Markets attempt to stabilise after worst sell-off since June 2020: S&P 500, NZD/USD, USD/JPY

Market Recap

Some late-night dip-buying revealed an attempt by major US indices to stabilise, coming after their worst sell-off since June 2020. However, sector performance suggests that gains were not broad-based, with the energy sector (+2.85%) tapping on a rise in crude prices to do the heavy-lifting. Following the recent outperformance in the US consumer price index (CPI), US core producer prices also came in higher-than-expected overnight (7.3% versus 7.1% expected). However, the headline figure came in slightly below forecast (8.7% versus 8.8% expected), reflecting the positive impact from lower gasoline prices. Overall rate hike expectations remain well-anchored by the CPI data. A 75 basis-point (bp) hike next week has been fully priced, with some slight paring back of expectations for a 100 bp hike next week (24% chance being priced versus 31% yesterday).

The slight relief may also be attributed to technical conditions, with the US 10-year yields finding some resistance at its June 2022 high. The two-year yields saw a slight uptick to 3.78%, but moves seem more measured compared to the day before. The overall absence of major moves in yields aid to reduce a risk catalyst on that front for now, with rate-sensitive growth sectors tapping on that for some overnight outperformance.

The S&P 500 is also back to retest an upward trendline support since June this year, with the last-hour dip-buying seemingly an attempt by buyers to hold the trendline support. There could be an attempt to follow through with the dip-buying efforts, but overall risk environment remains fragile, especially heading into the Federal Open Market Committee (FOMC) meeting next week where a hawkish Federal Reserve (Fed) outlook continues to be a cause for worry. The day ahead will bring US retail sales data and jobless claims in focus. Coming after the more persistent inflationary pressures presented this week, a moderation in both readings could be what buyers are hoping to see. Developments on a potential rail shutdown in US remain on watch as well and any unsuccessful resolution between the labour unions and railroads risk an added catalyst to fuel pricing pressures, which could renew market selling pressure.

Asia Open

Asian stocks look set for a muted open, with Nikkei +0.04%, ASX +0.24% and KOSPI +0.08% at the time of writing. Some reprieve in the US dollar, along with the late-night buying in Wall Street, could lead to a slight drift higher for Asia, although overall risk sentiments will continue to carry a cautious tone. Gradual easing of virus restrictions in certain parts of Chengdu is in place, but a more measured reaction was seen in the Nasdaq Golden Dragon China Index, eking a slight gain of 0.1%. The absence of any clear resolution in China’s Covid-19 policy and uncertainty on further moderation in economic conditions ahead remain a weighing block for risk sentiments.

The economic data front saw the release of New Zealand’s quarter two (Q2) gross domestic product (GDP), which came in higher-than-expected at 1.7% growth from the previous quarter. Year-on-year (YoY), its Q2 GDP stands at 0.4% (versus 0.2% forecast). With its inflation nearing its 30-year high, the data provided the go-ahead for further tightening to take place, with previous guidance from the central bank suggesting a terminal rate of 4.25%. That translate to another 125 bp of tightening. That said, an initial upward reaction in the NZD/USD failed to sustain, as US dollar moves remain the key driver which is edging slightly up this morning. The formation of lower high and lower low presents a continued downward bias. Resistance stands at the 0.622 level, where a key 61.8% Fibonacci retracement level lies, while near-term support seems to stand at the 0.592 level.

Ahead, Australia’s employment number will be in focus. China’s one-year medium-term Lending Facility (MLF) rate announcement will be in focus as well, where expectations are pointing to a no-change but any further cut will be a positive surprise for Chinese equities.

On the watchlist: Is the USD/JPY nearing a greater proximity for intervention?

Further jawboning from the Bank of Japan (BoJ) has led market participants to revisit the weak-yen story, as the central bank raised hopes of an intervention by saying that it has conducted a foreign exchange ‘check’ yesterday. This comes as the USD/JPY hovers near its 145.00 level, where it marks the peak for previous intervention efforts back in 1998 to lift the weak yen. That said, concerns of weakening Japanese yen have surfaced multiple times through the year and failure for any follow-through efforts has shown to lead to some shrugging off eventually. Near-term, the USD/JPY seems to trade on a double-top formation, with the 141.50 level closely watched for any downward break of the neckline. A break below this level could also complete a bearish crossover on moving average convergence divergence (MACD), potentially drawing technical sellers to add to further selling pressure. In that scenario, the 138.70 level could be on watch next.

Wednesday: DJIA +0.10%; S&P 500 +0.34%; Nasdaq +0.74%, DAX -1.22%, FTSE -1.47%