US debt ceiling resolution brings focus back to Fed’s rate outlook: Oil, Hang Seng Index, Gold

Market Recap

With the US debt default crisis averted which has been largely priced by markets previously, central focus this week could be shifted back to the US Federal Reserve (Fed) rate outlook. Following yet another stronger-than-expected read in the US May non-farm payroll, interest rate expectations are finding some conviction for the need of another 25 basis-point (bp) move from the Fed in July, while views have also adjusted towards a more prolonged pause in rates this year. At least for now, a promising uptick in unemployment rate and softer-than-expected wage growth still suggest that additional tightening could come as one-off moves as opposed to an extended process.

The US dollar has resumed its way higher (+0.6%), alongside a broad-based upmove in Treasury yields, which kept the pressure on gold and silver prices. Headlines of potential oil production cuts by Saudi Arabia in July has provided an initial boost for oil prices, but optimism were quick to fizzle out in today’s session. Market participants could be reminded of the short-lived rally back in April this year, where downside surprises in global economic data eventually overshadowed previous headlines of production cuts.

To see a more sustained upside in Brent crude prices, a series of resistance lies ahead to overcome. Prices are back to retest the US$78.60 level, where a near-term upward trendline stands alongside the Ichimoku cloud resistance. Greater conviction could have to come from a move back above the US$80.00 level in order to set the ground for a retest of its April 2023 high.

Asia Open

Asian stocks look set for a positive open, with Nikkei +1.30%, ASX +1.21% and KOSPI +0.60% at the time of writing, largely displaying a follow-through from Wall Street’s rally to end last week. The eye-catching performance could be the 4% gain in the Hang Seng Index last Friday, potentially reflecting some expectations for upcoming policy support following the downside surprises in economic data thus far. Further validation may have to be sought on that front, while the economic calendar today will bring the release of the Caixin services Purchasing Managers' Index (PMI) data. Economic resilience may be the key to provide any follow-through in gains.

For the Hang Seng Index, a bullish crossover on moving average convergence/divergence (MACD) may provide some relief for the bulls in the near term, but a series of resistance still stand in the way ahead. This includes a downward trendline resistance since January this year and the key psychological 20,000 level, which coincides with the upper edge of the Ichimoku cloud on the weekly chart. These levels may need to be overcome to provide greater conviction of a more sustained upside.

On the watchlist: Gold prices back to retest trendline support once more

US Treasury yields have found a broad-based move higher last Friday, following the stronger-than-expected US non-farm payroll figure which suggests that US interest rates could likely stay high for longer through the rest of the year. The two-year yields were up around 16 basis-points, with higher Treasury yields prompting gold prices to give back almost of its past week’s gains. The latest Commodity Futures Trading Commission (CFTC) data has revealed further unwinding of net-long positioning among money managers for the third consecutive week, with potentially more room for moderation from previous bullish build-up if Treasury yields remain supported.

On the technical front, last week’s move has brought gold prices back to retest a key trendline support at the US$1,950 level. Any further move below its May 2023 low could mark a downward break of a key support confluence zone, where its 100-day moving average (MA) and Ichimoku cloud resides. That could pave the way to retest the US$1,875 level next.

Friday: DJIA +2.12%; S&P 500 +1.45%; Nasdaq +1.07%, DAX +1.25%, FTSE +1.56%