15/07/2024

General Comment

The past week has been another bullish week for most equity markets worldwide. The primary reason was the renewed expectation that the US Federal Reserve (Fed) might reduce its interest rates twice this year, compared to the single rate cut anticipated by the markets a few weeks ago. This expectation was strongly supported by the confirmation of disinflationary trends in the US economy, as the Consumer Price Index (CPI) increased less than predicted in June. According to the US Bureau of Labor Statistics (BLS), CPI in the US fell to 3% in June from 3.3% in May. This figure was below the market expectation of 3.1%. The annual core CPI, which excludes volatile food and energy prices, increased by 3.3%, which was also lower than the market forecast and May’s rise of 3.4%. On a monthly basis, the CPI decreased by 0.1%, while the core CPI also rose by 0.1%.

After these updates, markets anticipate two or even three rate cuts in the second half of the year. According to the CME FedWatch tool, there is a 96% probability for the first rate cut to take place until September and a 50% that there will be three rate cuts until the end of 2024.

Furthermore, Jerome Powell, Chairman of the Fed, presented the Semi-Annual Monetary Policy Report and answered questions before the House Financial Services Committee as a part of his Congressional testimony. Key points from his remarks included his view that the current Fed policy is restrictive. Jerome Powell emphasized that the Committee needs to observe more progress toward the Fed’s 2% inflation target before contemplating an interest rate reduction. Although his message was consistent with previous statements, he did not provide any timeline for a potential rate cut but the markets became far more positive after the inflation announcement.

The Producer Price Index for the United States was announced on Friday. PPI increased by 2.6% year-over-year in June, surpassing the market expectation of 2.3% and following a 2.2% rise in May. The annual core PPI, excluding food and energy prices, rose by 3% during the same period, exceeding April’s increase and the market expectations of 2.3% and 2.5%, respectively. On a monthly basis, the PPI rose by 0.2%, while the core PPI increased by 0.4%. This development raised some concerns in conjunction with the negative result of the Michigan Consumer Sentiment Index, which was announced at 66 versus 68.5. Still, the weekly positive sentiment did not change significantly.

Throughout the week, there was no news from the European Central Bank. Klaas Knot (current President of the Dutch Central Bank De Nederlandsche Bank) stated that there was no justification for a rate cut this month.  However, he did not rule that out in September. There were no major announcements on the Eurozone economy this week.

In recent weeks, markets have been focusing on politics as well. The November elections in the United States are considered to be particularly important as well as the political uncertainty in Europe and especially in France with the possibility of an ungovernability being quite strong. The recent assassination attempt on former President Donald Trump has sent shockwaves through both the political landscape and financial markets. On July 14, 2024, an armed individual attempted to breach security at a Trump rally in Florida, resulting in heightened security measures and a temporary halt to the event. While Trump was unharmed, the incident has sparked concerns about political stability and potential repercussions for market confidence. Investors are wary of the increased political tension and the possibility of further unrest. The assassination attempt underscores the fragility of the current political climate and its potential impact on economic stability. The markets are also trying to assess the latest statements by US President Joe Biden on a ceasefire agreement between Israel and Hamas. While the development seems at first glance positive, the markets have an attitude of cautious optimism.

Most major equity indices in Europe and the United States had a positive result last week. The sign in the commodities markets was mixed with gold rising but oil and copper had losses. Bond yields continued to decline for a second week in a row, with the U.S. 10-year bond yield closing on Friday just above 4.18%. As far as the foreign exchange market is concerned, the US dollar was under intense pressure for the second week in a row, touching prices that we had not seen for several months. In contrast, the euro, sterling, and the Australian dollar were bullish. The yen was also particularly strong since according to information there was a new intervention by the Japanese authorities to support Japan’s currency.

Within the week that has just begun, the spotlight will largely leave the United States economy and shift to Europe. The European Central Bank’s decision on interest rates and monetary policy is expected on Thursday, followed by a press conference by Christine Lagarde. Markets do not expect a rate cut but there will be more information about the bank’s future plans. The only notable announcements for the US economy are retail sales on Tuesday, while markets will be particularly interested in announcing inflation in the Eurozone and the UK.

SP500

The US SP500 index was bullish last week as it closed at 5,615.34 points and profits of 0.86%. Adding to the complex market dynamics, the latest inflation announcement indicated a 3% year-over-year increase in the United States. This cooling inflation rate has bolstered investor confidence, cementing expectations for the Federal Reserve to implement two or three rate cuts by the end of 2024. As a result, US stocks have extended this year’s rally, with lower inflation and anticipated monetary easing providing a favorable environment for equities. On Wednesday, Federal Reserve Chairman Jerome Powell underscored the urgent need to keep a close watch on the deteriorating labor market. He also expressed confidence in the ongoing downward trend of inflation. Previously, Powell had stressed the importance of acquiring additional data to bolster confidence in the inflation outlook, and his recent remarks align with this cautious yet optimistic stance. According to Friday’s announcement, the Michigan Consumer Sentiment Index for July fell short of expectations, registering at 66 compared to the forecasted 68.5 and the previous month’s 68.2. Maybe it is another indication that the rate cuts should occur soon enough. Investors during the last few days have had another headache in the already complex financial environment. Markets are expected to react to the attempted assassination of former President Donald Trump over the weekend, an event that could have dire implications for the US political landscape. Despite the incident, Trump is still expected to attend the Republican National Convention, which kicks off Monday in Milwaukee. This comes as he leads President Joe Biden in national polls ahead of the November election. Investors closely monitor these developments, aware of the potential impact on market stability and future economic policies. The SP500 futures opened on Monday without any signs of panic or nervousness and since the trend is obviously bullish, we may try long positions this week.

DAX40

The German DAX40 index was bullish last week, closing at 18,748.18 points, with profits of 1.48%. DAX40 approached the all-time high price of 18,893 that occurred about two months ago. This result came after four consecutive profitable weeks for the index. The globally positive economic sentiment has affected the European markets too. The perception of the markets is that most of the central banks, including the ECB and Fed, have entered the cycle of aggressive interest rate cuts, based on the reduction of inflation, according to the latest reports. As per the macroeconomic results for the German economy that were announced last week, the trade balance in May touched 25 billion euros and it was well above the market expectations. Inflation in Germany, expressed by the Harmonized Index of Consumer Prices was announced for the previous month at 2.5% and the Wholesale Price Index dropped by 0.3%. All the above have shaped a positive environment but we believe that it is not easy to see a fifth consecutive bullish week so we prefer short positions for one more week.

FTSE100

The British FTSE100 index moved upward last week, closing at 8,236.5 points, earning about 0.32%. After the recent results of the UK elections, the political stability seems to return. According to most of the market analysts, the winning Party will be market-friendly enough without extreme actions that could create concerns. The focus is now mainly on the Bank of England and the possible dates of interest rate cuts. Markets try to translate the BoE officials’ statements. Chief Economist Huw Pill stated on Wednesday that it remains an open question whether the time has come to cut the interest rate, noting that there is still work to be done before the persistent component of domestic inflation is resolved. Monetary Policy Committee member Catherine Mann noted on the same day that overall progress on inflation has been uncertain and warned of a potential rebound in headline inflation figures. Mann emphasized the need to see sustained slower service inflation, stating that until there is a deceleration in service prices, she is not in a position to support a rate cut. The macroeconomic data of the previous week were mostly positive for the UK economy with May’s GDP rising by 0.4% and this was another source of optimism for a positive sentiment. If FTSE100 is able to exceed the resistance of 8,315 points, then a new uptrend may occur so we may try long positions this week.

Gold

The previous week was bullish for gold, with the next month’s futures closing at $2,420.7 and profits of 0.96%. Gold prices completed three weeks in a row of profits. This surge was driven by the drop in U.S. inflation, which spurred a market rally. The latest Consumer Price Index report released on Thursday showed a decrease in inflation, bolstering the belief that the Federal Reserve may soon start an aggressive rate-cut cycle. This has increased investor confidence in gold as a stable investment amid the changing economic landscape. Federal Reserve officials have recently adopted a notably more dovish stance, bringing their outlook more in line with market expectations of upcoming rate cuts. This shift in tone suggests a growing consensus within the Fed that the current economic conditions, characterized by cooling inflation and potential labor market softening, may warrant a reduction in interest rates sooner rather than later. The dovish approach has been welcomed by investors, who are anticipating a more accommodative monetary policy that could support continued economic growth and stability. Besides the economic landscape, global economic uncertainties continue to enhance gold’s reputation as a safe-haven asset. Persistent geopolitical tensions and political uncertainty contribute to the gold’s attractiveness. The obvious target of the buyers is the price of $2,450 which will bring gold close enough to the all-time highs. We may try long positions this week.

US Oil

Last week was bearish for oil with the next month’s futures closing at $82.21, with losses of 1.14%. The first three days of the week were clearly bearish but on Thursday oil prices strengthened following the low US inflation figures for June, which have raised the possibility of a Federal Reserve rate cut in September. Reduced borrowing costs would bolster the U.S. economy, thereby enhancing the demand for crude oil. The oil market faced increased uncertainty as OPEC and the International Energy Agency offered conflicting demand forecasts. OPEC remains optimistic, expecting demand to grow by 2.2 million barrels per day this year due to robust economic growth. On the other hand, the IEA predicts a smaller rise, under 1 million barrels per day, attributing this to a slowing global economy, particularly in China. According to the American Petroleum Institute, the weekly crude oil stocks were reduced last week by 1.9 million barrels, and according to the US Energy Information Administration, the weekly measure of the change in the number of barrels in stock of crude oil and its derivates was found at -3.44 million barrels last week. Both measures indicated high demand. Despite this correction that we saw last week, the summer demand, highlighted by significant stock reductions, is anticipated to support prices. Additionally, the possibility of interest rate cuts later in the year could boost economic activity and increase oil demand. We may try long positions this week.

EURUSD (Euro – US Dollar)
Last week was bullish for EURUSD as it opened at 1.0802 and closed at 1.0905. The U.S. dollar had strong losses for the second week in a row since the prevailing perception in markets is that the Fed has the scope to start cutting interest rates from the fall onwards. Two factors help this perception. One is inflation, which has dropped to 3% according to the last announcement, and the second factor is that high interest rates have already begun to cause side effects in the U.S. economy, especially in the labor market. In Europe, there has been a quiet week over the intentions of the European Central Bank even though the meeting to decide on interest rates and monetary policy is next Thursday. The most likely scenario is that there will be no action at this meeting without of course excluding surprises. Europe also seems to be finding political calm after the second round of elections in France, although the scenario of ungovernability is not ruled out. We may try buy positions for one more week.

GBPUSD (Great Britain Pound – US Dollar)

Strongly bullish was the last week for GBPUSD, as it opened at 1.2796 and closed at 1.2988. Clearly the U.S. dollar and its weak picture lately is a key cause of the upward trend in the exchange rate. GBPUSD has touched the milestone price of 1.30 and the last time it was above that value was a year or so back. The market has been convinced that the United States may make two or even three rate cuts in the year as inflation shows that it is declining favors this scenario. It is not ruled out that soon enough the Bank of England would do the same, but that when it was relatively expected and had been absorbed by the markets. The macroeconomic results announced last week in the UK were positive too. GDP rose by 0.4% last month while industrial production and manufacturing may not have been able to meet market expectations but were in positive territory. On Wednesday, the Consumer Price Index and the Producer Price Index for the UK are announced, and we may have a better picture of inflation in the country. We prefer buy positions for one more week.

USDJPY (US Dollar – Japanese Yen)

USDJPY was bearish last week, opening at 160.68 and closing at 157.86. The U.S. dollar fell for the second week in a row, mainly due to the perception that the U.S. central bank may start from September interest rate cuts. This fact was further reinforced after the announcement of inflation in the United States which declined to 3% last month. But the Japanese currency also had major reasons for strengthening last week. On Thursday, the USDJPY soared to 157.42, amid indications of unusually high trading volumes, sparking speculation of intervention from the Japanese Ministry of Finance. Daily operations data from the Bank of Japan on Friday indicated that the central bank had spent between 3.37 trillion and 3.57 trillion yen on purchases on Thursday, marking its intervention in the market less than three months after its previous one. Chief currency diplomat Masato Kanda did not confirm if the government was involved in the yen’s rebound. These rumors of intervention or one possible intervention helped the yen to recover significantly. However, we have seen this several times in recent years, and after a few days the exchange rate returns to its upward trend. That is why we will choose buy positions this week.

EURJPY (Euro – Japanese Yen)
Bullish was last week for EURJPY which opened at 173.59 and closed at 172.18. The euro has taken a strange course lately since investors were confident that interest rate cuts would continue after the first reduction in June, but it seems that this will not happen before September. Thus, the euro has regained some strength against its main competitors. However, the yen was quite strong last week, as at the end of it, there was probably a new intervention to support the currency by the Japanese authorities. Market analysts speculated that policymakers seized the opportunity presented by the U.S. inflation data to intervene in the market. After that, we saw the first down week for the pair after three consecutive up weeks. The experience of the last period though has shown that the results of these interventions do not last for long so we will choose buy positions this week.

EURGBP (Euro – Great Britain Pound)

Last week was bearish for the EURGBP, as it opened at 0.8437 and closed at 0.8395. The two central banks of the Eurozone and the UK appear to be in a cycle of interest rate cuts as inflation in both economies is de-escalating. The European Central Bank launched a cut in June and the Bank of England is likely to follow soon enough. However, sterling has recently been significantly stronger than the euro. The political stability that seems to be returning to the United Kingdom after the recent election and the result that gives a broad majority to the Labour Party is an important factor. Another factor is the positive macroeconomic results that the UK has been showing lately. Under these circumstances, the exchange rate was found at low prices that we had not seen since August 2022. The trend seems to be strong, and we will follow it with sell positions this week.

USDCAD (US Dollar – Canadian Dollar)

Bearish was the last week for USDCAD, as it opened at 1.3643 and closed at 1.3634. For the fifth week in a row, the exchange rate continued its downward trend, breaking the support at 1.3590, but was unable to keep below it and returned above 1.36. Its US dollar weakness has been the key factor in this downtrend. After the announcement of inflation in the United States at 3%, the market is dominated by scenarios of interest rate cuts by the Fed two or even three times in the year. This perception of markets balances to a large extent the recent rate cut by the Bank of Canada that weakened the CAD. There are serious signs that the Bank of Canada may be making further rate cuts this year, and that is why the weakness of the US dollar was largely not seen last week. Another reason the Canadian dollar held back was a correction in oil prices. The Canadian dollar with so many problems performed better than the US dollar but the dovish Bank of Canada may prevail to the markets’ sentiment and this will probably make us choose buy positions this week.

USDCHF (US Dollar – Swiss Franc)
The USDCHF was bearish last week as the opening price was at 0.8956 and the closing price was at 0.8943. The Swiss economy had no major economic announcements last week, so the exchange rate moved mainly through developments in the dollar and the United States as well as market estimates for the next moves of the Swiss National Bank. Switzerland’s inflation rate fell to 1.3% in June. Also, last month, the Swiss National Bank reduced the key interest rate by 0.25%. Meanwhile, the dollar has been declining since the last week of June, driven by increasing speculation that the Fed may reduce two or three times the interest rates within the year. Interest rates in Switzerland are already low and are likely to lower further and that is a fact that in itself could weaken the franc regardless of the dollar. We may try buy positions this week.

AUDUSD (Australian Dollar – US Dollar)

Bullish was the last week for AUDUSD, which opened at 0.6735 and closed at 0.6783. There has been a strong uptrend for the AUDUSD for five consecutive weeks due mainly to the weakness of the US dollar. This trend continued last week due to the low inflation announced in the United States. Low inflation gives the Fed the necessary conditions to start cutting interest rates soon enough. On the contrary, the Reserve Bank of Australia (RBA) is opposed to lagging in the global rate-cutting cycle due to ongoing domestic inflation.  A few weeks ago, there was even the possibility of interest rate hikes. Under these circumstances, the Australian dollar continues to strengthen.  Another reason is the latest positive results from China’s economy. Inflation may have been announced quite low last month in China, at 0.2% but exports rose significantly by 8.6% and the trade balance of the same month touched $ 100 billion. Due to overbought conditions, we may try sell positions this week.

Bitcoin

Last week, Bitcoin was strongly bullish and closed at $60,823 with profits of 8.95%. Recent U.S. inflation data has bolstered investor expectations for a Federal Reserve rate cut in September and maybe more until the end of the year. Several cuts in Fed interest rates within 2024 could lower borrowing costs and increase demand for risk-on assets. The US Bitcoin ETF market would likely benefit from a more dovish approach by the Fed too. Bitcoin extended its gains during the weekend following the shooting incident of US Presidential candidate Donald Trump. As a crypto-friendly, Trump has positively influenced market sentiment towards Bitcoin. Most analysts agree that Trump’s chances of winning the election have improved after these latest events. This increased likelihood of a pro-crypto administration has further bolstered investor confidence, driving up Bitcoin prices as traders anticipate more favorable regulatory conditions for digital assets under Trump’s potential leadership. On May 23, 2024, the staff of the Securities and Exchange Commission’s Division of Trading and Markets approved rule changes through the so-called “19b-4 forms,” allowing for the listing and trading of eight separate ETFs that invest in Ether. However, the S-1 forms have not yet received approval, preventing issuers from launching their ETFs. Despite this, the crypto community remains optimistic that the SEC will eventually approve the S-1 forms, allowing these Ethereum spot ETFs to enter the market. We may try buy 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.