06/05/2024

General Comment

Last week was quite important for the financial markets. The two main events were the Fed’s decision on interest rates and monetary policy in the United States on Wednesday and the labor market announcement (NFPs) on Friday.

Starting at the Fed, the monetary policy meeting turned out as expected, with interest rates remaining unchanged in the range of 5.25% to 5.5%. This decision was not surprising given signs of rising inflation and slowing growth in the first quarter of 2024. The Fed reiterated its position that it is waiting for a sustainable approach toward its 2% inflation target before taking into account a rate cut. At the same time, it was announced that there would be a substantial reduction in the speed of its quantitative tightening program. Beginning in June, the monthly limit on maturing Treasuries being removed from the balance sheet will drop from $60 billion to $25 billion. After the FOMC event and the press conference, there was an increase in uncertainty about the time of possible rate cuts by the Fed. However, markets found relief in the absence of any indication of interest rate hikes, leading to a rally in equity markets and a fall in the value of the US dollar, mainly due to optimism.

As per the jobs market, in April, the US released the Nonfarm Payrolls (NFP) report, revealing the addition of 175,000 new jobs, falling short of both the revised figure of 315,000 from March and the expected 243,000. Furthermore, the unemployment rate rose to 3.9% from 3.8%. Additionally, average hourly earnings decreased to 3.9%, below the anticipated 4%. That news was another indication for markets a possible rate cut may be closer than expected, as the United States labor market is being squeezed by expensive money costs.

Aside from the economic updates, markets received a significant lift on Friday from the performance of Apple and Amgen which released earnings reports late on Thursday. Apple saw its shares surge on Friday following the announcement of earnings that exceeded expectations. Amgen experienced a remarkable surge too after reporting quarterly earnings that surpassed forecasts. As the first quarter earnings season progresses, SP500 companies are maintaining a strong performance relative to expectations. Presently, 80% of the companies in the SP500 have released actual results for Q1 2024. Among these, 77% have reported actual earnings per share figures that surpass estimates. This figure matches the 5-year average of 77% and exceeds the 10-year average of 74%.

As for the Eurozone economy, the economic results announced last week were quite encouraging. The markets are now convinced that the start of a cut in interest rates could be as early as next June, without excluding further reductions in the coming months.

The geopolitical landscape seems to be relatively calm after recent incidents between Iran and Israel. It appears for now that neither side intends to expand its offensive activity, creating new problems in the region. This fact was seriously considered by the markets last week, especially from energy markets.

To sum up all of the above, most equity indices in the United States rose last week, while mixed was the sign of the equity indices in Europe. Bond yields de-escalated significantly, with the yield on 10-year U.S. Treasury notes closing the week just above the 4.5% milestone. We saw a strong correction for most commodity markets such as gold, oil, and copper. Strong losses were for the U.S. dollar, which had a sharp correction after three straight weeks of growth. On the contrary, other currencies such as the euro and sterling were on the rise. Notable also was the rise of the Japanese yen as we will see below in detail. Finally, Bitcoin and most cryptocurrencies, while they had high volatility throughout the week, did not have much change between opening and closing prices.

The current week will be relatively calm in terms of economic announcements and news. In the United States markets are expected to show interest in the speeches of some Fed executives. In the Eurozone, the producer price index and retail sales are announced. Markets will also pay attention to the announcement of interest rates and monetary policy by the Bank of England while on Saturday the inflation is announced in China.

SP500

The US SP500 index was bullish last week as it closed at 5,127.80 points and profits of 0.55%. Recent inflation data had raised worries that the Fed might need to maintain higher interest rates for a longer duration than what the market had predicted, or possibly even consider raising rates once more. However, at the conclusion of its FOMC press conference on Wednesday, Fed head Jerome Powell indicated that the next adjustment in rates would likely be downward, suggesting a slim possibility of a rate hike. This was a big breath for the markets as according to some Fed officials the possibility of a new rate hike had been left open. So, from Wednesday onwards the index took an upward trend which continued until the end of the week. On Thursday new announcements helped the uptrend since as we saw, in March, Factory Orders saw a 1.6% increase month-over-month, while Initial Jobless Claims remained steady low at 208,000. On Friday according to the jobs markets report, nonfarm payrolls grew by 175,000, marking the lowest figure since October 2023 and falling short of the 243,000 estimated by the markets and the 315,000 of the previous month. In particular, this result reinforced the upward rally of the SP500, since the markets believe that high interest rates have begun to hurt the real economy. Positive news also came from the announcements of the companies ‘ results, especially Apple which announced better-than-expected results. This upward reaction in the last few days may continue and for this reason, we will choose long positions this week.

DAX40

The German DAX40 index was bearish last week, closing at 18,001.60 points, with losses of 0.88%. Markets ‘ belief that the European Central Bank can start cutting interest rates from June and continue cutting in the coming months has helped the sentiment of European markets and stock indices like DAX40. Inflation in the Eurozone and in Germany, which has dropped significantly in recent times, is a help to this belief. But on Monday, inflation in Germany was announced at 2.4%, slightly above the previous month’s 2.3%, and that raised some concerns. Those concerns continued on Tuesday after the announcement that the jobs balance in Germany was negative by 10,000 positions. Germany’s first quarter GDP grew by 0.2%, above the 0.1% forecast by markets but there were concerns again after last month’s import price index rose by 0.4%, raising fears of a return to inflationary pressures. Wednesday was a May Day holiday and the DAX40 index on Thursday and Friday had upward reactions mainly influenced by the positive market sentiment in the United States. We consider that this assistance may not be enough to shift the indicator to a much higher level, and for this reason, we will choose short positions this week.

FTSE100

The British FTSE100 index moved upward last week, closing at 8,235.50 points, earning about 1%. FTSE100 has enjoyed another record-breaking week, culminating in a fresh all-time high. It is clear that this indicator has been influenced by other markets, especially the United States markets. The first three days of the week the performance was negative but on Thursday and Friday, there was a rise that gave the positive sign. The positive sentiment in the United States was mainly driven by the FOMC late on Wednesday and the result of new jobs in the United States on Friday, showing that it is difficult to have a new rate hike in the US. Some UK companies also announced strong Q1 2024 profits, giving the index a new boost. The trend for several months has been strongly upward for the FTSE100 and following it this week too, we will choose long positions.

Gold

The previous week was bearish for gold, with the next month’s futures closing at $2,308.6 and losses of 1.64%. Gold prices fell for the second consecutive week, reaching a one-month low. The Fed’s meeting on interest rates and monetary policy and the press conference that followed had a bit of an easing effect on markets that formed the belief that there would be no more interest rate hikes in the United States, and so asset classes considered safe havens such as gold had losses. The negative results of the Nonfarm Payrolls (NFP) report led to a short-term rally in gold prices. However, these gains did not last as the markets held the opinion that high interest rates cannot stand for long as they may create significant problems for the real economy. However, a significant share in the fall in gold prices has also been played by the relative calm in the Middle East in recent days. If all the factors that contributed to last week’s fall in gold prices continue, it is not excluded that we will see a new fall and so our choice for the current week is short positions.

US Oil

Last week was heavily bearish for oil with the next month’s futures closing at $78.11, with losses of 6.85%. Oil markets experienced significant weekly decline due to a series of factors and markets’ perceptions that have to do with demand and supply. The recent decision by the Fed to retain interest rates and the opinion the markets formed after the press conference that the reduction of interest rates is not going to start any time soon is an important factor. High interest rates worsen the situation in the economy, and this has the logical effect of reducing demand. The weekly oil stocks in the United States announced last week also affected the oil prices to the south. The American Petroleum Institute announced on Tuesday that its weekly inventories rose by 4.9 million barrels. The next day the Energy Information Administration announced an inventory increase of 7.26 million barrels. An increase in stocks usually means reduced demand for oil. On oil production and supply, the recent calm in the Middle East has led markets to believe there are no particular risks in the supply chain and oil prices had another reason to drop. The eyes of the markets will turn to OPEC and the monthly report we will see the week after next as well as the decision-making meeting in early June. The fall in oil prices, however, has been extremely sharp and it is not excluded that it may seem like a buying opportunity, therefore we will choose long positions for the current week.

EURUSD (Euro – US Dollar)
Last week was bullish for EURUSD as it opened at 1.0690 and closed at 1.0762. The US dollar fell significantly last week for two main reasons. The first reason is the FOMC which was not exactly dovish but at least it seems that the extreme scenario of a new increase in interest rates is limited as a possibility. The second reason has to do with the negative result of the labor market (NFPs) that may pressure the Fed to reduce rates before the effects on the real economy become even worse. These dollar-related developments have been able to overcome the weakness of the euro. The euro has recently been weak since all information converged that there will be a first reduction in interest rates from the European Central Bank in June and it is not excluded that the same will happen next month. The euro strengthened though due to the positive economic announcements we saw last week for the Eurozone economy. Consumer Confidence remained unchanged at -14.7 in April, while the inflation as it is expressed by the harmonized index of consumer prices had an increase of 2.4%. Additionally, the annualized GDP rose by 0.4% in the first quarter, significantly more than the 0.2% that the markets anticipated. With all that we have mentioned, it is most likely that the weakness of the euro will remain and if at the same time, the dollar is strengthening, we may see a new turn of the exchange rate downwards and for this reason, we will choose sell positions this week.

GBPUSD (Great Britain Pound – US Dollar)

Bullish was the last week for GBPUSD, as it opened at 1.2471 and closed at 1.2547. There were no major announcements last week about the UK economy, so most of this upward movement for the exchange rate should be attributed to weakness in the US dollar. The Fed kept interest rates unchanged at Wednesday’s meeting, limiting the chances of a new hike while declaring a noticeable slowdown in the rate of its quantitative tightening program. Amid all this came the negative labor market result for April that prompted investors to think it is not possible to keep interest rates at such high levels for much longer without a significant impact on the economy. In April, the service sector in the UK experienced an acceleration, with the Services PMI climbing to 55 from 53.1. This marked the highest level since May 2023, indicating six consecutive months of growth in the services sector with readings surpassing the 50 level. After this announcement, GBP recovered somewhat but the US labor market announcement that followed weakened the dollar again. We may try sell positions this week, trusting that the hawkish sense of the Fed may return as a perception.

USDJPY (US Dollar – Japanese Yen)

USDJPY was strongly bearish last week, opening at 157.80 and closing at 152.94. The exchange rate had its biggest weekly drop in several months after all the factors that affected it converged towards it. The US dollar weakened due to negative macroeconomic results and the Fed’s decisions, while bond yields declined significantly. However, the great downward momentum for the exchange rate was given by the outstanding strengthening of the JPY. The JPY surged during the week, reportedly triggered by potential intervention from the Japanese government. There were two instances of such interventions last week, as per a Reuters report. According to Reuters, on Monday, Japan’s Ministry of Finance reportedly intervened in the market, possibly injecting around 6.0 trillion yen to support the Japanese yen. Also, data from the Bank of Japan on Thursday suggested that Japanese authorities may have spent around 3.66 trillion yen on Wednesday to bolster the JPY. This was the major reason for the yen’s significant strength. On Thursday though, the Bank of Japan released minutes from the March meeting on the monetary policy outlook. With this release, we did not learn anything important about the Bank of Japan’s future plans for interest rates and monetary policy. It seems that the intentions of the Japanese government are clear to support the domestic currency but it’s doubtful if it is enough to support it drastically, so we will prefer buy positions for one more week.

EURJPY (Euro – Japanese Yen)
Heavily bearish was last week for EURJPY which opened at 168.72 and closed at 164.60. The euro is losing momentum after markets have given the impression that the European Central Bank will start cutting interest rates in the Eurozone in June. Last week, however, the main reason for this sharp downward move was the large strengthening of the yen. Throughout the week, the Japanese yen experienced a significant surge, allegedly sparked by indications of potential intervention from the Japanese government. According to Reuters, this intervention took place twice in the past week and the Japanese currency has strengthened significantly. It is not excluded that this trend will continue in the current week and therefore we will choose sell positions.

EURGBP (Euro – Great Britain Pound)

Last week was bullish for the EURGBP, as it opened at 0.8555 and closed at 0.8576. Both the euro and sterling strengthened last week as a counterweight to the fall in the US dollar. The central issue at this time is central banks and their decisions to cut interest rates. The Eurozone is expected to make this reduction in June, while there is no clear picture for the Bank of England. However, two reasons pushed the rate higher last week. The first reason is the positive macroeconomic results performed by the Eurozone and the second reason is more technical since it seems that for several months there can be no price below 0.85. Given that the problem of inflation in the UK is more severe than in the Eurozone, we may see sterling rise again, and that is why we prefer sell positions this week.

USDCAD (US Dollar – Canadian Dollar)

Bullish was the last week for USDCAD, as it opened at 1.3665 and closed at 1.3686. The U.S. dollar weakened last week, but it appears the Canadian dollar was in more trouble, so the exchange rate rose. First of all, the major decline in oil prices has caused strong pressure on the Canadian dollar. Oil is the main export product of Canada’s economy and so the country’s currency depends heavily on it. Another reason for the Canadian dollar’s decline was the negative economic results announced this week. In February, the country’s GDP increased by 0.2%, below market expectations. Also, below 50 was the PMI index for manufacturing. Bank of Canada Governor Tiff Macklem stated on Thursday that there is a boundary to the extent Canadian monetary policy can deviate from that of the US, but they have not yet approached that boundary. Markets anticipate the Bank of Canada to reduce interest rates in June or July, given the considerable easing of inflationary pressures in Canada. Our choice for the current week is sell positions.

USDCHF (US Dollar – Swiss Franc)
The USDCHF was bearish last week as the opening price was at 0.9127 and the closing price was at 0.9050. The United States dollar had losses last week mainly due to the FOMC and the negative labor market results in the United States. However, a share of the fall in the exchange rate was also the Swiss franc, which strengthened significantly last week. The main cause was the announcement of inflation in Switzerland. Inflation in Switzerland in April climbed to 1.4%, up significantly from the previous month’s 1% and above the 1.1% that markets had estimated. This brings the Swiss National Bank interest rate scenario back to the table for a longer period before there is a further reduction. The US dollar has dominated the exchange rate for some time and if it starts to strengthen again, we will see the USDCHF at higher levels and for this reason we prefer buy positions this week.

AUDUSD (Australian Dollar – US Dollar)

Bullish was the last week for AUDUSD, which opened at 0.6521 and closed at 0.6608. This week has had negative results and announcements on Australia’s economy. Retail sales in the previous month fell by 0.4% while the PMI index for manufacturing was below 50. The increase in new building permits was well short of market expectations, while April’s trade balance fell to 5 billion dollars from 6.5 billion the previous month. The rise in the exchange rate is mainly due to the weakness of the U.S. dollar and some positive news coming from China. China’s Caixin PMI index was announced at 51.4, surpassing market expectations of 51. The fact is, however, that the latest developments are converging on the conclusion that the Fed will not start cutting interest rates soon enough. If this is confirmed, it will strengthen the U.S. dollar again, so we prefer sell positions for the current week.

Bitcoin

Last week, Bitcoin was slightly bullish and closed at $64,021 with profits of 1.46%. By Wednesday, there had been intense pressure on the price of Bitcoin, up to $56,500, a price we hadn’t seen since last February. Since Wednesday, however, there have been strong bullish reactions. An important part of this development was the opinion of the markets that we won’t see a new rate hike by the Fed after Wednesday’s press conference and after Friday’s negative labor market announcement. High-risk options such as cryptocurrencies have been favored by these developments. Some encouraging news has also emerged from the Bitcoin ETFs market. There was a significant increase in net inflows last week. For nearly 80 days since January 11, spot Bitcoin ETFs have been trading on Wall Street with Grayscale only contributing to net inflows reaching $378.5 million on Friday. However, there are strong doubts about whether the ETF will be approved for Ethereum as they appear to be categorized by the SEC as unregistered security. Bitcoin is showing an inability to move towards the all-time highs it performed in March, and as long as this is not achieved, the likelihood of seeing new downward trends increases. 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.