Risk-on mood drove second day of gains: Russell 2000, NZD/USD, Gold

Market Recap

US indices surged higher for the second straight day (DJIA +2.80%; S&P 500 +3.06%; Nasdaq +3.34%), seemingly with the bear trap last Friday propelling the strong up-move, as the previous break below the June bottom for major US indices could draw in some shorts. The catalyst for the relief rally continues to revolve around poor economic data, which is in line with the Fed’s direction of seeing ‘more pain’. After the lacklustre US manufacturing PMI reading to start the week, the catalyst yesterday seems to be the worse-than-expected US job openings number for August, which delivered its biggest drop since April 2020. The decrease in openings is more prominent in the services sector, which may provide some hint for a weaker ISM services PMI reading, releasing later tonight.

The Fed Funds futures revealed that market pricing for a 75 basis-point hike in the November Federal Open Market Committee (FOMC) meeting has actually increased to 75%, which is a build-up from previous week, but markets are leaning towards a potential rate cut in June next year with the quicker moderation in economic conditions presented. A push-back from the Fed could still be likely, but with the next FOMC meeting a month away, that provides some room to recover before the upcoming earning season takes centre stage. The further decline in the US dollar (-1.27%) continues to provide the go-ahead for risk sentiment yesterday but its prevailing upward trend thus far will leave the 108.50 level on watch as a strong line of support.

Overnight gains were broad-based across all 11 US 500 sectors, as defensives underperformed. The energy sector (+4.34%) is the top performer, riding on an ongoing recovery in oil prices. The OPEC+ meeting will be on watch for the scale of production cuts later, with a cut of as big as two million barrels per day (bpd) now on the table from previous one million bpd. Twitter surged 23% with Elon Musk proposing the go-ahead for his US$44 billion acquisition. As opposed to other US indices, the Russell 2000 index has managed to defend its June bottom thus far. Further upmove may leave the 1,835 level on watch as the next line of resistance, where a 23.6% Fibonacci retracement resides. That said, it may seem too early to conclude the bottom, considering that moderation in corporate earnings will pose the next stage of challenge, which could have greater impact on small-cap companies. Thus far, the bottom in corporate earnings has not been presented.

Asia Open

Asian stocks look set for a slight positive open, with Nikkei +0.27%, ASX +1.48% and KOSPI +0.37% at the time of writing. The Hong Kong market will be back online after its holiday break, which could see some catch-up performance from recent risk-on environment. The Nasdaq Golden Dragon China Index is up more than 5% overnight. China markets remain closed for the week.

The highlight for Asia may continue to revolve around the surprise 25 basis-point hike from the RBA yesterday, where consensus were previously leaning towards a 50 basis-point increase. The slowdown in the RBA’s hiking process may have further reinforced some dovish sentiments for the Fed yesterday as well, which may reflect that global growth conditions may be becoming more prominent on the central bank’s radar and further hikes could be more measured. The Australian dollar did not take it in stride, with the AUD/JPY failing to overcome the 94.00 level of resistance. Interest rate decision out of the RBNZ will be on watch today, with market expectations leaning towards another 50 basis-point hike to 3.5%.

For the NZD/USD, oversold technical conditions may be supportive of some recovery, along with a bullish crossover on MACD. Guidance to rate outlook will be key, especially after the step-down from the RBA yesterday. Sticking to its hawkish view may lead a move to retest the 0.590 level, but the overall downward trend could still seem hard to reverse at current point in time.

On the watchlist: 7% surge in gold prices over past week brings a retest of channel resistance

Gold prices have been tapping on the sharp retracement in the US dollar over the past week to move higher, along with some breather in US Treasury yields serving as tailwind for the non-yielding asset as well. After reclaiming back above its key US$1,680 level on the improved risk environment, gold prices are currently retesting its upper channel resistance at the US$1,725 level. This level may be closely watched as the downward channel has been in place since March this year, which also coincides with a key 38.2% Fibonacci retracement level, therefore any break above this channel could suggest a potential longer-term shift in sentiments. Much will continue to revolve around the US dollar, which seems en route to retest the 108.50 level, but continues to retain its upward trend thus far. A break above the descending channel pattern for gold will leave the US$1,765 level on watch next.

Tuesday: DJIA +2.80%; S&P 500 +3.06%; Nasdaq +3.34%, DAX +3.78%, FTSE +2.57%