Higher Treasury yields, China’s woes kept the pressure on risk sentiments: S&P Regional Banking ETF, Nikkei 225, GBP/EUR

Market Recap

Market sentiments continue to reel in from the hawkish takeaway in the recent Federal Open Market Committee (FOMC) minutes, with the reckoning for rates to be kept high for longer pushing US Treasury yields to retest their recent highs. The US two-year yields continue to hover just below the 5% mark, while the 10-year yields briefly touches its October 2022 peak overnight. Any successful upmove in the 10-year yields above its October 2022 peak will point to a new 15-year high, which could further challenge the traction for holding equities.

Positive earning results surfaced from Walmart with an uplift to its annual guidance, which points to some resilience in US consumers ahead. Cisco Systems delivered as well, outperforming top and bottom-line expectations along with a boost in its margins. But with the US earnings season largely behind us, market participants may struggle to find the next set of bullish catalysts, while the property crisis and economic slowdown in China forces a lean back into the risk-averse camp.

The economic calendar today may be relatively quiet, which could drive a more subdued session to end the week. Perhaps one to watch may be the SPDR S&P Regional Banking ETF. Having validated an inverse head-and-shoulder formation in July last month, recent weakness has brought the index back to retest its neckline at the 44.75 level, which will require strong defending from buyers ahead. Failure to hold above the level may pave the way to retest the 40.00 level next, while immediate resistance for now will stand at its recent tops at the 49.40 level.

Asia Open

Asian stocks look set for a downbeat open, with Nikkei -0.58%, ASX-0.05% and KOSPI -0.47% at the time of writing. Fresh updates in Japan’s inflation rate saw a pull-ahead in its headline figure (3.3% versus 2.5% forecast), while the core aspect eased to 3.1% from previous 3.3%. The data may likely reinforce the gradual pace of policy normalisation from the Bank of Japan (BoJ), with patience still the story into the next meeting in September.

The Nasdaq Golden Dragon China Index ended flat at 0.3% overnight, as Chinese equities attempt to stabilise after the recent sell-off but much await. Woes in the property sector continue to pose a challenge to a quicker economic recovery, as China Evergrande’s filing of Chapter 15 bankruptcy protection and falling home prices suggest that downbeat sentiments in property developers may drag on for longer. More intervention efforts are potentially in the pipeline but it may still have to take a trend of positive economic surprises to provide the more sustained traction.

For the Nikkei 225 index, it has headed below the 32,000 level of support this week, where a 23.6% Fibonacci retracement stands from its year-to-date high. The formation of lower highs and lower lows put a near-term downward bias in place for now, while a bearish crossover is formed on its weekly moving average convergence/divergence (MACD). Greater conviction for buyers may have to come from a reclaim of its 32,000 level, while on further downside, the 30,800 level may be on watch next.

On the watchlist: GBP/EUR attempting for a retest of its year-to-date high

Still sticky pricing pressures presented in the recent UK inflation data have validated views for the Bank of England (BoE) to push rates higher through the rest of the year, with a 25 basis-point (bp) hike fully baked in for the September meeting. The GBP/EUR is up for the fifth straight day, finding some support off the Ichimoku cloud support on its daily chart, along with its 100-day moving average (MA), to retest its year-to-date high at the 1.174 level.

Having traded in a ranging pattern since June this year, the 1.174 level will mark a key resistance to overcome, as it marks the upper bound of the consolidation zone. Any successful break above this level may reflect buyers in greater control, which may potentially place the next level of resistance at the 1.192 level in sight next.

Thursday: DJIA -0.84%; S&P 500 -0.77%; Nasdaq -1.17%, DAX -0.71%, FTSE -0.63%