Weekly market recap 23 January 2023 - FTMO®

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23 January 2023

  • According to the Financial Times, this week Argentina and Brazil will announce the start of preparatory work for the creation of a common currency. They would create the second largest currency bloc in the world, and at the Buenos Aires summit they intend to invite other South American countries to join the project.
  • The currency, according to the Brazilian proposal, would be called “sur” (south) and its main objective would be to promote regional trade and reduce dependence on the US dollar.
  • Discussions about a joint currency between the two countries began in 2019, but ultimately foundered on the Brazilian central bank’s opposition.
  • Over-optimism is also tempered by Argentina’s Economy Minister Sergio Massa, who says that today it is more about studying the parameters needed for the introduction of a common currency and trade integration mechanisms. A monetary union of the whole of Latin America would represent about 5% of world GDP, while the countries belonging to the EuroArea, which pay with the euro, account for about 14% of world GDP.

Indices

US equities suffered in the shortened week on recession fears, which had a negative impact on market sentiment. Thanks to Friday’s strength across all markets, only the tech-heavy Nasdaq ended up in the green, helped by the strength of titles such as Netflix and Alphabet.

Stocks in Europe lost ground during the week, mainly due to announcements from central bankers at the ECB to continue aggressively raising interest rates at future meetings. Pan-European STOXX Europe 600 ended the week 0.09% lower, Germany’s DAX fell 0.35%, France’s CAC 40 eased 0.39%, and the UK’s FTSE 100 Index declined 0.94%.

US30
-2.70%
US100
+0.67%
US500
-0.66%
GER40
-0.35%

Commodities

Natural gas continues a free fall that perhaps has no end. In the last month alone, the price of natural gas traded in the US has fallen by more than 40% and is at a 19-month low, approaching USD 3 per mmBtu.“There is still the remainder of January, as well as the months of February and March, left to go before the end of the winter withdrawal season, therefore, weather will still play a large role in the bullishness or bearishness of NYMEX gas futures prices,” analysts at Houston-based energy trading consultancy Gelber & Associates said in a note to their clients

Oil, helped by the Fed’s restrictive actions, posted a second consecutive week of gains. The main factor supporting oil price growth is China’s improving economic prospects, which should have a positive effect on fuel demand. “Many traders believe it is highly likely that we are going to see higher demand coming from China as it continues to dismantle its COVID policies,” said Naeem Aslam, analyst at broker Avatrade.

Gold
-0.37%
Silver
-1.38%
BRENT
+2.88%
NATGAS
-8.36%

Forex

The US dollar hit its seven-month lows during the week. Weak data, mainly a drop in retail sales, industrial production and manufacturing production, pointing to a slowdown in the world’s largest economy was behind the dollar’s decline as investors await a slowdown in interest rate hikes by the Fed.

Even worse was the Japanese yen on the week, which weakened against the dollar after weeks of appreciation due to comments from the Bank of Japan governor that the central bank wants to continue its extremely easy monetary policy. The US dollar thus posted its biggest weekly gain against the Japanese yen since early December.

EUR/USD
+0.25%
USD/JPY
+1.32%
GBP/USD
+1.37%
USD/CAD
-0.12%

Macro

The Fed’s rate hikes are clearly having a significant impact on the US economy and the largest economy is slowing down significantly. This is evidenced by the surprisingly sharp 1.1% drop in December retail sales, while even the November figure was revised downwards.

Industrial production also saw a significant decline, with December’s 0.7% drop the most significant since September 2021. Housing starts and existing home sales also fell a bit, but less than expected.

The only positive aspect of the weakening economy is falling inflation, with producer inflation recording a 0.5% month-on-month decline in December.

ECB chief Christine Lagarde said at the World Economic Forum in Davos, that falling energy prices won’t mean the central bank will change its hawkish policy. “Inflation, by all accounts, however you look at it, is way too high. Our determination at the ECB is to bring it back to 2% in a timely manner, and we are taking all the measures that we have to take in order to do that,” said Lagarde.

Thanks to lower fuel prices, UK inflation fell from 10.7% to 10.5% in December. The labour market remains relatively strong, with the unemployment rate still close to a record low in the three months to November.

What to watch out for this week

  • On Tuesday, PMI data will be released in the services and manufacturing sectors, both in the Eurozone, the US and the UK. Investors and economists expect a slight improvement in economic conditions in both the EA and the US, with further deterioration expected in the UK.
  • On Thursday, we will see the first estimate of US gross domestic product for the final quarter of last year. Analysts expect growth to slow to 2.6% following annual growth of 3.2% in the third quarter.
  • In addition, we will also see data on durable goods orders and new home sales in the US, and the personal consumption price index will be very important.
  • In Europe, in addition to the PMI data, statements from several European Central Bank officials will be closely watched before they break their silence ahead of the next policy meeting on Feb. 2.
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