Fed Chairman Jerome Powell made a statement about scaling back on monetary measures. However, the U.S. stock market hardly reacted to such harsh remarks, which is troubling. Most likely, it was due to good earnings reports. What will happen when the positive signals come to an end? Don’t miss our digest.
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During the last week of October, the Australian dollar was the strongest performer. AUD/USD added a little more than 0.6% over the week, and the currency pair grew by almost 5% over the month. AUD/CAD and AUD/CHF grew by 0.64% and 0.64%, respectively. GBP/AUD and EUR/AUD, on the contrary, fell by 0.8%.
Rather interestingly, it is the Australian and New Zealand dollar that felt most comfortable over the last month. As for Australia, the reason for such comfort is the structure of its exports. Australia is a resource country. Iron and copper ore comprise almost 36% of the total export structure, while fuel and oil account for almost 26%.
In May of this year, the price of copper updated its historic highs with futures prices on COMEX coming close to $4.9 per pound, and the cost of oil is also in a bullish trend. Therefore, it is not surprising that Australia is becoming one of the main beneficiaries of commodities growth.
In June 2021, the surplus of the trade balance of the country stabilized above the mark of 10.5 billion dollars, which triggered the growth of the national currency. Naturally, against this background, the strengthening of the Australian dollar is not very profitable. Due to more or less stable inflation, monetary authorities have already rushed to make a statement about the continuation of stimulus measures (QE) of 4 billion dollars a week at least until mid-February 2022.
From a technical point of view, the AUD/USD currency completed the formation of the classic “double bottom” pattern and continued to grow. Time will tell whether it is worth relying on the full breakout of the chart pattern and if the price will reach its next target of 0.78500.
New Zealand mainly exports dairy products. The Dairy Price Index, which is the primary reference point, remained almost unchanged over the last month as we think the slight 2% growth can be disregarded. However, in early October, the RBNZ raised its key rate by 25 basis points to 0.5%, and now the market is preparing for another tightening of monetary policy, which we wrote about previously.
During the week, United States UST yields also continued to rise. Currently, the yield on the 20-year US Treasuries is 1.9263%, while the yield on the 30-year Treasuries is 1.934%. By the way, it is quite interesting what is happening to the yield curve on government securities now – it is becoming flatter and flatter.
To recap briefly, the inverted curve warns of a recession in the economy. Thus, what we are seeing now suggests that there are some warning bells for the U.S. Fed reserve.
By the way, a rather interesting event took place last week on October 22nd. The head of the FOMC Jerome Powell said that the time has come to roll back on emergency stimulus measures (QE), while it is still premature to think about raising the rate. Thus, everything that we have been waiting for, namely the change of rhetoric, has already started to happen.
What does this mean for markets? Here we need to pay attention to two of the most important consequences in the transition to a restrictive policy:
- Strengthening of the American national currency.
- A plunge on the U.S. stock market.
Then the story becomes somewhat amusing. Markets aren’t falling, or rather they are, but not that much. The Dow Jones index made a new all-time high on October 26th, almost making it to 35,900 points. On Wednesday, October 27th alone, the index made a rather strong bearish candle, forming an “evening star” on the candlestick chart. Experts say one of the main reasons for market stability now is strong earnings reports for Q3. There was a good report from Microsoft, which earned more than 45 billion dollars during the quarter, with projected revenue of 43.93 billion; good reporting from Visa with revenue of 6.56 billion dollars, against estimated 6.52 billion and there was also an excellent report from Alphabet Inc. (Google) – the company earned $65.12 billion (forecast was $63.47 billion).
From the technical point of view, the price of Google shares visited the local maximum at $2925.10. Will there be a breakout? We think that it’s possible, though after the earnings reports we believe that traders and investors will rush to collect their profits. Therefore, in the nearest future, we might see a technical correction down for stocks.
According to the discounted cash flow model we built, Alphabet’s fair price is almost $2.5 trillion. Given Google’s current capitalization of $1.96 trillion, the company’s stock has upside potential. However, that potential is limited. In the event of a tighter QE and a global stock market reversal, Google could be at the edge of a decline.
Brent crude oil started to decline on October 28th. The decline in the price of “black gold” was caused, among other things, by the released data on stocks of oil and petroleum products from the U.S. EIA. For the week inventories rose by almost 4.3 million barrels. The key price issue is, of course, is the COVID pandemic, which again started to take on threatening forms. According to data from Johns Hopkins, the number of reported infections is on the rise again this week, meaning that without reaching a plateau on infections, demand could start to decline once again, which would negatively affect the price of oil.
Oil demand is not expected to recover until 2022.
By the way, regarding demand for oil, there are forecasts from the International Energy Agency (IEA) – which expects oil demand to grow by 6.6% by 2040 compared to the pre-crisis year of 2019, assuming that current policies remain in place from the OPEC, which predicts demand growth of 8% from 2019. OPEC+ is set to meet on November 4th, where it will decide on the current 400k bpd recovery plan.
From the technical point of view, the candlestick chart shows an “evening star”. The indicators provide signals for a correction, the target of which may become the level of $78 per barrel (38.2% Fibonacci correction).
Bitcoin traded mostly flat this week. The price corrected slightly and fell just below $60,000 but then froze at $61,000. Bitcoin’s rise was fueled by the introduction of the first Bitcoin ETF into the market. Interestingly, assets on the ETF exceeded $1 billion in the first two days of trading, which is a record for the speed of asset growth.
However, there is another opinion about the increase in the capitalization of the cryptocurrency market from the U.S. giant JPMorgan Chase. They believe that the growth of crypto is simply investors moving away from the risk of inflation that’s hovering over global markets.
Nevertheless, the fact remains that we are currently witnessing Bitcoin testing its historic values. From the side of technical analysis, the correction at the current level may soon end, and growth may continue. The target for the price movement will become $63,700.
There are two fears in the markets right now. On the one hand, we are seeing an increase in cases of COVID, which should lead to a fall in demand. Consequently, there is a decrease in inflationary pressure and one of the reasons for the correction in oil prices. On the other hand, we see a run-up of inflation and inflation expectations in certain countries, which leads market participants to avoid risk, which may be one of the reasons for the growth of cryptocurrencies.
We believe that the fear of inflation, or more correctly, stagflation, will prove to be stronger. It could send cryptocurrencies back up, but the stock market down. This could also lead to a further strengthening of the U.S. dollar, which so far has had little reaction to Powell’s rhetoric, but may react to the actions of the Open Market Committee. In any event, it’s going to be interesting so stay tuned!