Brewing optimism ahead of US mid-terms election: US dollar, S&P 500, USD/JPY, AUD/USD

Market Recap

A largely quiet economic calendar in the US saw major indices pushing higher at the last hour, as the fall in VIX to its seven-week low and further retracement in the US dollar pointed towards an improved risk environment. US Treasury yields continued to push higher across the board, while rate hike expectations remained well-anchored, which suggests that the optimism could be attributed more to the upcoming US mid-term elections, as compared to hopes of any ‘dovishness’ from the Federal Reserve (Fed). The US 2-year yields rose by six basis-point (bp) to 4.72%, while the US 10-year yields climbed by five bp to 4.22%. That said, since 1946, one-year performance in the S&P 500 after the mid-term elections has been positive 100% of the time. Equities generally favour a split Congress, as a political gridlock may create more resistance for regulations to pass through. Current odds are pointing to the likely possibility of a split Congress this year, with an 84% chance that the Republicans will be able to take control of at least one of the chambers.

The US dollar continues to follow through with its downward move after hitting resistance at an upper channel resistance. While hawkish Fed policies remain intact, improving sentiments around US mid-term elections could be weighing on the safe-haven asset. That said, one may note that each move lower will bring it closer to its lower channel support. This will leave the 108.70 level on watch, where a longer-term upward trendline will be put to the test as well.

For the S&P 500, it has managed to reclaim the 3,800 level overnight but currently still trades below its pre-Federal Open Market Committee (FOMC) meeting level, which will serve as near-term resistance to overcome. This will leave the 3,820 – 3,834 range on close watch, which also marks a confluence of resistance from various key Fibonacci retracement levels. While US mid-term elections could provide a catalyst for markets to cheer, this will be pitted against the upcoming US Consumer Price Index (CPI) data this week, as an outperformance in pricing pressures could bring Fed’s policies back into the spotlight. Previous months’ performance and Cleveland Fed’s estimates suggest that upside risks to inflation remain.

Asia Open

Asian stocks look set for a positive open, with Nikkei +1.13%, ASX +0.40% and KOSPI +0.31% at the time of writing. The underperformance in China’s trade data yesterday has reinforced its lower-for-longer growth picture, with both exports and imports showing a year-on-year (YoY) contraction as compared to an expected expansion. But nevertheless, hopes of reopening are overshadowing signs of economic weakness and Chinese indices have been ignoring the pushback from authorities. The question may be how far the rally could continue without an official acknowledgement. For the Hang Seng Index, the 17,000 level could be a key test for the index, with that level marking the sell-off from previous disappointment in the Party Congress.

Updates from the Bank of Japan (BoJ) with their summary of opinions suggested that policymakers are keeping an eye on the side effects of prolonged monetary easing and potential impact of a future exit from ultra-low interest rates. While it could still be some time away before any shift in policy stance materialises, it suggests that we could be a step closer to the end. For now, the USD/JPY (大口） has been hovering around the 145.90 level, where the first round of intervention was delivered by Japanese authorities. The level has shown to be a key resistance-turned-support by underpinning the pair on three occasions since late October. Any break below the level could be on watch for a near-term bearish bias, which could pave the way towards the 141.00 level next.

On the watchlist: AUD/USD attempting a push above trendline resistance on improved sentiments

Despite the weak showing on China’s trade data yesterday, the AUD/USD continued to push higher to retest a downward trendline resistance in place since August this year. Buyers are looking towards a confluence of supportive catalysts, ranging from the improved risk environment, a weaker US dollar and lingering optimism on China’s economic reopening. A key test, however, will lie at the 0.654 level, where the pair was resisted on two occasions over the past month. A break above this level could be warranted to form a new higher high for the pair and reinforce the near-term upward bias. That may pave the way for the 0.670 level next if the level is overcome.

Monday: DJIA +1.31%; S&P 500 +0.96%; Nasdaq +0.85%, DAX +0.55%, FTSE -0.48%