quite aggressively. This development caused a downward trend for the pair. This trend is likely to continue and therefore we may try sell positions this week.

EURGBP (Euro – Great Britain Pound)

Last week was bearish for the EURGBP, as it opened at 0.8576 and closed at 0.8546. Although the sterling was not particularly strong last week, the exchange rate had a fall that brought it close to 0.85 again, which was mainly due to the weakness of the euro. There is a difference in interest rates between the Bank of England and the European Central Bank, which is expected to increase further. According to most reports, the ECB will start lowering its interest rates soon enough. The inflation that persists in the UK, although recently it has also de-escalated, probably does not allow such aggressive moves by the Bank of England. Believing that nothing is going to change significantly this week, but also bearing in mind that the 0.85 is a strong support, we will keep trying sell positions.

USDCAD (US Dollar – Canadian Dollar)

Heavily Bullish was the last week for USDCAD, as it opened at 1.3588 and closed at 1.3773. All the main reasons that usually affect the exchange rate contributed last week to its rise. The U.S. dollar strengthened sharply after high inflation announced in the U.S. exposed scenarios of extending high interest rates. But we also had significant developments for the Canadian dollar. Last week the Bank of Canada left interest rates unchanged at 5% but at the press conference followed by Tiff Macklem, the Governor of the Bank of Canada noted that even though there has been promising progress on reducing inflation, it is necessary to observe further improvements before making adjustments. Macklem also mentioned that a reduction in the interest rate could be considered as soon as June, should the positive trend in inflation continue. These statements were interpreted as dovish by the markets and the Canadian dollar came under strong pressure. The correction in oil prices has been another aggravating factor for the Canadian dollar too. But given the last events in the Middle East and Iran’s attack on Israel, we may see oil prices higher, which may help the Canadian dollar. We may try sell positions this week.

USDCHF (US Dollar – Swiss Franc)
The USDCHF was bullish last week as the opening price was at 0.9001 and the closing price was at 0.9143. The great strength of the dollar caused by the increased inflation announced in the U.S. was the root cause of this strong uptrend in the exchange rate. It is worth noting, of course, that there was another four weeks of rising. For Switzerland, there were no major economic announcements last week except for the unemployment rate, which remained unchanged at 2.3%. Swiss National Bank Chief Thomas Jordan in a speech on Monday did not offer significant information in relation to the bank’s future plans for interest rates and monetary policy, so the Swiss franc had no particular volatility. The trade balance in Switzerland is announced this week but if the U.S. dollar remains strong, we will probably see a new rise and for this reason, we will prefer buy positions for one more week.

AUDUSD (Australian Dollar – US Dollar)

Bearish was the last week for AUDUSD, which opened at 0.6571 and closed at 0.6461. The announcement of high inflation in the United States caused a great amount of strength in the U.S. dollar and this was the main cause of the downward trend for the exchange rate. Australia had no major economic announcements nor any other developments in the past week that could be decisive for the country’s currency. The Australian dollar was however affected by the negative news coming in from China. China has returned to deflation after its Consumer Price Index fell 1% in March. Moreover, the decline in China’s exports resulted in a significant decrease in the Chinese trade balance. This week Australia will announce the unemployment rate while China has a series of major announcements such as GDP, industrial output, and retail sales. 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.