De-risking amid the quiet economic calendar: Brent crude, Hang Seng Index, USD/CAD

Market Recap

The largely quiet economic calendar in the US overnight has left markets to place their focus on a line-ups of economic guidance from major US banks. A worsening growth picture next year seems to be the consensus, with comments from JPMorgan CEO Jamie Dimon pointing to a ‘mild to hard recession’. This was echoed by the Bank of America as well, whose research predicts three quarters of mild negative growth next year while Morgan Stanley was said to be reducing its global workforce by about 2%. The growth risks being highlighted are revealed in the deepening inversion for the US 10-year/2-year Treasury yield spread, which currently stands at its lowest level since 1981. Further defensive positioning from markets played out overnight, with bond yields lower and US dollar slightly higher, while de-risking from equities continued. Another quiet day in terms of US economic data lies ahead, which could keep the cautious risk environment in place.

Brewing growth concerns have driven oil prices lower overnight, with Brent crude prices breaking to a new low since January this year. That could increase the pressure for Organization of the Petroleum Exporting Countries Plus (OPEC+) to follow through with further output cuts, but with the next meeting in February next year, a drift lower in the near term could be on the cards. Previous upside from production cut in October has been short-lived, which could suggest demand outlook taking the driving seat with the lower-for-longer global growth picture.

Asia Open

Asian stocks look set for a negative open, with Nikkei -0.75%, ASX -0.71% and KOSPI -0.35% at the time of writing, weighed down by the fourth consecutive days of decline in Wall Street. Despite some profit-taking in Chinese equities yesterday, losses were quick to be pared back, leading to an ongoing divergence in performance with its US counterparts. The Nasdaq Golden Dragon China Index managed to close higher by 1.3% overnight, as further easing of virus measures continues to support reopening hopes. The need for a negative Covid-19 test to enter public places such as parks, supermarkets, offices and airports has been dropped, with some chatters that China may announce 10 new easing measures as early as today. A potential downgrade of disease management to a less-strict category from the current top-level remains on watch ahead. The day ahead will also place China’s trade data in focus. Deeper contraction in both China’s exports and imports seems to be the consensus, but weak data could be overridden by reopening optimism and led to some shrugging-off.

The Hang Seng Index has surged close to 32% since November this year, leaving it just 3% from its key 20,000 psychological level. That level stands in line with its 200-day moving average (MA) and will be closely watched for further validation as a longer-term trend reversal to the upside. For now, technical conditions seem to lean towards the overbought territory, which may drive some profit-taking once the news flow for reopening take a pause, but any retracement could leave the formation of any higher low on watch.

On the watchlist: USD/CAD on near-term rising channel pattern ahead of BoC meeting

The Bank of Canada (BoC)’s interest rate decision will be due later today and current expectations are relatively split between a 25 basis-point (bp) and a 50 bp hike from the current rate of 3.75%. With the central bank hiking interest rates for six consecutive meetings, downshifting to a lower pace of hikes has been on the table. A 25 bp increase could trigger a knee-jerk upside reaction in the USD/CAD, which has already been trading within a rising channel since mid-November. That may place the upper channel resistance on the radar at the 1.375 level. The central bank’s guidance on the rate outlook ahead will be key as well, current expectations for the central bank’s terminal rate are being priced at 4.25% so any tone to drive a more hawkish adjustment could see some weakness in the USD/CAD eventually kicking in. Near-term support for the pair could be at the 1.350 level.

Tuesday: DJIA -1.03%; S&P 500 -1.44%; Nasdaq -2.00%, DAX -0.72%, FTSE -0.61%