Cautious start to the week with US markets off-trading: S&P 500, China A50, US dollar index

Market Recap

A late-night surge brought the US equity markets to close in positive territory on Friday (DJIA +1.05%; S&P 500 +1.06%; Nasdaq +0.90%), although the S&P 500 was still down 2.4% for the week. The recent heavy sell-off on recession fears could have led to some sellers closing their positions ahead of the long US weekend break, while dip buyers attempted to defend the 3,800 level for the index. The 3,800 level marks a key confluence zone of Fibonacci levels from its Covid-19 bounce to January peak, along with a longer-term Fibonacci drawn from its 2009 market bottom.

Economic data last week continues to paint a risky picture, with the US Institute for Supply Management (ISM) manufacturing purchasing managers index (PMI) coming in way below expectations (53.0 versus 54.9 forecast). The slowing-growth economic landscape continues to be reinforced with the sub-indexes for new orders and employment in contractionary territory. This marks the first contraction for new order volumes after growing for 24 consecutive months. Prices paid by manufacturers also remained at elevated level albeit a slower increase from May, which should keep inflation as the focus in policy direction and the tightening process undeterred. On another note, the Atlanta Fed gross domestic product (GDP) tracker also saw its gauge of second-quarter US GDP coming in at -2.1%, all likely to add on to the increased risks of recession ahead and drive a still-cautious risk environment overall. The fresh trading week will bring a relatively quiet start with the US Independence Day holiday, which brings about lesser indication of risk sentiments. Trading volume may then pick up towards the rest of the week as we look towards the upcoming Fed minutes, along with several labour market indicators leading up to the key US non-farm payroll on Friday.

Asia Open

Asian stocks look set for a positive open, with Nikkei +0.81%, ASX +1.68% and KOSPI +0.05% at the time of writing. The late-night surge in Wall Street to end last week may provide a positive backdrop for the Asia session today, but gains could be capped due to a weak start for US futures and China’s climbing virus cases. Further tightening measures were implemented across some cities in Anhui province, which could take the spotlight amid the quiet economic calendar.

Thus far, Chinese equities have been turning in a series of higher highs and lows, as sentiments attempt to tap on an impending recovery in economic conditions for some dip-buying. The China A50 has broken out of its ascending channel pattern lately, currently retesting a resistance at the key 15,000 level. This is where a 61.8% Fibonacci retracement level lies in place, while a near-term bearish divergence seems to be revealed on its four-hour chart. For now, the upward bias remains intact and any retracement may leave the 14,500 level on watch as potential support.

Economic data on watch ahead may be Australia’s home loans growth and India’s trade data. Closer to home, Singapore’s Singapore Institute of Purchasing and Materials Management (SIPMM) manufacturing PMI will be released later tonight, where resilience in the manufacturing sector will be put to the test amid elevated prices and slowing global demand. Current expectations are for it to remain unchanged at 50.4 from May.

On the watchlist: US dollar on watch ahead of non-farm payroll this week

The US dollar index has been largely moving in tandem with the US 10-year Treasury yields over the past one year, as expectations for an interest rate upcycle from the Fed generally translate to strength in the dollar. That said, as markets shift towards pricing for recession risks, there has been a near-term divergence between the two, where recent fall in yields saw the safe-haven dollar holding up. Further retracement in yields may potentially lead the dollar to catch up to the relationship between the two, where a retracement in the index towards the 103.80 level could be a likely scenario. This is where an upward trendline connecting higher lows since February this year lies in place with a previous resistance-turned-support.

Friday: DJIA +1.05%; S&P 500 +1.06%; Nasdaq +0.90%, DAX +0.23 %, FTSE -0.01%