2023 Market Forecast by Solid ECN

[SOLID ECN LLC]

Gold

The improvement of market sentiment puts pressure on safe haven assets

The beginning of the final week of March looks much compared to the end of the previous one, when the cost of insuring Deutsche Bank's debt against the risk of default surged to the highest on record on Friday. Today, however, the moods improved, mostly thanks to the final sale of Silicon Valley Bank, which may probably end the topic of instability of the banking sector. Additionally, the FDIC will continue to participate in the takeover of SVB by First Citizens.

In Europe, investors were worried that Deutsche Bank could be another bank which faces serious problems, but it is worth remembering that recent years have brought a significant improvement in the bank's situation. Firstly - Deutsche recorded 10 quarters of profitability, secondly, the CET1 index, which shows the bank's solvency, amounted to 13.4% (although it is still lower than the average for EU countries). On the other hand, the bank's coverage ratio was 142% at the end of 2022, and the net stable funding ratio reached 119%. These data do not suggest that the bank may collapse quickly.

Therefore, the moods are improving significantly - we are observing a solid rise of US yields, which puts pressure on gold. Price pulled back 1.5% below $1950 and approaches the local lows of March 21/22 and 38.2 Fibonacci retracement of the last upward wave.​

 

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AUDUSD​

• US indices finished yesterday's trading mostly higher with tech shares lagging behind. S&P 500 gained 0.16%, Dow Jones moved 0.60% higher and Russell 2000 added 1.08%. Nasdaq dropped 0.47%​
• Indices from Asia-Pacific traded mostly higher today as well. Nikkei gained 0.2%, S&P/ASX 200 traded 1% higher, Kospi added 0.8% and Nifty 50 dropped 0.2%. Indices from China traded mixed​
• DAX futures point to a slightly higher opening of the European cash session today​
• Jose Manuel Campa, chair of European Banking Authority, warned in an interview with Handelsblatt that risk in the financial system remains very high and that increasing interest rates are weighing on financial markets​
• French finance minister Le Maire said that France wants to cut the deficit to 3% of GDP by 2027. French budget deficit stood at 4.7% of GDP and was lower than 5% target set by the government​
• Russia announced that it has carried out anti-ship missile tests in the Sea of Japan in a move that is seen as response to Japanese PM Kishida visiting Ukraine last week​
• Goldman Sachs now estimates probability of US economy falling into recession within the next 12 months at 35%, up from previous 25%​
• Fed's Jefferson said that inflation has been longer lasting and that current policy rate is too high​
• Israeli Prime Minister Benjamin Netanyahu withdrew a judicial reform that spark nationwide protests​
• Australian retail sales increased 0.2% MoM in February (exp. 0.3% MoM)​
• Cryptocurrencies are trading mixed - Bitcoin drops 0.9%, Dogecoin trades 0.6% lower, Ethereum gains 0.3% and Ripple jumps almost 2%​
• Energy commodities trade mixed - oil drops 0.3-0.4% while US natural gas prices climb 0.7%​
• Precious metals trade mostly lower - silver and platinum drop around 0.1% each while palladium trades 0.5% lower. Gold is an outperformer with 0.2% gains​
• AUD and JPY are the best performing major currencies while USD and EUR lag the most​

In spite of a miss in Australian retail sales data for February, AUD is one of the best performing G10 currencies today. AUDUSD trades 0.6% higher today and has managed to break above the 200-hour moving average (purple line).​

 

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Oil​

Oil is catching a bid this week. Crude prices rallied yesterday with WTI jumping around 5%. The move is being continued this morning, although the scale of gains is not as big as yesterday, at least not yet. Gains are driven by an overall improvement in market sentiment, with concerns over the condition of the banking sector in Europe and the United States slowly fading. Today's move higher may also be supported by comments from the Russian Energy Minister who said that he expects Russian oil and gas production to decline in 2023. However, this can be hardly seen as news as a drop in Russian output has been foreseen as an aftermath of the West imposing sanctions on Russia for its invasion of Ukraine.

Taking a look at WTI chart (OIL.WTI) at D1 interval, we can see that price is attempting to break above the $73.00 resistance zone that served as the lower limit of a previously broken trading range. While price is trading almost 15% above a daily low from March 20, 2023, technical setup is not bullish yet. In order for it to become more bullish, a break above the $81.20 resistance zone would be needed as this is where previous local high, the upper limit of Overbalance structure and previous price reactions can be found.​

 

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GBPUSD​

Andrew Bailey, governor of the Bank of England, as well as two other BoE members (Sam Woods and Dave Ramsden) appeared before the Treasury Select Committee today for a hearing on Silicon Valley Bank collapse. Bailey noted that collapse of SVB was the fastest banking failure since Barings Bank failure, which collapsed in 1995 following massive 827 million GBP loss incurred by trader Nick Leeson. However, those two cases cannot be compared as Barings failed due to rogue trader actions while SVB collapsed due to bank run and poor interest rate risk management. Speaking on Credit Suisse, Bailey said that problems of Swiss bank were company-specific and should not be seen as a risk for domestic banks. Overall, Bailey said that does not think that any of the features of recent banking failings (SVB and CS) are causing stress in the UK financial system. He said, however, that we are in a period of heightened tensions in the markets and higher levels of alertness are needed.

Bailey's comments today were in-line with his remarks yesterday, when he noted that UK rate setters are unlikely to be distracted from fighting inflation by troubles of the global banking system. GBP saw some weakness following Bailey's comments today but the move immediately after remarks was barely noticeable. Taking a look at GBPUSD chart at D1 interval, we can see that the pair has reached the resistance zone marked with 50% retracement of the downward move launched in June 2021. Pair attempted to break above it last week but failed and today's attempt also looks to be under question. GBPUSD erased gains from earlier today, painting a long upper wick on D1 interval. However, should we see a break above this zone, the 1.2440 area, marked with local highs from previous months, could be the next target for buyers. On the other hand, failure to break above could see the price pull back towards the support zone marked with 38.2% retracement and 200-session moving average (purple line).​

 

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USD unimpressed by Consumer Confidence data​

US Consumer Confidence Index rose to 104.2 from 102.9 in March (revised to 103.4). Today’s reading came in above analysts’ estimates of 101.​

• Present situation index 151.1 vs 153 prior​
• Expectations index 73.0 vs 69.7 prior​
• 1 year inflation 6.3% vs 6.3% prior​
• Jobs hard-to-get 10.3 vs 10.5 prior​
• 14.9% expect their incomes to increase, up from 14.4% last month​

Conference Board Confidence index moved higher in March, however inflation expectations still remain high, which is not what FED would like to see.

Simultaneously, Richmond manufacturing index for March was released. The index unexpectedly fell less than expected to -5 from-16 in February, while analysts’ expected -10.0 pointing to a modest improvement in business conditions. Of its three component indexes, shipments saw the largest change (up to 2 in March from -15 in February) and both the employment (-5 vs -7) and new orders (-11 vs -24) indexes improved but remained in negative territory. Firms continued to report easing of supply chain constraints as the indexes for backlogs and lead times remained negative. The average growth rate of prices paid decreased moderately, while the average growth rate of prices received changed little in March. Firms remained pessimistic about local business conditions and the index for future local business conditions edged down slightly.

EURUSD saw relatively small reaction to today’s data releases. The most popular currency pair continued to trade around 1.0820 level.​

 

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USDCAD​

USDCAD finally managed to break below the key short-term support at 1.3655. According to the Overbalance methodology, this may point to a change of the main sentiment to bearish. The level of 1.3655 should be treated as the first line of resistance. In turn, nearest support to watch can be found around 1.3535 and 1.3475 levels.

 

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AUDUSD​

• US indices finished yesterday's trading slightly lower. S&P 500 dropped 0.16%, Dow Jones moved 0.12% lower and Nasdaq plunged 0.45%. Small-cap Russell 2000 index dropped 0.06%​
• Indices from Asia-Pacific are trading higher today. Nikkei gained 1.1%, S&P/ASX 200 traded 0.2% higher, Kospi traded flat and Nifty 50 gained 0.1%. Indices from China traded 0.1-0.2% higher while Hong Kong's Hang Seng gains over 2%​
• DAX futures point to a slightly higher opening of the European cash session today​
• US Energy Secretary Granholm said that refilling of strategic petroleum reserve may start this year​
• Shinichi Uchida, deputy governor of Bank of Japan, said that if 10-year Japanese yield climbs to 2%, BoJ will experience an unrealized loss of 50 trillion JPY on its bond portfolio (currently 10-year yield sits at 0.3%)​
• United States said that China shouldn't overreact to Taiwan president's visit to the United States. This comes after China warned that meeting between US officials and Taiwan president would be seen as provocation​
• Lee Bokhyun, head of South Korean financial regulator, said that South Korean authorities will consider lifting the short-selling ban this year. Ban was imposed early in the Covid pandemic​
• Australian CPI inflation decelerated from 7.4 to 6.8% YoY in February (exp. 7.4% YoY). Core inflation dropped from 7.6% in January to 6.9% YoY in February​
• API report pointed to a 6.08 million barrel draw in US oil inventories (exp. +0.2 mb)​
• Cryptocurrencies trade higher - Bitcoin gains 1.3%, Ethereum adds 1.1% and Dogecoin jumps 2.4%​
• Energy commodities trade mixed - oil gains slightly while US natural gas prices drop​
• Precious metals pull back amid USD strengthening - gold drops 0.5%, silver trades 0.7% down and platinum dips 0.6%​
• NZD and USD are the best performing major currencies while JPY and AUD lag the most​

AUD is pulling back after a lower-than-expected CPI reading for February. AUDUSD failed to break above the 0.6710 resistance zone and is now pulling back towards the 200-hour moving average (purple line).​

 

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CHNCComp - Chart of the Day​

HSCEI (CHNComp) was one of the best performing Asian indices during today's Asia-Pacific trading session. The index jumped over 2% today and painted a daily peak at 3-week high. Improved sentiment towards Chinese shares can be reasoned with recent performance of Alibaba (BABA.US) as the index and the stock are highly correlated. According to a Bloomberg report, Alibaba aims to divide the company into 6 different entities with each being responsible for its own financing and decisions like going public. This news triggered an over-14% increase in Alibaba's share price yesterday.

Taking a look at CHNComp chart at D1 interval, we can see that while the index managed to climb above the price zone ranging between 6,600 pts mark and 200-session moving average (purple line), it was later halted at 50-session moving average (green line) in the 7,000 pts area. What comes next will be crucial from a technical point of view. An inverse head and shoulders pattern can be spotted building up on the chart - a bullish pattern. However, a pullback towards the aforementioned 6,600 pts area would be needed for the pattern to take shape.​

 

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EURUSD ticks lower after Kazimir remarks​

Peter Kazimir, member of the European Central Bank governing council, said that the ECB is closely monitoring the situation in the banking sector and that it is ready to step in to ensure price and financial stability in the euro area. However, his remarks relating to the monetary policy show that ECB is somewhat concerned by the uncertainty caused by recent banking failures in the US and Europe - Kazimir revealed that ECB members agreed not to provide guidance for the May meeting. On the other hand, Kazimir said in the very same speech that he thinks that inflation is too high for too long and that further rate hikes are needed, although possibly at a slower pace, which is a kind of guidance on its own. Speaking about future decisions he said that core inflation developments and trends will be key in determining the next move.

EUR ticked lower during Kazimir's speech but the move was very small and has been completely erased by now. The pair is trying to recover from an overnight drop that was launched after repeated failures to break above the 1.0850 swing area.​

 

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OIL

Can oil prices fall further? What does it mean for inflation?

Brent price dropped around 9% since the beginning of 2023 but price decline over the past 12 months is already exceeding 30%. Taking a look at the whole post-pandemic recovery move, crude prices currently trade near a midpoint. While it looked like undersupply and increasing demand could be a problem, those concerns turned out to be unnecessary. A strong bearish trend can be observed on the oil market since June 2022 and the latest issues in the banking sector may have resembled the 2007-2009 financial crisis when crude prices quickly plunged from $150 to less than $40 per barrel. Could history repeat itself? Will cheap oil turn out to be a remedy for a number of current issues? Are we set for further price drops in the later part of the year or will oil recover?


Is oil cheap already?

Brent and WTI are currently trading in a $70-80 per barrel range. Taking a look at the 5-year moving average, oil seems to be priced in-line but a look at the 1-year moving average shows that it is trading around 2 standard deviations below mean, which may hint at oil being oversold in the short-term. On the other hand, looking at a longer horizon, there is still some room for prices to fall. Bloomberg points out that the current price is still too high given the relatively high probability of US recession. According to the news agency, there is a high chance of barrel price dropping below $50 should a recession indeed arrive in the United States.

Oil looks to be oversold in the short-term but longer-term measures hint that it is priced in-line.

Taking a look at seasonal patterns, oil seems to be significantly oversold, especially when we take a look at 5-year and long-term patterns. On the other hand, taking a look at the worst year in terms of performance in the past 5 years or even longer, oil still has some room to fall, especially in the first 4 months of the year (January-April period). It is often the case that when the first third of the year is bad for prices, the second third is usually significantly better (May-August).

Seasonality for the oil market. Oil is having a bad start to the year but it does not mean that the worst is already behind.


Will cheap oil be a remedy for current global issues?

Spare for the Ukraine war and ongoing banking crisis, cheaper oil could actually be a remedy for a number of global issues. A further drop in oil prices would accelerate a drop in inflation, which not only would limit future rate hikes, but may also bring forward rate cuts. US producer's inflation reacted quickly and steeply to a year-over-year decline on the oil market. Lower oil prices may help avoid some of the economic issues but at the same time they may be driven by a potential economic crisis that is currently unfolding.

Change in oil prices suggests that PPI inflation may continue to drop to as low as 0% YoY!


Is there a chance for further price declines?

Oil has recovered a bulk of the losses triggered by the recent banking crisis. Nevertheless, a look at fundamentals suggests that price declines may resume and continue. Supply did not drop as much as feared as Russia managed to find markets for its oil. China continues to use its own stockpiles and does not increase imports. This may also lead to a further build-up in US oil inventories. Comparative inventories (nominal change in inventory level over 1 year) could be an important indicator here. It is currently pointing to possibility of further price declines and "strongly oversold" signal will not surface until inventories climb to 80-100 million barrels above year ago levels. Unless an economic crisis arrives, there is a chance for price recovery in the second half of the year - oil drilling rigs data suggests that US production is nearing peak output and inventories in China will run out at some point.

Comparative inventories suggest that oil prices may continue to drop. Contrarian signal would surface once inventories climb to 80-100 million barrels above year ago levels.

Oil recovered noticeably but continues to trade in a downtrend. A break above 50- and 100-session moving average, and a break above the upper limit of Overbalance structure later on, would brighten the outlook for oil bulls. However, the outlook for oil remains bearish for now.​