10/06/2024

General Comment

Two were the most important developments in the financial markets in the past week. The first one has to do with the announcement of new jobs in the United States (Non-Farm Payrolls) report for May that was released on Friday. The US economy saw an increase of 272,000 new jobs during the month, significantly exceeding the anticipated 185,000. Additionally, the unemployment rate climbed to 4% from April’s 3.9% and the average hourly earnings grew by 4.1% year-over-year and 0.4% month-over-month, both above the expected figures. It was another indication that the critical part of the labor market in the United States remains strong.

The second major development of the past week had to do with the Eurozone economy. On Thursday, the European Central Bank announced its monetary policy decision, and as widely expected, it reduced interest rates by 25 basis points. However, the markets had a hawkish view on the ECB after Christine Lagarde tempered expectations for another rate cut in July, stressing that future decisions will rely on forthcoming data. Lagarde mentioned that more data would be available during their projection meetings, indicating that they might consider another rate cut only in September. Both developments we saw above had a hawkish impact on both the United States economy and the Eurozone economy, for different reasons of course.  The strong US labor market leaves room for the Fed to maintain high interest rates for longer, and the Eurozone does not appear to be planning to cut rates until the fall. This impact affected the US and European markets as we will see in detail below.

The European Parliament elections held at the end of last week are particularly crucial for Europe. The governments of Emmanuel Macron and Chancellor Olaf Scholz facing significant negative results in France and Germany. Italy is becoming a pivotal nation for the European Union and the forthcoming European Commission presidency. Marine Le Pen’s party achieved double the vote share of Macron’s party. In response to the overwhelming defeat in the election, Emmanuel Macron announced the dissolution of the National Assembly and called for early parliamentary elections in France on June 30 and July 7. The far-right undeniably made significant gains in the European elections, with the National Rally dominating in France and the FPO in Austria. The Alternative for Germany (AfD) secured second place, surpassing Chancellor Olaf Scholz’s Social Democrats. Europe is under bigger uncertainty after these results.

 In addition to these two markets, China’s results contributed positively to the global economic sentiment. Manufacturing showed improvement as expressed by PMI indicators while exports in China increased by 7.6% last month, resulting in the trade balance soaring above $ 82 billion.

The strong macroeconomic picture in the United States was able to keep a positive sign on most US equity indices. In contrast, European indices fell for one more week after the cautious and hawkish stance of ECB. Bond yields fell slightly with the yield on the U.S. 10-year bond closing the week near 4.45%. The week was down for most commodities, such as oil and gold, while the third week in a row was strongly down for copper. In the currency market, last week’s big gainer was the US dollar and secondarily the Japanese currency. The euro and sterling had losses. The cryptocurrency market has been positive, with Bitcoin reaching the milestone of $ 70,000 again.

The week that has just begun may be the most critical for June (and not only) regarding the Fed’s future decisions.  On Wednesday, the United States will announce its May inflation rate, with estimates saying that it would remain unchanged at 3.4%. On the same day, the Federal Open Market Committee (FOMC) will announce its monetary policy & interest rates decision. Markets expecting interest rates to remain unchanged for the seventh consecutive meeting with the first rate cut in September being the most likely scenario. There will also be interest in the press conference that will follow from the bank’s head Jerome Powell.  Outside Europe and America, there is on Friday a similar announcement on interest rates and monetary policy from the Bank of Japan where markets will turn their eyes. Volatility is expected to be particularly high throughout the week but mostly from Wednesday and on.

SP500

The US SP500 index was bullish last week as it closed at 5,349.47 points and profits of 1.12%. The most significant day for SP500 was last Wednesday after the impressive result of the manufacturing sector in the USA. ISM Services PMI was announced at 53.8 vs 50.0 which markets expected, boosting the investing sentiment. It was one more confirmation that the US economy remains robust. Thursday and Friday were both mildly bearish. Initial jobless claims on Thursday were announced at 229K vs 220K expected but on Friday, the most important announcement for the US economy was released: Non-Farm Payrolls. The US economy experienced a surge of 272K new jobs last month, far surpassing the projected 185K. The unemployment rate rose to 4%, up from 3.9% in April. Meanwhile, average hourly earnings increased by 4.1% year-over-year and 0.4% month-over-month, both exceeding expectations. The impressive NFP result created the anticipation that the Fed may keep interest rates high for a few more months since the job markets seem robust and inflation remains at high levels. The current week promises high volatility: on Wednesday there’s the consumer price index announcement for May and FOMC – monetary policy and interest rates decision and on Thursday there’s the announcement of the producer price index. We may try long positions this week.

DAX40

The German DAX40 index was bullish last week, closing at 18,557.27 points, with profits of 0.32%. On Thursday, the European Central Bank announced a widely anticipated 0.25% cut in interest rates. However, markets responded with a hawkish outlook after Christine Lagarde downplayed the likelihood of another rate cut in July, emphasizing that future decisions would depend on upcoming data. Lagarde noted that more information would be available during their projection meetings, suggesting that any further rate cuts might not be considered until September. The sentiment for the European markets was mixed after that; the rate cut was a breath but the expectations for more rate cuts soon enough probably won’t come true. The results of the European Parliament elections in Germany were not positive for the current government. The Alternative for Germany (AfD) captured second place, overtaking Chancellor Olaf Scholz’s Social Democrats. As per the data released in the previous week, there was a decrease of 0.1% last month in industrial production while the trade balance could not meet the market consensus. Factory orders decreased by 0.2% but all the PMIs (manufacturing, services, composite) had a better-than-expected result. The overall sign of these data was neutral and that is why we saw a consolidative result in DAX40. The political crisis in Germany and in many other European countries may cause turbulence in the stock markets so we may try short positions this week.

FTSE100

The British FTSE100 index moved downward last week, closing at 8,221.5 points, losing about 1.07%. The Bank of England is anticipated to maintain interest rates at 5.25% in the June 20th session. Despite a recent decline in UK inflation, it hasn’t decreased as much as expected, diminishing the chances of multiple rate cuts by the BoE this year. Additionally, uncertainties surrounding the early July general election have negatively impacted the economic outlook. High interest rates and political uncertainty are situations not favorable for the stock markets. In the current week, the speculation of the markets regarding the Bank of England’s stance and regarding the election results will prevail again. Moreover, the current week has a lot of interesting economic announcements for the economy of the UK. On Tuesday last month’s unemployment rate is announced and on Wednesday there are announcements for the GDP, industrial production, manufacturing production, and trade balance. We may try short positions this week.

Gold

The previous week was bearish for gold, with the next month’s futures closing at $2,325 and losses of 0.89%. Gold prices were affected by the persistence of high interest rates driven by the strong US labor market. The report indicated that Non-Farm Payrolls increased by 272K jobs in May, surpassing the forecast of 185K. The robust job market, characterized by high wages and increased consumer spending, suggests that inflation may not decrease quickly, prompting the Fed to keep interest rates high for a longer time. This scenario may keep the bond yields high, not favoring the non-yielding gold. Adding to this bearish sentiment, the People’s Bank of China paused its gold purchases in May after an 18-month streak of consecutive buying. For months, gold’s rally was driven by aggressive central bank buying, especially from China and this change may have a serious impact on gold prices. However, gold prices may be affected more by the Fed and other central bank so we may try long positions this week.

US Oil

Last week was bearish for oil with the next month’s futures closing at $75.53, with losses of 1.90%. Oil prices dipped, marking a third consecutive week of losses. The most bearish days were Monday & Tuesday and this has mainly to do with OPEC. Despite reassurances from some OPEC members about potentially pausing or reversing output increases, crude oil prices declined. Analysts interpreted the recent OPEC meeting as signaling an increase in supply and this perception pushed the oil prices lower. Wednesday was a bullish day because the impressive result in the manufacturing of the US economy gave the impression that the demand could be high. However, the announcements of the stocks were against high demand. According to the US Energy Information Administration, the oil stock increased last week by 1.23 million barrels, and according to the American Petroleum Institute, the increase was 4.05 million barrels. These results indicated a lower demand. As per the rest of the world, the ECB cut interest rates by 0.25%. However, the Eurozone is still facing certain economic issues and political uncertainty that can slow economic activity, thereby reducing oil demand. China reported a decline in oil imports and this drop underscores ongoing demand concerns, negatively impacting global oil prices. Finally, the US NFPs on Friday had a neutral impact on oil prices because the result was impressive, indicating a robust job market but on the other hand it may trigger the Fed to keep high interest rates for a bit longer. We prefer long positions this week.

EURUSD (Euro – US Dollar)
Last week was bearish for EURUSD as it opened at 1.0846 and closed at 1.0801. The European Central Bank cut interest rates by 0.25% at Thursday’s meeting, but the press conference that followed had a hawkish tone, prompting markets to have the impression that there would be no further rate cuts before September. But that could not help the euro climb higher because the US dollar also grew stronger. The macroeconomic results in the United States show a strengthening labor market, which may allow the Fed to keep interest rates high for a few more months. In addition to this, Europe had to deal with two other important issues. The first issue is the European elections held at the end of last week and the impression that the European Parliament could be dominated by Eurosceptic and extremist forces and such a development would not be friendly to the markets.  Also, the euro area’s macroeconomic results were not particularly positive last week. GDP in the first quarter strengthened by 0.4% as markets expected, but last month retail sales remained unchanged, while PMI indicators for services and manufacturing were announced below market expectations. With all this, Europe’s shared currency may face serious challenges in the near future, and that is why we prefer sell positions this week.

GBPUSD (Great Britain Pound – US Dollar)

Mildly bearish was the last week for GBPUSD, as it opened at 1.2732 and closed at 1.2720. The impression that the markets have made for both the Fed and the Bank of England is that their behavior will be hawkish in the coming period, with no rate cuts. As far as the Fed is concerned, the most likely scenario is for a rate cut to start in September while the Bank of England is expected to keep interest rates at 5.25% on June 20th. Although UK inflation has recently decreased, it has not fallen as much as expected, reducing the likelihood of multiple rate cuts by the BoE during the year. Additionally, uncertainties related to the early July general election have influenced the economic outlook negatively. As per the UK economy announcements, we saw last week, these were not encouraging as manufacturing was announced below market expectations and so were like-for-like retail sales. In the current week interest will shift mainly to the announcements of the United States, inflation, and FOMC.  If the hawkish perception persists for the Fed, the US dollar will likely strengthen further and therefore we may try sell positions this week.

USDJPY (US Dollar – Japanese Yen)

USDJPY was bearish last week, opening at 157.12 and closing at 156.275. The United States has shown a strong picture in its labor market, which is why the US dollar has strengthened as markets believe this situation allows for high interest rates for the coming months without the risk of a deterioration in the economy. However, the exchange rate has had a slightly downward trend, and this is mainly due to the strengthening of the Japanese currency. On Tuesday, the deputy governor of the Bank of Japan, Ryozo Himino, reiterated concerns about the negative impact of a weak yen on the economy. His remarks hinted that the BoJ might be preparing for another direct intervention in the currency markets to support the yen. Such a potential intervention was matched by market expectations about the Bank of Japan’s decision on interest rates and monetary policy next Friday and in the following sessions. The central bank is widely expected to keep interest rates unchanged, while traders are closely monitoring whether the bank will reduce its monthly bond purchases. BoJ head Kazuo Ueda reaffirmed last week that the central bank will gradually scale back its essential balance sheet, though the timing remains uncertain. Meanwhile, BoJ board member Toyoaki Nakamura cautioned that the country might miss the 2% inflation target next year if consumption stagnates, dampening hopes for interest rate hikes in the future. Regardless of the strength of the U.S. dollar, a situation favorable to Japan’s currency is developing, and therefore we may try sell positions this week.

EURJPY (Euro – Japanese Yen)
Bearish was last week for EURJPY which opened at 170.42 and closed at 169.31. On the one hand, we have the Eurozone and the rate cut made last week by the European Central Bank but also the hawkish stance that seems to prevail. That means we’re probably not going to see another rate cut before autumn. Given that there have been analysts who thought there would be successive rate cuts, these developments logically strengthen the euro. However, it seems that the strength of the Japanese currency is greater. On Tuesday, BoJ Deputy Governor Ryozo Himino expressed concerns about the weak yen’s impact on the economy, hinting at possible intervention in currency markets. The BoJ is expected to keep interest rates unchanged, with traders watching for potential reductions in monthly bond purchases. We will choose sell positions for one more week.

EURGBP (Euro – Great Britain Pound)

Last week was bearish for the EURGBP, as it opened at 0.8508 and closed at 0.8489. At the moment circumstances are favorable for both the euro and sterling as the central banks of the two economies appear to have a hawkish stance.  However, sterling has taken a lead after the European Central Bank cut interest rates by 0.25% last week; the Bank of England still keeps them at 5.25%. It is likely that the Bank of England will not cut interest rates at its June meeting and the European Central Bank will not cut interest rates until the autumn. The exchange rate has come close to a very significant support on a technical level so we can rule out upward reactions. Since the fundamentals show a decline and the technical analysis an increase, we will prefer to stay out this week.

USDCAD (US Dollar – Canadian Dollar)

Strongly bullish was the last week for USDCAD, as it opened at 1.3628 and closed at 1.3765. This move makes perfect sense since all the main factors that influence the pair have contributed to it.  The US dollar has had a rebound due to the strong labor market results the U.S. announced last week.  But the weakening of the Canadian dollar was strong after the Bank of Canada decided to cut interest rates by 0.25%, from 5% to 4.75%. This decision was supported by recent data showing ongoing disinflation towards the target, weaker-than-expected GDP growth in the first quarter, and an uncertain labor market. At his press conference on Thursday, Bank of Canada’s head Tiff Macklem emphasized that interest rate decisions will be assessed on a meeting-by-meeting basis. He noted that the timing of any further cuts will depend on data, stating that the economy does not require policy to be as restrictive. Macklem also mentioned that their forecast predicts inflation will ease towards the BoC’s target. In addition, the Canadian dollar was further hurt by the decline in oil prices we saw last week. Canada’s dollar is under pressure and we’re keen to try buy positions this week.

USDCHF (US Dollar – Swiss Franc)
The USDCHF was bearish last week as the opening price was at 0.9025 and the closing price was at 0.8966. The exchange rate had a second week in a row of impressive decline, and that happened in a week when the US dollar strengthened. The Swiss franc has shown relative strength against the US dollar and this performance was driven by expectations that the Swiss National Bank might intervene in the currency markets to support the franc and curb inflation, which has been influenced by competitive Swiss exports. The Swiss National Bank initiated an easing cycle during its March meeting, lowering rates by 0.25% to 1.5%. Currently, the market anticipates a more than 50% probability of another rate cut at the upcoming meeting in June. Inflation in Switzerland was unchanged at 1.4% on an annual level and a monthly level rose by 0.3% against the 0.4% that markets had expected. The unemployment rate also remained unchanged at 2.3%. The recent strength of the Swiss franc may carry on so we may try sell positions this week.

AUDUSD (Australian Dollar – US Dollar)

Bearish was the last week for AUDUSD, which opened at 0.6638 and closed at 0.6579. Data last week showed that Australia’s economy grew by 0.1% in the first quarter, down from 0.3% in the previous quarter and below the market expectations of 0.2%. Markets see almost no likelihood of the Reserve Bank of Australia reducing interest rates this year and RBA head Michele Bullock stated they would act if inflation remains high but noted that risks for rates and inflation are currently balanced. Michele Bullock also commented that she expects Q1 GDP growth to be quite low. She emphasized that the central bank would take action if the inflation does not return to the target band, indicating readiness to hike rates if inflation remains persistent. All of this in some circumstances would have meant a strengthening of the Australian dollar but the great momentum of the US dollar on Friday had this very downward weekly effect that we saw. The Australian dollar found some support from the China news which was encouraging on both manufacturing and exports and the trade balance. It is not excluded that the exchange rate will react upward and for this reason, we may try buy positions this week.

Bitcoin

Last week, Bitcoin was bullish and closed at $69,640 with profits of 2.79%. The beginning of the week had heavy bullish trends for Bitcoin. The improved economic sentiment after a series of announcements (manufacturing in the USA, interest rate cuts in the Eurozone area) helped the risky asset classes such as the cryptos. Early on Friday, Bitcoin tried to break out the recent all-time high price as the approval of the Ethereum ETF in late May set the crypto market up for a blistering start to June 2024. However, the NFP report in the USA caused strong corrective trends in most of the cryptos. Non-Farm payrolls surged by 272,000, significantly surpassing economists’ expectations of a 185,000 increase and this caused an impression that the Fed may keep interest rates high for a longer period. High interest rates can potentially cause a slowdown in growth which is not favorable for the crypto assets. Until last week, Bitcoin was not able to apply a new all-time high price and when it tries to, the corrections that follow are strong. Probably some technical and profit-taking reasons appear. 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.