01/07/2024

General Comment

The markets were slightly corrective last week, with low volatility even though there was enough economic news that could lead to bigger moves.  The two economic announcements that markets expected mostly through the week were U.S. GDP for the first quarter of the year and last month’s personal consumption expenditures which is the Fed’s favorite measure of inflation. In both these announcements, there were no particular surprises. US GDP growth in the first quarter of 2024 was reported at 1.4% as the markets expected. Similarly, May’s personal consumption expenditures rose 2.6%, again verifying market expectations. Without big surprises, therefore, it makes sense that there was no high volatility and no clear directionality.

Comments from Federal Reserve officials indicate a careful attitude towards reducing interest rates. They stress a cautious stance, with Fed Governor Michelle Bowman and Atlanta Fed President Raphael Bostic emphasizing the need for inflation to reach 2% before contemplating rate cuts. They pointed out persistent inflation risks and signaled that the Fed is in no hurry to lower rates. Perhaps these statements and the stance of central bankers weighed and did not allow markets to develop upward momentum.

The market trends also reflected political and geopolitical influences. The initial debate between President Joe Biden and former President Donald Trump had minimal impact but market sentiment perceived Trump’s performance positively. During Thursday’s debate, Joe Biden stumbled at least five times, causing turmoil among Democrats who are now actively discussing how and whether they can replace him as a presidential candidate at this stage of the election season. Certainly, the markets are looking at the US election and the outcome, trying to figure out who and why might be friendlier.

In Europe, things remain critical after the recent result of the European elections. France’s parliamentary election is crucial for both the nation and Europe, marking one of its most significant in decades. The outcome of the first round of the early parliamentary elections in France, triggered by President Emmanuel Macron following his party’s crushing defeat in the European elections, has certain historically significant characteristics. Marine Le Pen’s National Rally achieved a decisive victory in the first round of France’s legislative election and is now aiming for an absolute majority. Meanwhile, President Emmanuel Macron and other opponents have begun strategizing to prevent the far-right from gaining power. Projections from five polling companies on Sunday night indicated that the National Rally could secure up to 34% of the vote. The stakes are high as the outcome will shape France’s policy direction on critical issues such as economic reforms, social policies, and its role within the European Union.

As we said above, U.S. equity markets moved slightly in correction last week, somewhat more positive was the week for some European indices. Yields on longer-term Treasuries rose throughout the week. Anticipated Fed rate cuts in September led to a modest decline in short-term Treasury yields, causing the yield curve to steepen. The yield on the 10-year U.S. Treasury bond closed the week just above 4.39%. As far as the foreign exchange market is concerned, the US dollar has had stabilizing trends while the continued weakness of the Japanese currency continues to impress, as we will see in detail below. The week was slightly bullish for many commodities such as gold and oil while copper continued its downward trend. Finally, the downward trend for Bitcoin and most cryptocurrencies continues, as they have completed three consecutive weeks of decline.

The week that has just begun contains several important announcements that may shape the trend and volatility of the markets. The minutes from the June 11-12 meeting of the U.S. Federal Reserve will be released on Wednesday and the labor market announcement (Non-Farm Payrolls) in the United States on Friday. The Fed’s minutes will increase our awareness of the central bank’s intentions while the labor market outcome will show the resilience of the U.S. economy and whether it can withstand an extension of high interest rates. The week is also important for the Eurozone as on Tuesday inflation and the unemployment rate are announced and important will be announcements of PMI indicators for manufacturing and services of the world’s largest economies.  Markets will certainly keep their eyes on the outcome of the French election and the upcoming US elections in November.

SP500

The US SP500 index was practically neutral last week as it closed at 5,476.42 points and marginal losses of 0.01%. SP500 had a profitable June and an impressively profitable first half with profits exceeding 14%. These actions coincided with a surge in market enthusiasm for artificial intelligence, which fueled a significant rally in Nvidia and other technology stocks. This excitement was driven by advancements and breakthroughs in AI technologies, leading investors to pour money into companies at the forefront of this innovation. Other tech stocks also benefited from this trend, reflecting the broader market’s optimistic outlook on the future impact of artificial intelligence. Another source of optimism comes from the Fed and the expected interest rate cuts. Markets perception now is for two rate cuts within the year as according to the CME FedWatch tool, the probability of a first cut in September is at 56.3%. Last week’s results made no significant difference. The market was primarily focused on two economic announcements throughout the week: the U.S. GDP for the first quarter and the previous month’s personal consumption expenditures, the Fed’s preferred inflation measure. Both reports met expectations without any major surprises. The U.S. GDP growth for Q1 2024 was 1.4% and May’s personal consumption expenditures increased by 2.6%, both matching expectations. This week the focus will be on the FOMC meeting minutes release on Wednesday and the Non-Farm Payrolls announcement on Friday. Of course, investors’ eyes are also on the US election in November. The uptrend seems strong with several new all-time highs in the last weeks so we may try long positions for the current week.

DAX40

The German DAX40 index was bullish last week, closing at 18,235.45 points, with profits of 0.40%. It was the third consecutive bullish week for DAX40 and it seems like a message that the recent political crisis in Germany & Europe has been digested by the markets without important concerns. It also makes sense that this profitable week came along with a series of negative results to the German economic announcements. Business climate, current assessment & expectations were announced well below market expectations. Consumer confidence dived into a deep negative territory while the unemployment rate in June climbed to 6%, the highest rate since May 2021. However, the sentiment was positive for three weeks and the DAX40 managed to stay above the milestone price of 18,000 points, staying about 3% below its all-time high. One issue is the latest result of the French election but the bullish beginning of the current week means that the markets do not really worry. The PMIs for the German economy will give us a better idea about the manufacturing and the services sectors but we’re keen to try long positions for one more week.

FTSE100

The British FTSE100 index moved upward last week, closing at 8,179.3 points, earning about 0.63%. Investors also positioned themselves ahead of the UK’s general election on Thursday, where the Labour Party is anticipated to win. This potential shift in political power has led to increased market activity as investors assess the implications of a Labour victory in various sectors. Market participants are particularly focused on potential changes in economic policies, regulatory frameworks, and government spending priorities that a Labour government might implement. In the first quarter, the UK economy grew by 0.7%, outpacing the initial forecast of 0.6% and marking its strongest growth in over two years. The recent inflation announcement of 2% created an optimism that the Bank of England may start cutting interest rates soon enough but it seems that the political uncertainty prevails for the moment. It’s difficult to estimate how the markets will react to the election result but at least the uncertainty will end so we prefer long positions for the current week.

Gold

The previous week was bullish for gold, with the next month’s futures closing at $2,339.6 and profits of 0.36%. The Personal Consumption Expenditures (PCE) Index, the Fed’s favored measure of inflation, remained unchanged from April to May. This stabilization in inflation suggests that the Fed’s monetary policies are effective, raising the prospects of interest rate cuts later this year. Markets anticipate two interest rate cuts within the year with the first one, most likely to take place in September. Expectations of lower interest rates globally have supported the gold. Anticipated rate cuts by the Bank of England and similar reductions by the People’s Bank of China to stimulate economic growth have contributed to the positive outlook for gold. Gold has been confined to a narrow trading range in the last five weeks but continues to hold strong above the critical $2,300 support. Additionally, the U.S. dollar which had no significant changes last week, helped in these consolidations of gold prices. The last five weeks seem like a pause to the sharp bullish trend of gold that started in February and maybe it’s a situation of gathering more fuel for its trend continuation. We may try long positions this week.

US Oil

Last week was bullish for oil with the next month’s futures closing at $81.54, with profits of 1%. Geopolitical risk is a factor that has contributed significantly to the rise of oil prices during the last weeks. Israel has deployed troops to its northern border in response to escalating attacks from Lebanon. Markets consider the case of a direct military confrontation between Hezbollah and Israel which may lead to a dangerous escalation in the Middle East. It raises concerns about regional energy supplies, particularly with the possibility of Iranian involvement. As per the demand, the US stock announcements of the previous week indicate a decline. According to the American Petroleum Institute, the weekly crude oil stocks increased by 0.91 million barrels, and according to the US Energy Information Administration, the change in the number of barrels in stock of crude oil and its derivates increased by 3.59 million. Concerns about the support raise the oil prices, lower demand pushes the prices lower but it seems that currently the first factor prevails. The neutral US dollar last week was a factor that did not affect the energy markets to a remarkable extent. We prefer long positions for one more week.

EURUSD (Euro – US Dollar)
Last week was bullish for EURUSD as it opened at 1.0683 and closed at 1.0713. The U.S. dollar had stabilized during the week, so the exchange rate had the chance to recover slightly after three consecutive downward weeks.  The macroeconomics in the United States resulted in what markets expected and so the dollar did not make sharp moves with high volatility.  There were no major economic announcements in Europe, so developments around the euro centered around the next decisions of the European Central Bank and around the political crisis and elections in France. ECB Governing Council member Olli Rehn hinted at the possibility of two additional interest rate reductions later this year. If this is confirmed, we may see the euro under pressure in the future, given the Fed’s hawkish stance. Marine Le Pen’s National Rally secured a significant victory in the first round of France’s legislative election and is now targeting an absolute majority. In response, President Emmanuel Macron and other opponents are strategizing to block the far-right from gaining power. According to projections from five polling companies, the National Rally could receive up to 34% of the vote. The current week is important for the Eurozone economy as on Tuesday we will learn about inflation and unemployment and the Fed’s minutes release of Wednesday’s announcement of the United States labor market into Friday will largely determine the path of the exchange rate. We may try sell positions this week.

GBPUSD (Great Britain Pound – US Dollar)

Neutral was the last week for GBPUSD, as it opened and closed around 1.2640. The U.S. dollar did not move much last week and the sign of developments for the sterling was neutral, so the exchange rate did not move much. In the first quarter, the UK economy expanded by 0.7%, which exceeded initial projections of 0.6%, and marked its most robust growth in more than two years. This development probably balanced the political uncertainty that exists in the United Kingdom. The UK stands on the verge of a notable political shift before the July 4 elections, with polls forecasting a decisive victory for Keir Starmer’s Labour Party and a substantial setback for Rishi Sunak’s Conservatives, who have held power for 14 years. In terms of interest rates and monetary policy, markets believe that the first rate cut by the Bank of England will not be delayed since the inflation target of 2% has already been met. Such a development, given that markets, do not expect a similar rate cut in the United States before September, could push the exchange rate lower so we prefer sell positions this week.

USDJPY (US Dollar – Japanese Yen)

USDJPY was bullish last week, opening at 159.75 and closing at 160.85. The dollar was not particularly strong last week, but that did not stop the exchange rate from continuing to rise. This rise has triggered a new high that we haven’t seen since the mid-80s. The Bank of Japan continues its very loose monetary policy and very low interest rates while continuing to purchase big quantities of bonds. Japan named a new senior diplomat for foreign exchange on Friday amid the yen’s decline to such low levels against the dollar. This has raised expectations of Tokyo intervening in the market soon to support the weakened currency. Atsushi Mimura, an experienced figure in financial regulation, takes over from Masato Kanda, who earlier this year orchestrated the largest yen-buying intervention on record and actively warned speculators against excessively devaluing the Japanese currency. While a weaker yen benefits Japanese exporters, it poses challenges for policymakers by raising import expenses, contributing to inflationary pressures, and putting pressure on households. However, the scenario of Japan’s interventions in the currency market has been heard recently many times and the fact is that whenever it has happened, it has caused some downward spikes in the exchange rate but quickly this distance is covered. Considering that this kind of intervention cannot change the trend we prefer buy positions for one more week.

EURJPY (Euro – Japanese Yen)
Bullish was last week for EURJPY which opened at 170.65 and closed at 172.32. The euro is not in its best shape since the European Central Bank started its rate-cutting cycle and Europe is going through a political crisis following the recent outcome of the European elections and the uncertainty that followed. However, the exchange rate continued its upward course, reaching a new high of several years, driven by the great weakness of the Japanese currency. The Bank of Japan continues its very loose monetary policy and very low interest rates. Even though there are many voices and signs that there may be new currency intervention from Japan, markets do not seem to be budging and so the upward trend continues. We will follow the trend by opening buy positions for one more week.

EURGBP (Euro – Great Britain Pound)

Last week was bullish for the EURGBP, as it opened at 0.8450 and closed at 0.8472. The exchange rate continued last week’s bullish reaction after it appeared that 0.85 is considered an oversold price band. Europe, with its political instability and the start of the interest-rate cycle, is advocating a relatively weak euro. Sterling is in the same phase as the recent inflation announced at 2% allows the Bank of England to start cutting interest rates. But interest rates are already higher in the UK compared to the Eurozone, and it may be that this difference is tilted in favor of sterling. Sell positions is our selection for the current week.

USDCAD (US Dollar – Canadian Dollar)

Bearish was the last week for USDCAD, as it opened at 1.3689 and closed at 1.3678. The exchange rate was able to continue its downward course for the third week in a row, even if the US dollar had some strengthening. There were two key factors that helped the Canadian dollar develop this momentum. The main reason was the inflation announcement on Tuesday. According to this announcement, in May inflation in Canada, as expressed by the Consumer Price Index, was 2.9%, significantly above the 2.6% that markets had expected and above the previous month’s 2.7%. These figures underscore the Bank of Canada’s challenge in managing inflationary pressures while promoting economic stimulus, a dilemma that was evident in their recent reluctance to cut interest rates during their latest meeting. The second reason for the strengthening of the Canadian dollar was the continued rise in oil prices. Oil and Canada’s currency usually have a positive correlation. This downward momentum that has developed at USDCAD is not excluded from testing the critical support of 1.3590 and for this reason, we will choose sell positions this week.

USDCHF (US Dollar – Swiss Franc)
The USDCHF was bullish last week as the opening price was at 0.8921 and the closing price was at 0.8986. The U.S. dollar has had some strengthening, but the exchange rate has risen further in relation to this strengthening as the echo of the recent rate cut by the Swiss National Bank is still affecting the Swiss franc. The Swiss National Bank reduced its interest rate by 0.25% in the previous week and policymakers cited decreasing underlying inflationary pressures as they aimed to uphold suitable monetary conditions. In May, inflation in Switzerland remained steady at 1.4%. On the other hand, markets believe that there will be no rate cut by the Fed before at least September, so this Swiss decision was of paramount importance. The KOF Leading Indicator was announced on Friday at 102.7, above market expectations and so there was a slight pause in the upward rally. This upward rally will gain more momentum if the exchange rate manages to exceed the critical price of 0.90. We prefer buy positions for one more week.

AUDUSD (Australian Dollar – US Dollar)

Bullish was the last week for AUDUSD, which opened at 0.6634 and closed at 0.6669. It was the third week in a row for the pair with the headline inflation announcement in Australia. In May, Australia’s inflation as it is expressed by the Consumer Price Index rose by 4%, up from 3.6% in April and surpassing market forecasts of 3.8%. This increase came after Reserve Bank of Australia policymakers mentioned discussing a rate hike in their recent meeting. Currently, markets are estimating a remarkable probability of an RBA rate increase in August following this data, while ruling out any possibility of an RBA rate cut for the remainder of the year. It makes sense, then, that when the United States is expected to cut interest rates once or twice in the year, AUDUSD has been building this upward momentum for three weeks. This week, the U.S. dollar has more important announcements, with the Fed’s minutes on Wednesday and the labor market (NFPs) on Friday. The hawkish RBA seems for the moment an unbeatable factor for the AUDUSD so we prefer buy positions for one more week.

Bitcoin

Last week, Bitcoin was bearish and closed at $62,676 with losses of 0.76%. For three consecutive weeks, Bitcoin was in decline. There was a strong bullish reaction during the weekend but the weekly negative sign remained. Mt. Gox, the Japanese Bitcoin exchange that went bankrupt many years ago following a significant hack, is finally preparing to repay its creditors. In the 2011 hack, up to 950,000 bitcoins were lost when the cryptocurrency was valued at a fraction of its current price. About 140,000 of these coins have been recovered, which, at today’s market value, equates to approximately $9 billion being returned to the original owners. Also, the German Federal Criminal Police Office (BKA) transferred $24 million in Bitcoin to cryptocurrency exchanges Kraken and Coinbase, following similar transactions totaling $195 million on June 19 and 20. The purpose of these transfers is unclear, but analysts speculate they may be preparing for a sale. Another reason for last week’s downtrend was the three-day tech selloff, driven by Nvidia, adding additional downward pressure on digital assets. However, the weekend recovery was impressive. On Sunday, Bitcoin increased by 2.9%, building on an almost 1% gain from Saturday. The US PCE announcement on Friday calmed down the markets, and the victory of Donald Trump in the recent debate helped to this recovery. Trump is considered more friendly to crypto markets. Although the current week started with strong bullish trends, we believe that the downtrend of the last 25 days is strong and still stands on so 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.