Pandemonium

The information presented in this publication is provided for informational purposes only and does not constitute investment advice, an offer to sell, or a solicitation to buy, and should not be relied upon or considered as an incentive to engage in any investment.

The macro point

Do you know pandemonium? This term was invented by British poet John Milton in 1667. It refers to a place where chaos and disorder reign. Pandemonium is the perfect term to summarize the current situation in financial markets and geopolitics. Currency traders fear that tensions in the Middle East could ignite the entire Arab world or part of it. Safe-haven assets are, unsurprisingly, in high demand. The Swiss franc, the Japanese yen, and the US dollar are the big winners of the current period. Do you know pandemonium? This term was invented by British poet John Milton in 1667. It refers to a place where chaos and disorder reign. In painting, John Martin depicted pandemonium as the capital of Hell in an 1841 work displayed at the Louvre Museum. Pandemonium is the perfect term to summarize the current situation in financial markets and especially geopolitics. An indescribable chaos prevails. Risk aversion is making a comeback in the foreign exchange market, fearing that tensions in the Middle East could ignite the entire Arab world or part of it. In these circumstances, no one will be surprised that the yen and the Swiss franc are sought after by market operators. Both currencies perfectly play their role as safe havens during crises, like gold in the commodities sector. The dollar has benefited a bit less, although this does not in any way challenge the favorable long-term trend for the greenback (which is linked to the very healthy state of the US economy and the fact that the Federal Reserve will likely maintain its high rates for a long time). It is likely that tensions in the Middle East will continue to be a disruptive factor in financial markets for a few weeks – until the Israeli operation to eliminate Hamas achieves its main objectives. This means that risk aversion should remain and potentially experience sudden spikes, as seen last week when Iran threatened Israel with an oil blockade. From our perspective, geopolitics is an additional argument for central banks to refrain from moving their rates in the short term. This was also the central argument developed by the governor of the Greek central bank in an interview for the Financial Times last week. In addition to this, of course, is the fact that inflation is trending downwards. Fortunately, not everything is completely negative. China is increasingly moving towards a stimulus. It won't be as extensive as in 2009. But it should allow the Chinese economy to regain some momentum. The figure for Chinese growth in the third quarter at 4.9% year-on-year and retail sales have positively surprised. Now, it is time to move to the next stage with aid and subsidies amounting to more than 100 billion dollars, which should be primarily directed towards infrastructure. It seems that Beijing is choosing infrastructure and the manufacturing sector (with a reorientation of real estate credits to this segment) rather than consumption. It's ingenious. Chinese households are wary of the future. They fear a collapse in real estate prices and save for retirement. Hence a savings rate close to 40% of GDP. That's huge. In such circumstances, it is difficult to restore confidence and it's certainly not by putting money on the table that you'll encourage Chinese consumers to spend. To restore confidence, real estate prices need to stabilize (which won't happen in the short term) and a more protective pension system needs to be implemented (although this raises strong internal opposition). The bad news (there is one) is that a stimulus focused mainly on infrastructure is unlikely to be a driver of global growth. Many European countries hope to benefit from the Chinese stimulus (especially Germany). They will be disappointed. In Europe, the budgetary outlook for 2024 is on everyone's mind. It's not about repeating the mistakes of the early 2010s with austerity policies. But it is necessary to cut spending (so make budgetary consolidation) as the cost of debt continues to rise. At this level, stabilization is not expected before the beginning of next year at best. In France, two paths have been chosen: (1) the withdrawal of numerous aid measures for businesses implemented during Covid and the energy crisis and (2) the drastic reduction of local authority and social security expenditures. On this last point, we are quite doubtful about the ability to achieve the set objective. But it's a way to reassure rating agencies that will soon deliver their verdict on French debt.

Technical point

As we said in the introduction, we are facing a foreign exchange market that is in risk aversion mode (as is the case with the commodities market). We expect in the short term that long positions on the Swiss franc and the Japanese yen will increase, and probably also on the US dollar. For the EUR/USD, the latest geopolitical events reinforce the upward trend that has been well established for several weeks due to a sluggish European macroeconomy. The main support zone on the pair is at 1.0450. In case of a breakthrough, we could see an acceleration of the decline. Some analysts predict a return to parity. It's a bit premature. But it is certain that the euro still has significant bearish potential. This also applies to the EUR/CHF, which could reach the zone around 0.9380 if risk aversion persists. We are in a market configuration we know well where only safe havens perform well. The supports and resistances displayed below indicate the respective lows and highs within which prices are expected to move during the week.

Announcements to follow

This week, two central banks are on the agenda. In both cases, we expect the key rate to remain unchanged. Given the downside risks weighing on real estate, the Bank of Canada is expected to maintain its main rate at 4.50%. It is likely that the terminal rate has already been reached. This is also probably the case in the eurozone. In view of declining inflation and the increasing pressure on heavily indebted states and companies within the Union, it is likely that the European Central Bank will refrain from raising its rate. The issue for central banks now is to avoid making the rate hike that could precipitate the economy into a recession. In the eurozone, the recession is certainly already here (since Germany is in a technical recession). But for now, it is relatively painless. An additional rate hike would be interpreted as a monetary policy error by the market, with two immediate consequences: an increase in the cost of money to a level that could increase the number of business failures and new selling pressures on the euro. No one wants that, especially not in Frankfurt. Below you will find the publications and events that are expected to have a major impact on currency rate developments.

Day	Time	Country	Indicator	What to expect?
10/25/2023	10:00	GER	Ifo Business Climate Index (October)	Previous at 85.7.
10/25/2023	16:00	CA	Central bank meeting	Unless there is a last-minute surprise, the central bank should keep its key rate unchanged at 5.00%.
10/26/2023	14:15	EU	Central bank meeting	Maintenance of the key rate at 4.50%.
10/27/2023	14:30	USA	Core PCE Index (September)	This is a somewhat lagging indicator compared to the economic cycle but it has the merit of clearly highlighting any inflationary pressures. It's closely watched by the Fed.