Worst single-day performance in two months for Wall Street: US dollar, USD/SGD, Brent crude

Market Recap

Major US indices continue to slide overnight (DJIA -1.91%; S&P 500 -2.14%; Nasdaq -2.55%) while posting their worst single-day performance in two months, as de-risking in Wall Street continues ahead of the Jackson Hole Symposium.

The quiet economic calendar only saw the release of July data for the Chicago Fed National Activity Index but despite a positive reading (0.27 versus -0.25 in June) from the previous month, that failed to trigger a reaction for markets. Market focus continues to revolve around some unwinding of dovish bets with increasing expectations that Federal Reserve (Fed) Chair Jerome Powell will stand firm in the fight against inflation, with guidance on economic conditions largely a black box as well.

The Fed Funds futures suggest that the tide has turned, with markets now pricing for a 55% chance of a 75 basis-point (bp) hike in the September Federal Open Market Committee (FOMC) meeting, compared to the 50 bp lean just a week ago. This could account for the underperformance in rate-sensitive growth sectors overnight, as yields ticked slightly higher and US dollar pulled ahead. Some pricing for a more persistent inflation is also on the cards, with the five-year and 10-year breakeven inflation rate moving higher from a week ago.

Overall, it seems that a cautious positioning is playing out as we look towards further clues on inflation and economic growth from key data and Fed’s guidance ahead.

The risk-off environment is no good news for meme stocks, who thrive on risk sentiments. Bed Bath & Beyond was down 16% overnight, while AMC was down 42%. On the corporate earnings front, Zoom Video cut its annual profit and revenue forecasts, reflecting further cooling-off from the Covid-19 induced trend and rising competition from Microsoft and Cisco.

Zoom Video’s share price was down more than 8% post-market.

The US dollar index is back to retest its 20-year high at the 108.95 level, coming after a seemingly false break below an upward trendline in place since February this year. A bullish moving average convergence divergence (MACD) crossover may provide an upward bias for short-term momentum but longer-term, a relative strength index (RSI) bearish divergence on the weekly chart provided a mixed view to US dollar upside. Any break above the 108.95 level could drive the formation of a new higher high and leave the 113.25 level on watch next.

US dollar basket daily chart

Asia Open

Asian stocks look set for a negative open, with Nikkei -1.16%, ASX -0.45% and KOSPI -0.41% at the time of writing. The downbeat mood in Wall Street is playing out in the Asia session as well and although another round of rate cuts to benchmark lending rate in China yesterday may aid to cushion some losses, overall upside could still remain limited amid the shunning of risks.

The Nasdaq Golden Dragon China Index has delivered a 1.2% positive gain overnight, taking on some relief with the recent rate cuts. The day ahead will leave a series of manufacturing and services Purchasing Managers' Index (PMI) data in focus, which are likely to display further moderation in economic conditions and leave markets with the glaring theme of recession risks. Data out of Australia and Japan thus far have shown some moderation in the manufacturing sector, while services sector dipped into contractionary territory.

This marks a 19-month low for Japan’s factory activity, with the decline in new orders reflecting a weaker global demand picture.

Singapore’s inflation rate for July will also be on watch later today, with inflationary pressures expected to remain elevated with no signs of relief yet for both core and headline inflation. Core inflation is expected to move higher to 4.7% from the previous 4.4%, while headline figure is expected to move to 7% from 6.7% in June.

The lack of any signs of inflation peaking thus far may keep the Money Authority of Singapore (MAS) tightening stance intact as we inch closer to the October meeting. Any upside surprise in Singapore’s inflation figures may drive a knee-jerk reaction in the USD/SGD to the downside, but previous instances suggest that such moves could be short-lived with the eventual key driver revolving around US dollar movement.

After surging more than 2.3% over the past two weeks, the pair is attempting to hang above the 1.395 support. Failure to do so over the coming days could lead to a retest of the 1.387 level, where a key 23.6% Fibonacci retracement level resides.

On the watchlist: Make-or-break moment for Brent crude

Brent crude prices have been trading within a tight range between an upper channel trendline resistance and a key 61.8% Fibonacci retracement level, which has proven to be a key support on three occasions. Earlier losses were pared back overnight when Saudi Arabia said that Organization of the Petroleum Exporting Countries (OPEC) stands ready to cut output to correct a recent oil price decline.

The current tight demand-supply is also presented with US crude inventory in the Strategic Petroleum Reserve (SPR) at its lowest level in more than 35 years. Against the downward trend for oil prices, a bullish divergence on MACD provides a mixed view by suggesting moderating downside momentum. The outcome of the Iran nuclear deal could be a key determinant of prices ahead, with one to watch for any break above the channel resistance or a break down of the US$92.87 support.

Monday: DJIA -1.91%; S&P 500 -2.14%; Nasdaq -2.55%, DAX -2.32%, FTSE -0.22%