Swift reversal in major US indices mid-day: S&P 500, USD/JPY, AUD/USD, Silver

Market Recap

Major US indices were initially encouraged by another downside surprise in US producer price index (-0.5% MoM versus -0.1% forecast), but took a swift reversal mid-day as growth conditions and Federal Reserve (Fed) members’ comments seem to drive traders’ sentiments towards the latter half of the session. A deeper contraction in both US retail sales (-1.1% MoM versus -0.8% forecast) and industrial production data (-0.7% MoM versus -0.1% forecast) initially supported views that the Fed could be nearing the end of its hiking cycle, but those data has thus far failed to sway Fed members in feeding markets with pivot hopes, with Fed voting members Loretta Mester and James Bullard, recently sticking firmly to their expectations of a policy rate above 5%. Current market rate pricing remains less hawkish, with a terminal rate at the 4.75-5.0% range still the consensus. Quicker moderation in economic conditions and an unmoved Fed to recent downside surprise in inflation and growth have kept risk sentiments in check. Further job cuts were also announced by Microsoft and while it may affect less than 5% of its overall workforce, it reinforces the view that relatively more stable big tech companies are caving in to economic pressure as well.

Over the past few trading days, the S&P 500 has been at a crossroad at the 4,000 level, attempting to overcome a key downward trendline resistance. That said, it seems that equity bulls are stopped in their tracks for now, with the index running the risks of forming another new lower high and reinforcing its overall downward trend once more. The VIX has moved back above its key 20 level, which points towards mounting market stress. On further retracement, the 3,800 level will be on watch next, where a previous consolidation range was displayed back in December last year. The 3,800 level marks a key Fibonacci confluence zone.

Asia Open

Asian stocks look set for a mixed open, with Nikkei -1.13%, ASX +0.37% and KOSPI -0.19% at the time of writing. Overnight, US-listed Chinese equities were down as well, with the Nasdaq Golden Dragon China Index closing lower by 2.5%. Sentiments in the region could track its US counterparts lower as US futures point to potentially another drift lower for US equities. In yesterday’s Bank of Japan’s meeting, the central bank has refrained from making further adjustments to its yield curve control policy, which brought about some unwinding of previous ‘hawkish’ bets. That said, the current pushback from the central bank has at best delayed market expectations of the timeline for a policy shift, with consensus that it will be a matter of time before the BoJ step away from its accommodative policies eventually. The USD/JPY (大口） has since pared its initial gains, with movements firmly guided by a descending channel pattern. The 126.84 level will be on watch next as potential support.

On another front, a surprise contraction in employment change out of Australia (-14.6k versus 22.5k expected) and a higher unemployment rate (3.5% versus 3.4% expected) have prompted a sharp sell-off in the AUD/USD in today’s session. The underperformance in labour data complicates the policy path for the Reserve Bank of Australia (RBA), which just saw a return in inflation back in November. The AUD/USD is back to retest a key Fibonacci confluence zone at the 0.690 level. Failure to hold the line could prompt further downside to the 0.673 level next, where the next zone of Fibonacci confluence stands.

On the watchlist: Silver prices still facing strong challenges at the US$24.20 level

Silver prices have been largely trading in a range over the past month, with multiple retests of the key US$24.20 level failing to find a decisive upward break thus far. This level of resistance is where the 76.4% Fibonacci retracement stands in place, while silver prices failed to find a much-needed catalyst to move higher amid some resilience in the US dollar and the more risk-off environment. This may leave the US$23.00 level on watch ahead, which marks the lower consolidation range in coincidence with a 61.8% Fibonacci retracement level. Breaking below this level of support could confirm a near term retracement in place and pave the way towards the US$22.15 level next.

Wednesday: DJIA -1.81%; S&P 500 -1.56%; Nasdaq -1.24%, DAX -0.03%, FTSE -0.26%