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.