Dip-buying allows S&P 500 to defend a key confluence of support: S&P 500, Brent crude, Gold

Market Recap

Major US indices managed to break their losing streak overnight, with the recovery allowing the S&P 500 to defend its key confluence of support at the 3,915 level. That seems to validate a previous bullish hammer candlestick for some relief by potentially driving some near-term paring of shorts build-up. That said, ahead will lie several key resistances to overcome, particularly its 50-day moving average (MA) where a retest just last week was met with a bearish rejection.

For now, market expectations for a 75 basis-point (bp) hike in the September Federal Open Market Committee (FOMC) meeting remains undeterred at a 75% probability, further underpinned by a series of hawkish comments from Federal Reserve (Fed) officials who continued to drum up the prospects of higher-for-longer rates overnight. Fed vice-chair Lael Brainard maintained that ‘it will be necessary to see several months of low monthly inflation readings to be confident that inflation is moving back down’ towards the Fed’s 2% target. Cleveland Fed President Loretta Mester said she is ‘not even convinced that inflation has peaked yet’. The Fed’s beige book also indicated that price pressures are expected to persist at least through the end of the year.

That said, the negative reaction from the US dollar and US Treasury yields may provide some comfort in suggesting that markets may be getting more accustomed to the higher-for-longer rate narrative. Any positive reaction to further hawkish comments from Fed Chair Jerome Powell later today could validate that. For now, the formation of higher lows may suggest dip buyers stepping up, but the longer-term trend could still bring about some reservations, largely carrying a downward bias with the series of lower highs since the start of the year with indications of a Fed dovish pivot potentially coming only in quarter one (Q1) 2023.

Asia Open

Asian stocks look set for a positive open, with Nikkei +1.20%, ASX +0.51% and KOSPI +0.49% at the time of writing. The broad-based surge in Wall Street (except the energy sector), along with a sharp moderation in the VIX, may set up the Asia session for some near-term relief as well. Economic conditions in the region will continue to be in focus, with China’s trade balance data yesterday revealing challenges in both external and domestic demand. Exports (7.1% year-on-year versus 12.8% forecast) and imports (0.3% year-on-year versus 1.1% forecast) in August both missed expectations by a wide margin, reinforcing the lower-for-longer picture for growth once more. That said, the late-session recovery in Chinese indices yesterday suggests some resilience, further reinforced with a 2.3% move higher in the Nasdaq Golden Dragon China Index overnight.

The economic calendar today saw Japan’s quarter two (Q2) gross domestic product (GDP) figure being revised up this morning to 3.5%, compared to the initial estimate of 2.2%. Private consumption and business spending remains resilient which may continue to hold up, as Japan’s economy trends in a mid-cycle economic recovery as opposed to other major economies in their late-cycle. The plunge in oil prices could also provide a positive backdrop, translating to higher margins and profitability for Japanese firms. Japan is the fourth largest crude oil importer.

Brent crude plunged below its key support at US$92.50 yesterday, with the formation of a lower low reinforcing its overall downward bias. Further moderation in economic activities ahead will continue to put recession risks at centre stage, which could serve as a cap for oil upside. The relief factor could come from further indications of production cuts from Organization of the Petroleum Exporting Countries Plus (OPEC+), but that may not materialise until more oil supplies flow into the market from any resolution in the Iran nuclear deal.

The economic calendar will place trade data in Australia in focus, which could reflect some weakness from China’s muted growth picture. That said, the positive mood in risk environment may lead to some shrugging-off. The key focus will be on the interest rate decision out of the European Central Bank (ECB), where an aggressive 75 bp hike is the consensus.

On the watchlist: Gold prices retesting upper channel trendline resistance on four-hour chart

After a 7% sell-off over the past month on the rise in real Treasury yields and a stronger US dollar, gold prices are attempting to stabilise with its overnight move retesting an upper channel trendline resistance on the four-hour chart. It has managed to stay above its US$1,680 level thus far, which marks a key bottom supporting prices on at least six occasions since 2020. The absence of hawkish comments coming from the upcoming Fed blackout period may drive an attempt for some near-term reprieve. If prices could break above its descending channel pattern with a move above the US$1,728 level it could potentially lead to a retest of the US$1,765 level next.

Wednesday: DJIA +1.40%; S&P 500 +1.83%; Nasdaq +2.14%, DAX +0.35%, FTSE -0.86%