Investors became
very nervous during this week as volatility is growing in the market. This is
manifested through CBOE Volatility Index (VIX) and rapid changes of the assets’
prices. The S&P 500 broad market index was tossed by 1.7% in both
directions this week with currencies, gold and debt prices were actively moving
around too.
There are a
lot of reason for such hectic moves such as stronger-than-expected Big Tech
reporting and unexpected strength of U.S. economy. A lot of surprises came from
world’s major central bank, and especially from the Bank of Japan.
Microsoft
(MSFT), Alphabet (GOOGL), Meta (META), and Amazon (AMZN) beat Wall Street consensus
estimates and pushed stock indexes up. The S&P 500 index climbed above 4600
points on Thursday, but rolled back later to 4530 points. The Federal Reserve
(Fed) and the European Central Bank (ECB) were quite prudent in their comments,
as Fed’s Chair Jerome Powell referred to incoming data to decide on possible interest
rates actions in September, while ECB’s President Christine Lagarde alluded to
a possible early termination of the interest rates hike cycle due to the
growing weakness of the Eurozone’s economy.
The Bank of
Japan (BoJ) has become a troublemaker this time as it loosened its control over
the yield curve promising greater flexibility. The Bank of Japan will now offer
to purchase 10-year JGBs at 1% through fixed-rate operations, effectively
raising its tolerance by 50 basis points. This is a major change in BoJ’s
monetary policy that could point towards a possible monetary tightening cycle. This
idea is also supported by the record high inflation in Japan at 3.3% YoY. If
this move would indeed be translated into monetary tightening cycle, Japanese
investors will withdraw their capital from the markets outside Japan that will
have a huge impact on interest rates in the United States. Eurozone and other
large economies. In other words, interest rates will rise dramatically, while
stocks’ prices will plunge. This logic could be a true reason behind the drop
of U.S. stock indexes and a surge of U.S. 10-year Treasuries above 4.0%.
The U.S. Q2
2023 GDP at 2.4%, which is above consensus at 1.8%, also contributed largely to
correction in stocks amid fears of another interest rates hike by the Fed
latter this year. Investors were also inspired by the Personal Consumer
Expenditure (PCE) Index that slowed down to 3.0% YoY in June, beating a
forecast at 3.1%. This is a significant slowdown from 3.8% in May.
Technically,
the S&P 500 index continues to have an upside formation with targets at
4250-4350 points, that have already been met. The benchmark went above
4540-4560 points, and rolled back. The nearest support level is located at 4440-4460
points. The downside signal has not formed yet, while there are more than
enough incentives for this signal to emerge.
Brent crude
prices passed the resistance at $81.80-82.00 per barrel after Organisation for
Petroleum Exporting Countries (OPEC) and its allies demonstrated commitment to
continue with production cuts. This time prices may continue to go up towards
$86-88 per barrel. In the alternative scenario, prices may slip below $76 per
barrel initiating a recession scenario with targets at $67-69 per barrel of
Brent crude.
Gold prices
are moving inside the mid-term upside formation with targets at $2000-2100 per
troy ounce that have already been met. But the situation has changed
dramatically as the important support level of $1980-2000 per ounce was
smashed. The chances for a correction towards $1820-1850 per ounce are still
high.
The
Greenback conducted a heroic blitzkrieg recovering almost a half of its losses in
early July, and is still looking solid compared to its major peers. Thus, even
mid-term long positions for the U.S. Dollar are seen not to be appropriate. It
would be better to wait for a decline of the EURUSD below 1.06000 to seek out
sell opportunities for the Greenback.
Two
positions were opened for July. First, is a short position for the EURUSD at
1.08900-1.09200 with the take profit and stop loss both set at 5000 points from
the opening price. A long trade for the AUDUSD was opened from 0.66400-0.66600
with the same size of the stop loss and take profit orders as for the EURUSD.
Two operations balance each other and should be kept to mitigate risks.
The long
trade on GBPUSD opened at 1.28500-1.28700 with the target at 1.30500 was successfully
closed at 1.29200 just before the Fed announced it monetary decisions on
Wednesday. This trade brought some profit.