Downbeat start to the week, while Chinese equities weigh: VIX, Nikkei 225, Copper

Market Recap

Major US indices kicked off the shortened trading week in the red (DJIA -0.72%; S&P 500 -0.47%; Nasdaq -0.16%), although the sharp paring of losses mid-day, especially in the Nasdaq, may still reflect some strength in buyers. The key drag on market performance overnight comes from the energy sector (-2.3%), tracking a dip in oil prices, while the consumer discretionary sector shines on a 5.3% gain from Tesla.

The next two days will place Federal Reserve (Fed) Chair Jerome Powell in the spotlight, who will offer his report on monetary policy and the economy to the House Financial Services Committee today before testifying to the Senate Banking Committee tomorrow. The Fed Chair may likely join his colleagues in retaining his hawkish tone, but with market participants not buying into Fed’s recent guidance lately, he will face a difficult task in having to provide the much-needed conviction for his rate outlook.

The day ahead will also leave eyes on UK inflation numbers, with expectations for a tick lower in the headline to 8.4% (previous 8.7%), but the core aspect is expected to reveal some persistence at 6.8% year-on-year, unchanged from April. Stubborn inflation is likely to reinforce a hawkish tone from the Bank of England (BoE) tomorrow, which has previously expressed their discomfort with the progress in its inflation fight.

The VIX has been struggling to move higher lately, hovering at its lowest level since February 2020. Following a 17% sell-off since the start of the month, the index has been forced into near-term ranging moves lately, revealing a flat-lined moving average convergence/divergence (MACD). Some attempts to stabilise seem to be at play, although it still lacks the catalyst for a sustained move higher. If seasonality is of any guide, it suggests that the VIX generally see greater upside in late-July until early-October. Near-term, a move back above the 18.00 level may provide some conviction of retesting the key 20.00 level.

Asia Open

Asian stocks look set for a subdued open, with Nikkei +0.23%, ASX -0.16% and KOSPI -0.29% at the time of writing. Chinese equities have failed to find much traction yesterday despite the series of rate cuts by the People's Bank of China (PBOC), as market participants expect more to be done.

The Nasdaq Golden Dragon China Index plunged 4.9% overnight, while the Hang Seng Index retraces from its key psychological 20,000 level with a 1.5% dive yesterday. The leadership change at Alibaba provides testament to the tough environment that Chinese companies operate in, despite regulatory risks taking more of a backseat and recent reopening efforts. On the calendar, early numbers of South Korea’s exports pointed to its first gain (5.3% year-on-year) since August 2022, but ongoing weakness in semiconductors and petroleum products may still provide little reason to cheer just yet.

The Nikkei 225 has retained some strength in today’s session, as the Relative Strength Index (RSI) has managed to revert from overbought to more neutral territory without much of a dip. A bearish crossover remains on its MACD, but previous attempts for a bearish cross (1 June 2023, 9 June 2023) has proven to be a bear trap, which provides less conviction that it should be looked upon as a solid guide. Perhaps one to watch in the near term will be its 20-day moving average (MA), which has been supporting the index steadily over the past two months. With the overall upward trend intact, any retracement may still leave the formation of a higher low on watch, potentially at the 32,000 level.

On the watchlist: Copper prices back to retest resistance confluence at US$8,600/tonne level

Copper prices have been reacting positively to China’s policy-easing efforts lately, staging a recovery of close to 10% since late-May this year. Mounting hopes of a less-bad-than-feared demand outlook have surfaced, with more stimulus measures from China expected over the coming months while market participants continue to price that the Fed is heading towards its final stage of tightening next month.

Three straight week of gains have brought prices back to retest a key resistance confluence at the US$8,600/tonne level. Its RSI above the 50-mark and MACD attempting for a cross back to positive territory seem to support a near-term bullish bias, but a firm sit above the US$8,600/tonne level may still be warranted for the bulls, where the Ichimoku cloud on the daily chart awaits for a breakout.

Reclaiming the US$8,600/tonne level may potentially support a move to retest its March high at the US$9,100/tonne level. On the downside, immediate support may be on watch at an upward trendline around the US$8,270/tonne level.

Tuesday: DJIA -0.72%; S&P 500 -0.47%; Nasdaq -0.16%, DAX -0.55%, FTSE -0.25%