13/05/2024

General Comment

Equity markets rebounded impressively last week after most major equity indices in Europe and the United States performed strong gains. Without a significant event to guide them, investors focused on the latest weekly employment data from the United States. The initial jobless claims announced on Thursday escalated to 231,000 for the previous week, marking the highest figure since November 2023 and showing an increase of 22,000 from the previous week’s figures, missing the target of 210,000. This sparked speculation that the Fed might hurry interest rate reductions as it seems that the high money cost has serious consequences for the economy, especially in the jobs market. In response, equity markets surged.

On Friday the barrage of negative news in the United States continued. The Michigan consumer sentiment index indicated a drop as it fell to 67.4 from 77.2 in April, missing the expectations of 76. This development was a pause in the rise of the markets since very negative developments may on the one hand mean an acceleration of the rate cut process, but on the other hand, it is a negative sign for the markets.

Throughout the week, several Fed speakers made statements. None of the Fed officials presented new insights but they consistently emphasized the need for more evidence of inflation moving towards the 2% target before considering any rate reductions. Some expressed concerns about the risks of reducing rates prematurely. Fed officials’ speeches will continue in the coming days and, in conjunction with the announcement of inflation in the United States this week, will be the catalyst for markets. According to the CME FedWatch tool, there is currently a 3.5% probability of an interest rate cut in June. The likelihood increases to 25.4% for July, jumps to 61.2% by September, and reaches 74.8% by November.

Regarding the European economy, the Eurozone continues and announces positive economic results, as we will see in detail below. On the expected rate cuts, nothing seems to have changed in the market’s view that the first rate cut will take place in June. China’s economy had mixed results last week, with the manufacturing Caixin PMI index announced at 52.5. Imports and exports rising, and inflation was reported last month at 0.1%. much better than the -1% of the previous month, which meant deflation. However, the trade balance fell quite a bit and it was announced at $ 72 billion against the $ 76 billion markets had expected.

It was also an important week for the UK, with the Bank of England leaving interest rates unchanged at 5.25% at its meeting. Two members of the Bank of England proposed a reduction in interest rates.

As we said above, most of the main indices of Europe and the United States had strong profits. The U.S. dollar rose against its main rivals, following a week of heavy losses. The week was mixed for the commodities market, with metals such as gold and copper having strong gains but oil had consolidative trends. Bond yields were stabilizing, with the yield on the U.S. ten-year bond closing the week at 4.50%. The week was also down for bitcoin and most cryptocurrencies since it seems that this market cannot recover yet from the downtrend of recent weeks.

The week that has just begun will be dominated by United States inflation announcements. More specifically, on Tuesday the producer price index for April is announced while the next day the consumer price index will be released. These prices are expected to greatly influence the Fed’s decisions for the coming period. Many Fed executives also will speak throughout the week: Jefferson, Mester, Kashkari. The Eurozone will announce GDP, inflation, and industrial output while markets are expected to show particular interest at OPEC’s monthly meeting on Tuesday.

SP500

The US SP500 index was bullish last week as it closed at 5,222.68 points and profits of 1.85%. The dominant events that caused this uptrend belong to two major categories. First of all, the macroeconomic results, and especially the increased initial jobless claims of the previous week, triggered the perception that the job markets have been hurt lately due to high interest rates and that the Fed won’t be able to keep them high, even if the inflation still remains in high levels. Markets had already formatted this idea through the recent negative Non-Farm Payrolls result and initial jobless claims just confirmed the facts. News and perceptions that have to do with interest rate reductions favor the stock markets during the last period. In some sense, bad news is good news but even this case has some limits. Very negative results may cause negative investing sentiment accordingly and markets react nervously. This is what happened on Friday with the Michigan consumer sentiment index which was announced well below market expectations, stopping the uptrend rally of SP500. Another dominant factor for the equity markets is the statements of Fed officials. Richmond Fed head Thomas Barkin stated that a patient approach by the Fed would ultimately bring inflation down to the target level. John C. Williams, head of the Fed Bank of New York said “Eventually there will be rate cuts”. Minneapolis Fed head Neel Kashkari said that the Fed will maintain stable interest rates if inflation figures justify it. Fed Boston head Susan Collins said that cutting interest rates too early carries certain risks. As we see, the Fed members have a cautious stance, knowing that inflationary pressures still remain, and suggest rather a wait-and-see behavior. The inflation data that will be released this week will be highly critical. Persistent inflation may create new concerns about the Fed’s monetary policy while a relief of inflationary pressures may be faced by the markets as an opportunity for rally. There is a clear uptrend during the last three weeks and we will follow it in the current week as well with long positions.

DAX40

The German DAX40 index was heavily bullish last week, closing at 18,772.75 points, with profits of 4.28%. European markets and DAX40 were affected by the positive sentiment from the US stock markets. There are also particular reasons regarding the economies of the Eurozone and Germany that caused such high profits and new all-time high prices. On Friday, the minutes from the ECB monetary policy meeting captured investors’ interest. The details from the meeting matched markets’ predictions of a June interest rate cut by the European Central Bank. Expectations of reduced interest rates and decreasing inflation are beneficial for the European stock markets. Lower interest rates bolster the outlook for the Eurozone economy’s improvement in the second half of 2024. The German macroeconomic data that were released last week were not too positive or too negative. Composite PMI was better than expected but services PMI did not meet the expectations. Imports and exports increased but the factory orders and the trade balance were below estimations. Finally, industrial production dropped by 0.4% in March but it was better than the consensus of -0.6%. This week, along with US inflation data, European markets will put their eyes on the German and Eurozone inflation as well as on the GDP and industrial production announcements in the Eurozone area. Even if the new all-time high events usually cause profit-taking corrections, we’re keen to try long positions for one more week.

FTSE100

The British FTSE100 index moved upward last week, closing at 8,423.50 points, earning about 2.28%. FTSE100 had five consecutive record highs, each for one day, during the last week, buoyed by investor enthusiasm following the Bank of England’s decision on interest rates and the British economy’s stronger-than-anticipated growth in the first quarter of the year. The results were quite impressive: Q1 GDP rose by 0.6% vs 0.4% which the markets were expecting. Industrial production rose by 0.5% in March and manufacturing production rose in the same month by 2.3%. Both numbers beat the markets’ expectations. The total trade balance was negative by 1 bn pounds but again the markets estimated a more negative figure. As per the Bank of England, on Thursday, the Bank of England’s announcement regarding interest rates and monetary policy significantly shifted market sentiment. The central bank maintained the interest rate at 5.25%, but there was a minor surprise as two members voted in favour of cutting the rates. The press conference that followed had some hawkish statements but it was not enough to prevent the markets from the perception that interest rate cuts won’t delay too much. We may try long positions for one more week.

Gold

The previous week was bullish for gold, with the next month’s futures closing at $2,375 and profits of 2.88%. The sharp rise in gold prices was triggered by the increase in initial jobless claims in the USA along with disappointing Non-Farm Payroll figures that were released in the previous week. The negative jobs data has fuelled speculation that the Fed may reduce interest rates earlier than expected to help the economy and especially the jobs market. The Fed is increasingly emphasizing employment data, indicating that future policy decisions may also depend on the health of the job market. Lower interest rates do not favour non-yielding assets such as gold so it is a critical factor. The US dollar had some mild profits last week but this factor did not affect the gold prices. Usually, the US dollar and gold have a negative correlation as gold is denominated in US dollars. Bond yields remained more or less unchanged so this factor also did not have a significance in gold prices during the last week. Significant focus is now on the upcoming inflation announcements (producer price index on Tuesday and consumer price index on Wednesday), which are projected to indicate persistently high inflation. These figures are critical indicators that will influence whether the Fed will start reducing interest rates soon. If the market estimations come true (3.4% is the prediction for April’s inflation), the US dollar may strengthen so we may try short positions on gold this week.

US Oil

Last week was slightly bullish for oil with the next month’s futures closing at $78.26, with mild profits of 0.19%. Fed officials stressed the importance of keeping interest rates high to effectively tackle inflation. This position suggests a tough scenario for the crude oil markets, where higher rates often curb economic activity and diminish oil demand. The mini surprise that came last week after the increased initial jobless claims in the USA, somehow changed this perception since the job markets are hurt by high interest rates and the Fed should consider this seriously. This news created optimism in the markets and hopes for higher demand came back. But for one more week, the oil stock announcements show that the demand remains low. The American Petroleum Institute in its weekly crude oil stocks report announced that the stocks increased by 0.51 million barrels last week versus -1.43 million barrels that the markets estimated. Also, according to the US Energy Information Administration, the weekly measure of crude oil stockpiles report had a decrease of 1.356 million barrels which was less than the market consensus of a 1.43 million barrels reduction. In China though, the crude oil imports in April saw a significant increase, indicating a potential rebound in demand that helped support oil prices. As per the supply, the geopolitical landscape continues to be unstable, with ongoing conflicts in the Middle East as the conflict between Israel and Hamas is getting wilder. All these factors, created a balance in the oil prices last week but keeping in mind that there was a more than 10% decrease during the last weeks, somehow the current price seems low. It could create a wave of buyers so we prefer long positions this week.

EURUSD (Euro – US Dollar)
Last week was slightly bullish for EURUSD as it opened at 1.0760 and closed at 1.0770. The slight recovery in the US dollar was compensated by a corresponding rise in the euro. The dollar had started to rise in the week, but the negative announcement on initial jobless claims on Thursday brought to the surface scenarios of a faster rate cut by the Fed. Similarly, the euro also had reasons to strengthen last week due to positive economic announcements for the Eurozone. The PMIs, (Composite, and Services) were announced above market expectations. Retail sales in the Eurozone rose by 0.8% in March and the producer price index declined sharply, meaning inflation continues to fall. All the lights of the markets will fall on inflation announcements in the United States this week. If the results do not show a de-escalation of inflation, the US dollar will probably strengthen further and based on this assessment we will choose sell positions this week.

GBPUSD (Great Britain Pound – US Dollar)

Mildly bearish was the last week for GBPUSD, as it opened at 1.2535 and closed at 1.2524. The exchange rate started the week on a downward trend, following the mild recovery of the U.S. dollar. But on Thursday the Bank of England’s announcement on interest rates and monetary policy was enough to change the mood. The Bank of England has left interest rates unchanged at 5.25% but a mini surprise came out after two members voted to cut interest rates. Bank of England chief Andrew Bailey said it’s hopeful that inflation will approach the target in the rising months and that the dynamics of UK inflation are distinct from those in the U.S. These statements in the markets ‘ view had a hawkish character, helping sterling recover. The recovery continued on Friday after a series of positive announcements for the UK economy, on GDP, industrial production, manufacturing, and the trade balance. It is not excluded that this upward reaction will continue this week and for this reason, we may try buy positions.

USDJPY (US Dollar – Japanese Yen)

USDJPY was bullish last week, opening at 152.87 and closing at 155.75. The first three days of the week were strongly bullish after concerns returned to markets about the Japanese currency and the Bank of Japan’s intentions to raise interest rates in the near future. Interest rates in Japan are at 0%, and the huge difference with respect to the Fed rates continues to cause a rise in the exchange rate. From Thursday onwards the rise in the exchange rate was somewhat mediated following statements from Japan. Bank of Japan head Kazuo Ueda announced that the central bank will closely examine the recent depreciation of the yen when determining monetary policy. His hawkish remarks led to anticipations of a rise in short-term interest rates in the upcoming months. On Friday, Japan’s Finance Minister Shunichi Suzuki reiterated his readiness to implement necessary actions concerning foreign exchange as needed. Those hawkish statements helped in a partial braking of the climb for the USDJPY. This week the spotlight will fall on announcements of inflation in the United States and we’re keen to try buy positions, following last week’s trend.

EURJPY (Euro – Japanese Yen)
Bullish was last week for EURJPY which opened at 164.60 and closed at 167.75. It was a clear rise for the pair since all five days of the week were up. The Japanese currency has returned to its familiar weakness after markets saw no determination from the Bank of Japan for strong increases in interest rates. On the other hand, the market has already valued the strong likelihood that the European Central Bank will start cutting interest rates in June. But last week, the Eurozone economy had a series of positive economic results that helped the euro a lot to recover. If the scenarios for the reduction of interest rates in the Eurozone from June onwards are confirmed, there is a high probability that the euro will weaken, and based on this logic we may try sell positions this week.

EURGBP (Euro – Great Britain Pound)

Last week was bullish for the EURGBP, as it opened at 0.8568 and closed at 0.8599. The Bank of England left interest rates unchanged, based on its latest decision, at 5.25%, while statements at the press conference that followed helped sterling recover, but not to the extent of overtaking the euro’s strength. The European economy had strong economic results last week, so the euro was able to impose itself and the exchange rate to rise for the second week in a row. Technically speaking, the EURGBP has not been able to escape the narrow band between 0.85 and 0.86 for several weeks. Sell positions is our selection for the current week.

USDCAD (US Dollar – Canadian Dollar)

Slightly bearish was the last week for USDCAD, as it opened at 1.3674 and closed at 1.3671. The U.S. dollar strengthened slightly last week, as markets believe labour market pressure will force Fed to cut interest rates as quickly as possible. But the Canadian dollar has also been able to put up strong resistance, even though oil prices have decelerated for one more week. The main cause is the hawkish behaviour of the Bank of Canada recently and the strong macroeconomic results announced last week. The previous month’s jobs balance was positive by 90,000, far exceeding market forecasts. As a result, the unemployment rate fell to 6.1%. We may try buy positions this week.

USDCHF (US Dollar – Swiss Franc)
The USDCHF was bullish last week as the opening price was at 0.9048 and the closing price was at 0.9064. The U.S. dollar strengthened slightly last week after markets assumed that the Fed would not be able to hold interest rates at such high levels for a long period of time since the impact on the real economy and especially on the labor market is already evident. The exchange rate broadly reflected this slight rise in the U.S. dollar. The unemployment rate in Switzerland remained unchanged at 2.3% so macroeconomic factors were somehow neutral for the Swiss franc. This week, inflation is announced in the United States, which will have a decisive role in the exchange rate. If the results strengthen the dollar, we may see a strong uptrend for the USDCHF so we prefer buy positions this week.

AUDUSD (Australian Dollar – US Dollar)

Slightly bearish was the last week for AUDUSD, which opened at 0.6616 and closed at 0.6603. The U.S. dollar strengthened slightly last week after developments and announcements showed the impact on the real economy of high interest rates is a given. On the Australian side, the Reserve Bank of Australia left interest rates unchanged at 4.35% last week. According to the RBA’s latest quarterly monetary policy statement, there has been an upward revision in short-term inflation forecasts. The inflation is projected to rise this year, as it is now expected at 3.8% up from 3.2%. This adjustment means that market expectations are leaning towards rate reductions being postponed until next year, with a rate hike in 2024 currently viewed as more probable than a cut this year. These developments, however, could not help the Australian dollar, which also had negative macroeconomic results after last month’s retail sales fell by 0.4%. The results from China were mixed and so did not severely impact the Australian dollar. It seems, however, that the Bank of Australia is more hawkish than the Fed, and if this view prevails, the exchange rate will move higher. We may try buy positions this week.

Bitcoin

Last week, Bitcoin was bearish and closed at $61,462 with losses of 4%. Santiment data shows that Bitcoin’s on-chain transaction volume has decreased, reaching levels not seen since 2019. This trend suggests that traders are hesitant to move their positions, likely due to the market’s volatility. The significant drop in transactions came after Bitcoin reached its all-time high on March 14th. This fact confirms the downtrend of the Bitcoin that has started since mid-March. It also seems that the news from the traditional markets affects the cryptocurrency asset class as well. The persistent inflation in the USA causes concerns that the Fed will not be able to reduce interest rates soon enough. Such a development would mean that the economy will receive more pressure and so the higher risk assets such as cryptocurrencies are not favored. The crypto community still has its spotlight on the decision of the SEC, regarding the approval or not of the Ethereum ETFs. There was some bad news in the last few days as Grayscale Investments has withdrawn its application for an Ethereum ETF. Also, Uniswap Labs, the organization behind the decentralized exchange Uniswap, confirmed in a Wednesday blog post that it received a Wells notice (formal notification issued by the SEC to inform a person or company that they were involved in a completed investigation by the regulator). Robinhood, the well-known trading platform, received also a Wells notice from the SEC recently. In a press release, Robinhood adopted a more confrontational approach, stating that the company had previously decided against offering certain tokens or products that the SEC had classified as securities in past actions. However, JPMorgan has suggested that the SEC’s legal actions against crypto exchanges and companies seem to be an effort by the agency to impact U.S. policymakers and legislators, who are expected to pass regulations governing the crypto market in the future and these actions should not be a barrier to the eventual approval of Ethereum ETFs. Positive news regarding Ethereum ETFs may boost the prices of crypto assets again and by considering the recent decline in prices we may try long 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.